UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from                      to

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number: 001-39005

Sundial Growers Inc.

(Exact name of Registrant as specified in its charter)

 

#200, 919 - 11 Avenue SW

Calgary, AB, Canada, T2R 1P3

Tel.: (403) 948-5227

 

 

Securities registered or to be registered, pursuant to Section 12(b) of the Act

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

 

Common Shares

 

SNDL

 

Nasdaq Global Select Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of business covered by the annual report. As at December 31, 2019, 107,180,423 common shares were issued and outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No      

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes      No      

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

Emerging growth company  

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  

 

International Financial Reporting Standards as issued by the International Accounting Standards Board  

 

Other  

 

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.    Item 17      Item 18  

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

Presentation of Financial and Other Information

 

5

Cautionary Statement Regarding Forward-Looking Statements

 

5

 

 

 

 

PART I

 

 

 

 

 

 

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

7

 

 

 

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

 

7

 

 

 

 

ITEM 3.

KEY INFORMATION

 

7

 

A. Selected financial data

 

7

 

B. Capitalization and indebtedness

 

7

 

C. Reasons for the offer and use of proceeds

 

7

 

D. Risk factors

 

7

 

 

 

 

ITEM 4.

INFORMATION ON THE COMPANY

 

38

 

A. History and development of the company

 

38

 

B. Business overview

 

40

 

C. Organizational structure

 

49

 

D. Property, plant and equipment

 

50

 

 

 

 

ITEM 4A.

UNRESOLVED STAFF COMMENTS

 

51

 

 

 

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

51

 

A. Operating results

 

51

 

B. Liquidity and capital resources

 

51

 

C. Research and development, patents and licenses, etc.

 

52

 

D. Trend information

 

52

 

E. Off-balance sheet arrangements

 

52

 

F. Tabular disclosure of contractual obligations

 

52

 

 

 

 

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

52

 

A. Directors and senior management

 

52

 

B. Compensation

 

54

 

C. Board practices

 

62

 

D. Employees

 

67

 

E. Share ownership

 

68

 

 

 

 

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

68

 

A. Major shareholders

 

68

 

B. Related party transactions

 

69

 

C. Interests of experts and counsel

 

72

 

 

 

 

ITEM 8.

FINANCIAL INFORMATION

 

72

 

A. Consolidated statements and other financial information

 

72

 

B. Significant Changes

 

73

 

 

 

 

ITEM 9.

THE OFFER AND LISTING

 

74

 

A. Offer and listing details

 

74

 

B. Plan of distribution

 

74

 

C. Markets

 

74

 

D. Selling shareholders

 

74

 

E. Dilution

 

74

 

F. Expense of the issue

 

74

 

 

 

 

2


ITEM 10.

ADDITIONAL INFORMATION

 

74

 

A. Share capital

 

74

 

B. Memorandum and articles of association

 

74

 

C. Material contracts

 

74

 

D. Exchange controls

 

75

 

E. Taxation

 

75

 

F. Dividends and paying agents

 

81

 

G. Statement by experts

 

81

 

H. Documents on display

 

81

 

I. Subsidiary information

 

82

 

 

 

 

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

82

 

 

 

 

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

82

 

A. Debt Securities

 

82

 

 

 

 

PART II

 

 

 

 

 

 

 

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

83

 

 

 

 

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

83

 

 

 

 

ITEM 15.

CONTROLS AND PROCEDURES

 

83

 

 

 

 

ITEM 16

 

 

83

 

A. Audit committee financial expert

 

83

 

B. Code of Ethics

 

83

 

C. Principal Accountant Fees and Services

 

83

 

D. Exemptions from the Listing Standards for Audit Committees

 

84

 

E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

84

 

F. Changes in Registrant’s Certifying Accountant

 

84

 

G. Corporate Governance

 

84

 

H. Mine Safety Disclosure

 

84

 

 

 

 

PART III

 

 

 

 

 

 

 

ITEM 17.

FINANCIAL STATEMENTS

 

85

 

 

 

 

ITEM 18.

FINANCIAL STATEMENTS

 

85

 

 

 

 

ITEM 19.

EXHIBITS

 

85

 

 

3


INTRODUCTION

 

Unless otherwise indicated, all references in this annual report on Form 20-F (the “Annual Report”) to “Sundial,” “we,” “our,” “us,” “the Company” or similar terms refer to Sundial Growers Inc. and its consolidated subsidiaries. We publish our consolidated financial statements in Canadian dollars. In this Annual Report, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$,” “CDN$,” “CAD$,” and “dollars” mean Canadian dollars and all references to “US$” or “USD”, mean United States dollars.

Unless otherwise indicated, all references in this Annual Report to “Bridge Farm” refer to Bridge Farm Nurseries Limited, its subsidiaries and, subsequent to August 11, 2017, Project Seed Topco Limited, the parent of Bridge Farm Nurseries Limited. We completed the acquisition of Bridge Farm on July 2, 2019.

 

This Annual Report contains our audited consolidated financial statements and related notes for the year ended December 31, 2019, the ten months ended December 31, 2018 and the year ended February 28, 2018. (“Annual Financial Statements”). Our Annual Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

In addition to our financial results presented in accordance with IFRS as issued by the IASB, we believe certain non-IFRS measures provide useful information both to management and investors in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by IFRS (or US GAAP); and, therefore, they may not be comparable to similarly titled measures presented by other companies, and they should not be construed as an alternative to other financial measures determined in accordance with IFRS.

All references to “shares” or “common shares” in this Annual Report refer to the common shares of Sundial Growers Inc., no par value.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim”, “anticipate”, “assume”, “believe”, “contemplate”, “continue”, “could”, “due”, “estimate”, “expect”, “goal”, “intend”, “may”, “objective”, “plan”, “predict”, “potential”, “positioned”, “pioneer”, “seek”, “should”, “target”, “will”, “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.

These forward-looking statements include, but are not limited to, statements about:  

our ability to operate on a going concern basis, including our ability to raise future capital through debt or equity financing transactions;

our ability to successfully implement our cost and asset optimization initiatives;

the continued development and growth of the demand and markets for medical and adult-use cannabis and CBD products;

the maintenance of our existing licences and the ability to obtain additional licences as required;

our ability to establish and market our brands within our targeted markets and compete successfully;

our ability to produce and market additional products as regulations permit;

the number of flowering rooms and combined production capacity therefrom that we expect to have by the end of 2020;

our growth strategies, including plans to sell edibles and other forms of cannabis as well as CBD products;

the timing and the amount of capital expenditures related to the proposed expansion or conversion of our facilities;

the transition of Bridge Farm’s historical ornamental flower business to the cultivation of hemp and extraction of CBD;

the outcome of medical research by our partners and the acceptance of such findings in the medical community;

our ability to leverage Bridge Farm’s existing distribution relationships for future CBD products;

our ability to attract and retain key employees;

4


our ability to manage growth in our business;

our ability to execute a sale of Bridge Farm; and

our ability to identify and successfully execute strategic partnerships.

Although we base the forward-looking statements contained in this Annual Report on assumptions that we believe are reasonable, we caution you that actual results and developments (including our results of operations, financial condition and liquidity, and the development of the industry in which we operate) may differ materially from those made in or suggested by the forward-looking statements contained in this Annual Report. In addition, even if results and developments are consistent with the forward-looking statements contained in this Annual Report, those results and developments may not be indicative of results or developments in subsequent periods. Certain assumptions made in preparing the forward-looking statements contained in this Annual Report include:

our ability to obtain and maintain financing on acceptable terms to allow us to maintain operations;

our ability to implement our operational and liquidity strategies;

our ability to optimize our costs by implementing cost-cutting initiatives, deferring capital expenditures and conducting a strategic review of certain facilities;

our competitive advantages;

the development of new products and product formats for our products that align market demand;

the impact of competition;

the changes and trends in the cannabis industry;

changes in laws, rules and regulations;

our ability to maintain and renew required licences;

our ability to maintain good business relationships with our customers, distributors and other strategic partners;

our ability to keep pace with changing consumer preferences;

our ability to protect our intellectual property;

our ability to manage and integrate acquisitions, particularly Bridge Farm;

our ability to retain key personnel; and

the absence of material adverse changes in our industry or the global economy, including as a result of COVID-19.

These forward-looking statements are based on our current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions, and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Annual Report may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Item 3D—Risk Factors” and elsewhere in this Annual Report. Readers of this Annual Report are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this Annual Report. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the U.S. Securities and Exchange Commission (the “SEC”) after the date of this Annual Report.

This Annual Report contains estimates, projections and other information concerning our industry, our business, and the markets for our products. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from our own internal estimates and research as well as from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

 

In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Item 3D—Risk Factors”. These and other factors could cause our future performance to differ materially from our assumptions and estimates.

 

 

 

5


PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A.

Selected financial data.

 

 

 

Year ended

Dec 31

 

 

Ten months ended Dec 31

 

 

Year ended

Feb 28

Year ended

Feb 28

($000s, except as indicated)

 

2019

 

 

2018

 

 

2018

2017

Gross revenue

 

 

79,225

 

 

 

 

 

 

Net revenue

 

 

75,860

 

 

 

 

 

 

Net loss

 

 

(271,629)

 

 

 

(56,526)

 

 

 

(12,995)

(1,545)

Per share, basic and diluted

 

 

$(3.17)

 

 

 

$(0.82)

 

 

 

$(0.23)

$(0.04)

Total assets

 

 

510,036

 

 

 

110,200

 

 

 

25,754

12,666

Net assets (liabilities)

 

 

221,198

 

 

 

(7,908)

 

 

 

13,710

11,521

Total non-current liabilities

 

 

19,592

 

 

 

48,450

 

 

 

116

17

Share capital

 

 

509,654

 

 

 

65,133

 

 

 

25,769

15,136

Shareholder’s equity

 

 

216,484

 

 

 

(7,908)

 

 

 

13,710

11,521

 

B.

Capitalization and indebtedness.

Not applicable.

 

C.

Reasons for the offer and use of proceeds.

Not applicable.

 

D.

Risk factors.

Going Concern Risk

Our consolidated financial statements contain a going concern qualification, which indicates the existence of a material uncertainty that casts significant doubt on our ability to continue as a going concern. Our ability to continue as a going concern depends on a number of factors, including Health Canada maintaining our licences, the continued support of our lenders, our ability to achieve profitable operations and our ability to raise additional financing to fund current and future operations. Any delay or failure to achieve the foregoing would have a significant negative impact on our business, and we may be forced to reduce or discontinue operations or seek protection of the bankruptcy laws.

Our consolidated financial statements at December 31, 2019 have been prepared on a going concern basis, which assumes that we will be able to realize our assets and discharge our liabilities in the normal course of business.  Our liquidity and ability to comply with covenants in our Syndicated Credit Agreement and Term Debt Facility (as such terms are defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1) have been negatively impacted by our significant levels of indebtedness, the oversupply of cannabis in the Canadian adult-use market due to distribution bottlenecks and related pricing pressure. Additionally, at December 31, 2019, we were not in compliance with the interest coverage ratio in our Syndicated Credit Agreement, the full principal amount of our Syndicated Credit Agreement and Term Debt Facility was classified as a current liability on our balance sheet as of such date. Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company.

6


In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020. In addition, we anticipate that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar amendments in the past; however, there is no guarantee that we will be able to do so in the future.

Our present level of indebtedness, our significant accumulated losses, the existing legal cannabis distribution bottlenecks, production and expected demand disruptions caused by the COVID-19 pandemic present challenges to our ability to comply with the covenants in the agreements governing our indebtedness and management anticipates that our available cash and cash equivalents and cash generated from financing activities will be insufficient to satisfy the our liquidity requirements for the next 12 months. As a result, we require additional funding to meet our ongoing obligations and to fund anticipated operating losses and no assurance can be given that future sources of capital will be available.

In addition, our ability to continue as a going concern depends on Health Canada and other regulators maintaining our licences and our ability to achieve profitable operations. We have incurred losses to date and there can be no assurance that our products will gain adequate market acceptance or that we will be able to generate sufficient positive cash flow from operations to meet our capital requirements. Additionally, if Health Canada or the other regulators that have jurisdiction over us were to revoke, suspend, fail to renew or otherwise materially change the terms of our licences, such action could have a significant negative impact on our business, results of operations and financial condition, and we may be forced to reduce or cease our operations or seek relief under the Canadian bankruptcy laws.

If we initiate (or are forced to initiate) a bankruptcy filing or other restructuring, (whether in or out of court), it is possible that holders of claims and interests with respect to, or rights to acquire, our equity securities, including our common shares, would be entitled to little or no recovery, and those claims and interests may be canceled for little or no consideration. If that were to occur, we anticipate that all or substantially all of the value of all investments in our equity securities would be lost and that our equity holders will lose all or substantially all of their investment. It is also possible that our other stakeholders, including our secured and unsecured creditors, will receive substantially less than the amount of their claims.

Risks Related to Our Business and Our Industry

Cannabis for adult use only recently became legal in Canada. As a result, the industry and the regulations governing the industry are rapidly developing, and if they develop in ways that differ from our expectations, our business and results of operations may be adversely impacted.

Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts (the “Cannabis Act”), federally legalized adult-use (non-medical) cannabis in Canada effective as of October 17, 2018. Under the Cannabis Act, each province and territory of Canada has the ability to separately regulate the distribution and sale of cannabis within such province or territory, and the laws (including associated regulations) adopted by each province and territory may vary significantly. Each Canadian province and territory has enacted and implemented regulatory regimes for the distribution and sale of cannabis for adult use; however, there is no guarantee that provincial and territorial legislation regulating the distribution and sale of cannabis for adult use, or the application and enforcement of such legislation, will not change in the future. Any such change could result in significant additional compliance or other costs and may make participation in such markets uneconomical. Since cannabis was only recently legalized in Canada, there may be inconsistencies in the interpretation and enforcement of the Cannabis Act and the Cannabis Regulations (SOR/2018-144) (the “Cannabis Regulations”), and associated provincial and territorial rules and regulations. In addition, Health Canada has experienced delays in approving applications for new licences, capacity expansions and employee security checks, including with respect to the expansion of our Olds Facility and the approval of certain members of our management to perform functions requiring regulatory approval. Additional inconsistencies, changes or delays could have a material adverse effect on our business and results of operations.

In particular, our business model is dependent on additional licensed dispensaries opening in the provinces in which we operate, most importantly Ontario. To the extent there continue to be delays in licensing and opening of legal dispensaries in Ontario and the other provinces, or the legal cannabis market fails to develop as planned, our ability to achieve our near term or long term business objectives would be materially adversely affected.

In addition, regulations are continuing to be developed for different aspects of the adult-use cannabis industry in Canada. For example, on June 26, 2019, Health Canada published amendments to the Cannabis Regulations to expand the permitted formats for products

7


that contain or are derived from cannabis to include edible cannabis, cannabis extracts and cannabis topicals. These regulations came into force on October 17, 2019 and sales of edible cannabis, cannabis extracts and cannabis topicals commenced in December, 2019. While we intend to continue to offer edible cannabis products in accordance with the final rules and regulations, the regulations and market for such products and adult-use cannabis generally may not develop, or may not develop as we expect or on the timeline that we expect, which could have a material adverse effect on our business and results of operations.

The federal and provincial or territorial legislation and regulatory regimes for cannabis products also include excise duties payable by licensed cannabis producers on adult-use cannabis products, in addition to goods and services tax or harmonized sales tax in certain provinces and territories. The rate of the excise duties for cannabis products varies by province and territory. Any significant increase in the rate of excise duties on cannabis products in the future could reduce consumer demands for cannabis products and adversely impact the adult-use cannabis industry and market in general. In addition, any increase in the rate of excise duties on cannabis products in the future could reduce our margins and profitability in the event that we could not or chose not to pass along such increases to consumers.

We are dependent upon regulatory approvals and licences for our ability to grow, process, package, store and sell cannabis and other products derived therefrom, and these regulatory approvals are subject to ongoing compliance requirements, reporting obligations and fixed terms requiring renewal.

Our Canadian business operations are dependent on licences issued by Health Canada. Our licence for our Olds Facility expires on September 14, 2021, and our licence for our facility located in Rocky View, Alberta (the “Rocky View Facility”), expires on June 12, 2020. Each of these licences was issued for a period of three years. A holder of a cannabis licence under the Cannabis Act and Cannabis Regulations must apply to renew its licence on or before the licence expiry date. Following receipt of the renewal application, Health Canada will (i) confirm the security clearance status of all relevant individuals; (ii) confirm the status of fees paid (if applicable) and (iii) confirm the status of licences issued by the Canada Revenue Agency under the Excise Act, 2001 (if applicable). Health Canada may also conduct an inspection to verify compliance or ask the licence holder to provide additional information. A renewed licence with a new expiry date will be issued once Health Canada confirms that all requirements have been met. Cannabis licence holders can apply to renew their licence up to four months before the licence expires. Failure to comply with the requirements of the licences or any failure to renew the licences would have a material adverse impact on us. There can be no guarantee that Health Canada will renew our licences, or that such renewals will occur in a timely fashion or on terms similar to our existing licences or otherwise acceptable to us. Any new facilities or the expansion of our business at existing facilities requires the approval of Health Canada, and there is no guarantee that Health Canada will grant such approvals. Our ability to expand our production capacity depends on our ability to obtain such approvals. Health Canada requires new applicants for cannabis licences under the Cannabis Act to have a fully built site that meets all the requirements of the Cannabis Regulations at the time of their application, as well as satisfying other application criteria. Further, according to Health Canada, it will not substantively review our licence applications until the facilities associated with such licence applications are fully constructed and meet all the requirements of the Cannabis Regulations. Any delay in renewing or granting a licence, revocation of an existing licence, refusal to grant a licence or change in the terms of licence could materially adversely impact our expected future operations.

Pursuant to the Cannabis Act, only industrial hemp or cannabis used for medical or scientific purposes may be imported into or exported from Canada. Any such import or export requires a permit. In the future, we may seek permits to import or export cannabis and cannabis products. If we do not receive the required permits or receive licences with limitations that we do not expect, our ability to import and export cannabis and cannabis products could be materially adversely affected.

Bridge Farm currently holds a hemp cultivation licence granted by the U.K. Home Office at one of its facilities and cultivates hemp in a portion of this facility. This licence was granted on December 28, 2018 and is set to expire on December 31, 2021, and we intend to seek renewal of this licence with the U.K. Home Office prior to its expiry. The renewal application is submitted online and it takes approximately two to four weeks for the U.K. Home Office to review the application and issue its decision. Bridge Farm also holds a and a high-THC research and development licence, which enables it to conduct research and development for phenotyping exercises and to refine extraction methods to produce CBD extracts from the controlled parts of the cannabis plants. In addition, Bridge Farm will need additional licences to process hemp and otherwise commercialize any future CBD products. Should the U.K. Home Office not renew or delay the renewal of our licences (or renew our licences on different terms), or fail to grant any future necessary licences, our ability to recognize the strategic objectives of our acquisition of Bridge Farm could be materially adversely affected.

If we expand outside of Canada and the United Kingdom, our ability to operate and sell in foreign jurisdictions will be dependent on our ability to obtain and comply with the necessary regulatory licences and requirements. Additional government licences may be required in the future in connection with our operations, in addition to other known and unknown permits and approvals which may be required, including with respect to our Canadian, Bridge Farm and other foreign operations. To the extent such permits and approvals are required and not obtained, we may be prevented from operating or expanding our business.

8


 

We intend to focus primarily on the premium segment of the adult-use cannabis market, which may not materialize, or in which we may not be able to develop or maintain a brand that attracts or retains customers.

We intend to focus primarily on users of cannabis in the Canadian adult-use cannabis market who are looking for premium products; however, such a market may not materialize or be sustainable. If this premium market does materialize, we may not be able to achieve or maintain attractive margins and our ability to achieve our near term or long term business objectives would be materially adversely affected. Further, we may not be successful in creating and maintaining consumer perceptions of the value of our premium products. The promotion of cannabis is strictly regulated in Canada. For example, promotion is largely restricted to the place of sale and subject to prescribed conditions set out in the Cannabis Act and the Cannabis Regulations. Among other restrictions, the Cannabis Act prohibits testimonials and endorsements, lifestyle branding and promotion that is appealing to minors. Such restrictions on advertising, marketing and the use of logos and brand names, and other restrictions on advertising imposed by Canadian federal or provincial laws or regulations, or similar regulations imposed in other jurisdictions, may prevent us from creating and maintaining consumer perceptions in the value of our premium products and establishing ourselves as premium producers. If we cannot successfully enter into or compete in the premium market, we may face significant challenges in gaining or maintaining a market share in Canada or in other cannabis markets in which we intend to operate, or we may be forced to sell our products at a lower price, which may materially adversely affect our results of operations.

Our success depends, in part, on our ability to attract and retain customers who in turn sell to ultimate consumers of cannabis and cannabis-related products. To do this, we are dependent upon, among other things, continually producing desirable and effective products and the continued growth in the aggregate number of adult-use cannabis consumers. We have made significant investments in enhancing our brand to attract consumers. Subject to the applicable legal restrictions, we expect to continue to make significant investments to promote our current products to new consumers and new products to current and new consumers. Such campaigns can be expensive and may not result in increased sales. If we are unable to attract new consumers or retain existing customers, we may not be able to increase our sales or sustain our business.

Our business model, including our ability to successfully target the premium segment of the adult-use cannabis market and maintain our brand, is also dependent on being able to grow at scale different strains of cannabis with consistent yields and THC-levels by strain. To the extent we are unable to do so, or we are unable to achieve desired THC-levels, our ability to achieve our near term or long term business objectives would be materially adversely affected.

Any failure on our part to comply with applicable regulations could prevent us from being able to carry on our business, and there may be additional costs associated with any such failure.

Our business activities are heavily regulated in all jurisdictions where we do business. Our operations are subject to various laws, regulations and guidelines by governmental authorities, including Health Canada and the U.K. Home Office, relating to the cultivation, processing, manufacture, marketing, management, distribution, transportation, storage, sale, packaging, labelling, pricing and disposal of cannabis and cannabis products. In addition, we are subject to laws and regulations relating to employee health and safety, insurance coverage and the environment. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over our activities, including the power to limit or restrict business activities as well as impose additional disclosure requirements on our products and services.

Health Canada inspectors routinely assess our facilities for compliance with applicable regulatory requirements. In addition, we have, and in the future may, self-report violations of regulatory requirements to Health Canada and other regulators. Any failure by us to comply with the applicable regulatory requirements could:

require extensive changes to our operations;

result in regulatory or agency proceedings or investigations;

result in the revocation of our licences and permits, increased compliance costs;

result in damage awards, civil or criminal fines or penalties;

result in restrictions on our operations;

result in Health Canada or other regulators destroying or placing a hold on our inventory;

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harm our reputation; or

give rise to material liabilities.

 

Further, our employees or other agents may, without our knowledge and despite our efforts, policies and procedures, engage in prohibited conduct under applicable regulatory requirements for which we may be held responsible.

There can be no assurance that any future regulatory or agency proceedings, investigations or audits will not result in substantial costs, a diversion of management’s attention and resources or other adverse consequences to our business.

Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by governmental authorities and obtaining all necessary regulatory approvals for the cultivation, processing, production, storage, distribution, transportation, sale, import and export, as applicable, of our products. Any failure to comply with the regulatory requirements applicable to our operations may lead to possible sanctions, including:

the revocation or imposition of additional conditions on licences to operate our business;

the suspension or expulsion from a particular market or jurisdiction or of our key personnel;

the imposition of additional or more stringent inspection, testing and reporting requirements;

product recalls or seizures; and

the imposition of fines and censures.

In addition, changes in regulations, government or judicial interpretation of regulations, or more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increase compliance costs or give rise to material liabilities or a revocation of our licences and other permits. Furthermore, governmental authorities may change their administration, application or enforcement procedures at any time, which may adversely impact our ongoing regulatory compliance costs. There is no assurance that we will be able to comply or continue to comply with applicable regulations.

Any failure on our or our suppliers’ part to comply with supplier standards established by provincial or territorial distributors could prevent us from accessing certain markets in Canada.

Government-run provincial and territorial distributors in Canada require suppliers to meet certain service and business standards, and routinely assess their suppliers for compliance with these standards. For example, our current supply agreement with the Alberta Gaming, Liquor and Cannabis Commission (the “AGLC”), permits the AGLC to inspect and test our products for compliance with a rigorous set of criteria, including packaging, labelling, timing and stated quality test results. We may pursue arrangements with third parties to produce cannabis on our behalf to supplement internal production. In addition, we use third parties to extract THC and CBD for use in various product offerings, including for use in our vape products. Any failure by us or our third-party suppliers to comply with such standards could result in our being disqualified as a supplier and could lead to the termination or cessation of orders under existing or future supply contracts. Further, provincial and territorial purchasers, including the AGLC, may terminate or cease ordering under existing contracts at any time without cause. If any of the foregoing events were to occur, our access to such markets may be limited or eliminated.

We currently sell, and expect to continue to sell, a significant share of our product to provincial governments through supply contracts that may not generate orders as expected or which may not be renewed.

Under the terms of our licences and the Cannabis Act, we are restricted as to whom we can sell our cannabis products. We currently, and expect to continue to, derive a significant portion of our revenues from supply agreements with Canadian provincial and territorial governments, including AGLC, the Ontario Cannabis Store (the “OCS”), the BC Liquor Distribution Branch (the “BCLDB”), Manitoba Liquor and Lotteries (the “MLL”), Saskatchewan Liquor and Gaming Authority (the “SLGA”), New Brunswick Liquor Corporation (the “ANBL”), Nova Scotia Liquor Corporation (the “NSLC”), PEI Cannabis Management Corporation (the “PEICMC”) and Quebec SQDC (the “SQDC”). We also intend to expand our offerings to other provincial and territorial governments across Canada.

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Our provincial or territorial supply agreements do not contain purchase commitments or otherwise obligate the purchaser to buy a minimum or fixed volume of products from us. As a result, the amount of cannabis that the AGLC, the OCS, the BCLDB, MLL, SLGA, ANBL, NSLC, PEICMC or SQDC or, collectively, Provincial Buyers, may purchase under our supply agreements, or its price, may deviate significantly from our expectations. In addition, our results of operations could fluctuate materially in the future and could be materially and disproportionately impacted by the purchasing decisions of the Provincial Buyers and any other future government purchasers. If any of the Provincial Buyers decides to purchase lower volumes of products from us than we expect, charges “slotting fees” in connection with carrying our products, charges additional taxes, insists on a price that is lower than we expect, alters its purchasing patterns at any time with limited notice, decides not to continue or begin to purchase our cannabis products at all or does not renew its agreement with us on similar terms or other terms acceptable to us, our results of operations could be materially adversely affected. In addition, if the legal distributions channels in Canada for cannabis do not develop either because of delays in the opening of dispensaries or otherwise, our results of operations would be materially adversely affected.

 

We experience significant customer concentration, with a limited number of customers accounting for a significant portion of our revenues.

Our top five customers accounted for 81% for the year ended December 31, 2019. Of these customers, four customers have each accounted for more than 10% of our revenues for such period. Inherent risks exist when a large percentage of total revenues is concentrated with a limited number of customers.

 

It is not possible for us to predict the future level of demand for our products that will be generated by these customers or the future demand for the products of these customers in the consumer marketplace. In addition, revenues from these large customers may fluctuate from time to time based on market demand for our products among consumers, the level which may be affected by market conditions or other factors, some of which may be outside of our control. Further, our contracts with these large customers do not contain purchase commitments or otherwise obligate the purchasers to buy a minimum or fixed volume of products from us. If any of our major customers experience declining or delayed sales of our products to consumers due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our products, reduce the volume of products we supply to such customers or we could lose the customer. Additionally, although historically, our reserves for doubtful accounts have not been material, if any of our large customers were to suffer financial instability, they could refuse or delay payment of outstanding receivables. Any such development may have a material adverse effect on our business, results of operations and financial condition.

The legal cannabis market is a relatively new industry (including the recent introduction of additional Canadian cannabis regulations, or Cannabis 2.0). As a result, the size of our target market is difficult to quantify, and investors will be reliant on their own estimates on the accuracy of market data.

Because the cannabis industry is in a nascent stage, there is a lack of information about the total addressable market as well as comparable companies available for potential investors to review in deciding about whether to invest in us. In addition, the development of the legal cannabis market is dependent on Health Canada and other regulators approving licences for retail stores and other distribution channels in a timely fashion. Any delays in such approvals or other regulatory developments may impact our market and price estimates, which may make it difficult to develop reliable expectations and assumptions. Accordingly, investors should rely on their own estimates regarding the potential size, economics and risks of the cannabis market in deciding whether to invest in our common shares. We are an early-stage company that has not generated net income. There can be no assurance that our growth estimates are accurate or that the cannabis market will be large enough for our business to be profitable or to grow as projected.

Although we are committed to researching and developing new markets and products and improving existing products, there can be no assurances that such research and market development activities will prove profitable or that the resulting markets or products, if any, will be commercially viable or successfully produced and marketed. We must rely largely on our own market research to forecast sales and design products as detailed forecasts and consumer research are not generally obtainable from reliable third-party sources in Canada and in other international jurisdictions.

In addition, there is no assurance that the industry and market will continue to exist and grow as currently estimated or anticipated or function and evolve in the manner consistent with management’s expectations and assumptions. We could also be subject to other events or circumstances that that adversely affect the cannabis industry, such as the imposition of further restrictions on sales and marketing or further restrictions on sales in certain areas and markets

The adult-use cannabis market in Canada has experienced, and may in the future experience, supply and demand fluctuations.

 

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Following legalization, there was a shortfall in supply in the Canadian adult-use cannabis market leading to increased prices, increases in out-of-stocks and the consumers opting to buy cannabis on the illicit market. We and other licensed producers responded by increasing capacity. Recently, the increase in production combined with slower than expected retail store growth has resulted in over-supply. As inventory levels become greater than consumer demand, we have had to, and may in the future have to, engage in sale of excess inventory at discounted prices, which could significantly impair operating results and our brand image. Conversely, if we underestimate demand for our products, we may experience inventory shortages, which might delay shipments to customers, reduce revenue, negatively impact customer relationships and diminish brand loyalty. For example, we have experienced shortages and out-of-stocks in our vape products due to supply constraints. In addition, demand for cannabis and cannabis products is dependent on a number of social, political and economic factors that are beyond our control, including the novelty of legalization, which may wear off. A material decline in the economic conditions affecting consumers can cause a reduction in disposable income for the average consumer, change consumption patterns and result in a reduction in spending on cannabis products or a switch to other products obtained through illicit channels. There can be no assurance that market demand for cannabis will continue to be sufficient to support our current or future production levels or that we will be able to generate sufficient revenue to be profitable.

We are dependent upon a limited number of facilities that are integral to our business.

As of the date of this Annual Report, all our cultivation and production activities are conducted at our Olds Facility and Rocky View Facility, and our licences from Health Canada are specific to those facilities. Disruptions at, or adverse changes or developments affecting, our Olds Facility or Rocky View Facility, including municipal rezoning, facility design errors, environmental pollution, equipment or process failures, production errors, disease or infestation of our crops, fires, breakdowns of our sewage system, explosions, power failures, natural disasters or security failures, have had and could have negative impacts on our production, the quality of our products, our reputation in the market and our financial results – any one of which could materially adversely impact our business. For example, a fire at our Olds Facility in December 2018 damaged a portion of our crops and caused some delays in our production cycle. In addition, any failure to comply with regulatory requirements under the Cannabis Act could result in the suspension or termination of our Health Canada licences and could have an adverse impact on our ability to renew such licences.

Any expansion on current facilities or future development and construction of new facilities would increase our cultivation, growing, processing and distribution capacity; however, licensing or construction delays or cost over-runs in respect to the development of these facilities could delay, diminish or prevent our ability to produce cannabis at these facilities. Furthermore, we are required to fully construct such facilities or expansions and ensure that such facilities or expansions are compliant with the requirements of the Cannabis Regulations prior to receiving Health Canada approval. There is no guarantee that Health Canada will approve new development projects or future construction at any of our existing facilities and any delay or failure to receive approval could adversely affect our business and results of operations. The final costs relating to any development or construction of our facilities may be significantly greater than anticipated, in which case we may be required to curtail or delay such development or construction projects, which could reduce our planned production capacity. In addition, we may be required to raise additional capital, which may not be available on acceptable terms or at all.

In addition, we do not currently have extraction capabilities and, until we develop such capabilities, we will be reliant on third parties to extract THC and CBD for use in various product offerings. Such third-party extraction may cost more than we anticipate, which would negatively impact our margins. In addition, such third-party extraction may not be delivered on schedule, meet our standards of quality or comply with applicable regulatory requirements, any of which may cause inventory shortages and cause us to fail to deliver certain offerings on a timely basis or at all. Similarly, we may rely on third parties to manufacture vaporizers and other consumption accessories product offerings on our behalf (or we may license our brands to thirty-party manufacturers). Such third-parties may fail to deliver product offerings that meet our or our customers’ expectations, and we may have difficulty obtaining satisfactory products in sufficient quantities or at all. Any interruption in the supply or consistency of these products may adversely impact our ability to deliver products to our customers, may harm our relationships and reputation with our customers, and may have a material adverse effect on our business, results of operations and financial condition.

We currently rely on a limited number of suppliers for our extraction requirements.

Although we have recently commenced extraction activities at our facility at Olds, we currently and may continue to depend on a limited number of suppliers for extracting THC and CBD for use in certain of our cannabis products. We cannot ensure that these suppliers will remain in business, have sufficient capacity or supply to meet our needs or that they will not be purchased by one of our competitors or another company that is not interested in continuing to work with us. Our use of single-source suppliers exposes us to several risks, including disruptions in supply, price increases or late deliveries. There are, in general, relatively few alternative sources of supply for substitute components. Our current vendors may be unable or unwilling to meet our future demands for our supply needs. Establishing additional or replacement suppliers for these components, materials and processes could take a substantial amount of time and it may be difficult to establish replacement suppliers who meet regulatory requirements. Any disruption in supply from

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any single-source supplier or service provider could lead to supply delays or interruptions, which would damage our business, financial condition, prospects and results of operations.

If we were to have to switch to a replacement supplier, the manufacture and delivery of our product candidates or components of our product candidates could be interrupted for an extended period, which could adversely affect our business. Furthermore, although we are developing our own extraction capabilities, there is no guarantee that we will be successful in doing so or that we will have sufficient capacity to meet our supply needs. We may not be able to quickly establish additional or replacement suppliers for our extraction needs, if required. If we are able to find a replacement supplier, the replacement supplier would need to be licensed by Health Canada, which might require additional regulatory authority approval, which could result in further delay. While we seek to maintain adequate inventory of the single source components and materials used in our products, any interruption or delay in the supply of components or materials or our inability to obtain components or materials from alternate sources at acceptable prices, or at all, in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders.

Our reliance on these suppliers, service providers and manufacturers subjects us to a number of risks that could harm our reputation, business, financial condition, prospects and results of operations, including, among other things:

 

delays to the development timelines for our products;

 

interruption of supply resulting from modifications to or discontinuation of a supplier’s operations;

 

delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s variation in a component;

 

a lack of long-term supply arrangements for key components with our suppliers;

 

inability to obtain adequate supply in a timely manner or to obtain adequate supply on commercially reasonable terms;

 

difficulty and cost associated with locating and qualifying alternative suppliers for our components in a timely manner;

 

production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications;

 

delay in delivery due to our suppliers prioritizing other customer orders over ours;

 

damage to our reputation caused by defective components produced by our suppliers; and

 

fluctuation in delivery by our suppliers due to changes in demand from us or their other customers.

If any of these risks materialize, our costs could significantly increase and our ability to meet demand for our products could be impacted.

We are constrained by law in our ability to market our products in Canada.

The development of our business and operating results may be hindered by applicable restrictions on production, sales and marketing activities imposed on us and other licensed producers under the Cannabis Act by Health Canada. All products we distribute into the Canadian adult-use market are subject to restrictions with respect to product formats, product packaging and labelling. In addition, the Cannabis Act regulates our marketing activities, including prohibitions on testimonials and endorsements, lifestyle branding, and promotion that is appealing to young persons. Each Canadian province and territory has also enacted regulatory regimes for the distribution and sale of cannabis for adult-use purposes within its jurisdiction. As such, our portfolio of brands and products must be specifically tailored, and our marketing activities carefully structured, to comply with individual provincial and territorial rules and regulations. These restrictions may preclude us from establishing our branding, achieving pricing differentiation, effectively marketing our cannabis products or competing for market share, and may impose costs on us that cannot be absorbed through increased selling prices for our cannabis products.

Trade of cannabis for non-medical purposes within Canada may be restricted by the Canadian Free Trade Agreement.

We have entered into supply agreements with the Provincial Buyers for the supply of adult-use cannabis and cannabis derivative products. We have also been cleared by the SLGA to supply cannabis to retail and wholesale permit holders in Saskatchewan. The Canadian Free Trade Agreement, which generally reduces or eliminates the barriers to the free movement of persons, goods, services, and investments within Canada, specifically excludes cannabis for non-medical purposes from its scope and instead leaves the intra-Canadian movement of non-medical cannabis to future negotiations among the provinces and territories. There is a risk that the outcome of the negotiations will result in the interprovincial and interterritorial trade of cannabis for non-medical purposes in Canada being entirely restricted or subject to conditions that will negatively impact our ability to sell cannabis in provinces and territories in which we do not have cultivation and production facilities, including those in which we have already executed agreements or been approved to supply cannabis to retailers.

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We have a limited operating history and a history of net losses, and we may not achieve or maintain profitability in the future.

We were incorporated in 2006, began cultivating cannabis in 2012, and started selling cannabis in 2018 after the federal legalization of adult-use cannabis in Canada. We have yet to generate an annual profit. We generated a net loss of $271.6 million, $56.5 million for the fiscal years ended December 31, 2019 and 2018, respectively, and had negative operating cash flows for each of these periods. Our accumulated deficit as of December 31, 2019 was $360.3 million. Although we have announced business optimization initiatives and temporarily suspended construction of certain facilities, we will continue to expend significant funds to maintain our growing and production capacity, fund certain planned capital investments, invest in research and development, expand our marketing and sales operations and meet the increased compliance requirements associated with our operation as a public company. We expect the aggregate amount of our operating expenses will continue to increase, and we may not achieve or maintain profitability.

We are an early-stage company, and our efforts to grow our business may be more costly than we expect and we may not generate enough revenue to offset our operating expenses. We have incurred, and may in the future incur, significant losses for a number of reasons, including as a result of unforeseen expenses, difficulties, complications and delays in obtaining governmental licences and the other factors and risks described in this Annual Report. The amount of any future losses will depend, in part, on our ability to generate revenue on the one hand and any increases in our expenses on the other hand. If we continue to incur losses in the future, the net losses and negative cash flows incurred to date, together with any such future losses, will have an adverse effect on our shareholders’ equity and working capital. Because of the numerous risks and uncertainties associated with our business and industry, we are unable to accurately predict when, or if, we will be able to achieve profitability. Even if we achieve profitability at some point in the future, we may not be able to sustain profitability in subsequent periods. If we are unable to achieve and sustain profitability, the market price of our common shares may significantly decrease and our ability to raise capital, expand our business or continue our operations may be impaired. A decline in the value of our common shares may also cause you to lose all or part of your investment.

In addition, our consolidated financial statements at December 31, 2019 have been prepared on a going concern basis, which assumes that we will be able to realize our assets and discharge our liabilities in the normal course of business.  Our present level of indebtedness and our significant accumulated losses as well as a number of other factors present challenges to our ability to comply with the covenants in the agreements governing our indebtedness and management anticipates that our available cash and cash equivalents and cash generated from financing activities will be insufficient to satisfy the our liquidity requirements for the next 12 months. As a result, we require additional funding to meet our ongoing obligations and to fund anticipated operating losses and no assurance can be given that future sources of capital will be available.

Our business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business.

In the United States, despite cannabis having been legalized for medical use or adult use in a number of states, cannabis and cannabis products, other than hemp and certain hemp-derived products, such as CBD, continue to be categorized at the federal level as a Schedule I controlled substance under the Controlled Substances Act (“CSA”), and subject to the Controlled Substances Import and Export Act, as amended (“CSIEA”). We believe that we are not subject to the CSA or CSIEA, because we have no business operations in the United States, and we do not distribute any products in the United States. Nonetheless, we are or may become subject to various other U.S. federal laws and regulations, including in connection with the listing of our common shares on the Nasdaq Global Select Market (“Nasdaq”), and violations of any U.S. federal laws or regulations, including the CSA and CSIEA, whether intentionally or inadvertently, could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings initiated by either the U.S. federal government or private citizens or criminal charges, including disgorgement of profits, cessation of business activities or divestitures. Further, the status of cannabis as a Schedule I controlled substance may cause us, and our business, to be negatively perceived by prospective U.S. investors or other parties, who may incorrectly believe that the CSA or CSIEA apply to us, or who may have reputational or other concerns about dealings with a cannabis grower even if it is not conducting business in, or distributing any products in, the United States.

We are, or expect to become, subject to a variety of laws and regulations in Canada, the United States, the United Kingdom, the European Union and elsewhere that prohibit money laundering, including the Proceeds of Crime and Terrorist Financing Act (Canada), the Money Laundering Control Act (United States), as amended, the UK Bribery Act 2010, the UK Proceeds of Crime Act 2002, Directive (EU) 2015/849 and the rules and regulations thereunder and any related or similar rules, regulations or guidelines issued, administered or enforced by governmental authorities in Canada, the United States, the United Kingdom, the European Union or any other jurisdiction in which we have or are developing business operations or to which we export. Although we believe that none of our activities implicate any applicable money laundering statutes, in the event that any of our business activities, any dividends or distributions therefrom, or any profits or revenue accruing thereby are found to be proceeds of crime under one or more of the statutes described above or any other applicable legislation, any persons, including investors, found to be aiding and abetting us in such violations could be subject to criminal or civil liability. Any violations of these laws, or allegations of such violations, could

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disrupt our operations, significantly distract management and involve significant costs and expenses, including legal fees. We could also suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures.

Our business is also subject to Canadian laws which generally prohibit companies and employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are, or will become, subject to the anti-bribery laws of any other countries in which we conduct or will conduct business, and as a company listed on a national securities exchange in the United States, we are subject to the Federal Corrupt Practices Act of 1977, as amended. Our employees or other agents may, without our knowledge and despite our efforts, policies and procedures, engage in prohibited conduct under anti-bribery laws for which we may be held responsible. Our policies mandate compliance with these anti-corruption and anti-bribery laws; however, there can be no assurance that our internal controls and procedures will protect us from liability for the recklessness, fraudulent behavior, dishonesty or other inappropriate acts of our affiliates, employees, contractors or agents. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences.

We may be unsuccessful in competing in the overall legal adult-use cannabis market in Canada and any other countries we intend to operate in.

Our Canadian adult-use business faces enhanced competition from others who are licensed under the Cannabis Act to participate in the adult-use cannabis industry. The Cannabis Act has established a licensing regime for the cultivation, production, processing, testing, packaging, labelling, delivery, transportation, distribution, sale, possession and disposal of cannabis for adult use. Pursuant to transitional provisions in the Cannabis Act, existing holders of medical cannabis licences under the Access to Cannabis for Medical Purposes Regulations have, subject to satisfying certain requirements, automatically been deemed licensed under the Cannabis Act for corresponding activities, and other individuals and corporations are now able to apply for such licences.

Subject to certain restrictions set out in the Cannabis Act, adults are permitted to cultivate, propagate, harvest and distribute up to four cannabis plants per household. If a significant number of individuals take advantage of the ability to cultivate and use their own cannabis, our success in the adult-use business may be limited and may not fulfill our expectations.

As of March 25, 2020, approximately 350 licences were issued by Health Canada. Certain of these competitors have longer operating histories and significantly greater financial, production, marketing, research and development and technical and human resources than we do. Some of these competitors have become public companies in the United States or Canada, giving them the ability to raise significant amount of capital quickly or use their publicly traded equity securities to conduct acquisitions. In addition, many other competitors have established retail locations. As a result, our competitors may be able to bring more and better products to market more quickly than us. Our commercial opportunity in the adult-use market could be reduced or eliminated if our competitors produce and commercialize products for the adult-use market that, among other things, are safer, more effective, more convenient, better quality or less expensive than the products that we produce, have greater sales, marketing and distribution support than our products, enjoy enhanced timing of market introduction and perceived effectiveness advantages over our products and receive more favorable publicity than our products. If our adult-use cannabis products do not achieve an adequate level of acceptance by the adult-use cannabis market, we may not generate sufficient revenue from these products, and our adult-use cannabis business may not become profitable. We expect that competition in the adult-use cannabis market and other cannabis markets in which we expect to participate will become more intense as current and future competitors begin to offer an increasing number of diversified products. As competition increases, we may experience downward price pressure on our cannabis products, loss of market share and increased marketing costs. To remain competitive, we will require a continued high level of investment in research and development, marketing, sales and client support, and we may not have sufficient resources to maintain such efforts.

We also face competition from the illicit cannabis market. Illegal dispensaries and ‘black market’ operations and participants, despite not having a valid licence under the Cannabis Regulations, command a significant percentage of the total market for cannabis and cannabis products in Canada and may be able to (i) offer products with higher concentrations of active ingredients, including THC, than permitted by the Cannabis Act and Cannabis Regulations or offered in the legal market, (ii) use delivery methods, that licensed producers are prohibited from offering to individuals in Canada, (iii) brand products more explicitly, (iv) sell products at lower prices and (v) market and distribute products in ways not permissible by law. As these illicit market participants do not comply with the regulations governing the cannabis industry in Canada, their operations may also have significantly lower costs.

As well, the legal landscape for medical and adult-use cannabis is changing internationally. An increasing number of jurisdictions globally are passing laws that allow for the production and distribution of medical or adult-use cannabis. Increased international competition, including competition from suppliers in other countries who may be able to produce at lower cost, and limitations placed on us by Canadian or other regulations, might lower the demand for our products on a global scale.

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Consumer preferences may change, and we may be unsuccessful in acquiring or retaining consumers and keeping pace with changing market developments.

As a result of changing consumer preferences, many consumer products attain financial success for a limited period of time. Even if our products find success at retail, there can be no assurance that such products will continue to be profitable. Our success will be significantly dependent upon our ability to develop new and improved product lines and adapt to consumer preferences. Even if we are successful in introducing new products or developing our current products, a failure to gain consumer acceptance or to update products could cause a decline in our products’ popularity and impair our brand. In addition, we may be required to invest significant capital in the creation of new product lines, strains, brands, marketing campaigns, packaging and other product features—none of which are guaranteed to be successful. Failure to introduce new features and product lines and to achieve and sustain market acceptance could result in us being unable to satisfy consumer preferences and generate revenue.

Our success depends on our ability to attract and retain consumers. There are many factors which could impact our ability to attract and retain consumers, including our ability to continually produce desirable and effective products, the successful implementation of our consumer acquisition plan and the continued growth in the aggregate number of potential consumers. Our failure to acquire and retain consumers could have a material adverse effect on us.

The legal cannabis industry is in its early stages of development and it is likely that we, and our competitors, will seek to introduce new products in the future. In attempting to keep pace with any new market developments, we may need to spend significant amounts of capital in order to successfully develop and generate revenues from new products we introduce. As well, we may be required to obtain additional regulatory approvals from Health Canada and any other applicable regulatory authorities, which may take significant amounts of time. We may not be successful in developing effective and safe new products, anticipating shifts in social trends and consumer demands, bringing such products to market in time to be effectively commercialized, or obtaining any required regulatory approvals, which, together with any capital expenditures made in the course of such product development and regulatory approval processes, may have a material adverse effect on our business and results of operations.

In addition, the patterns of cannabis consumption in Canada and elsewhere in the world may shift over time due to a variety of factors, including changes in demographics, social trends, public health polices and other leisure or consumption behaviors. If consumer preferences for our products or cannabis products in general do not develop, or if once developed they were to move away from our products or cannabis products in general, or if we are unable to anticipate and respond effectively to shifts in consumer behaviors, we may be adversely affected.

Legalization of cannabis in Canada may have an adverse impact on our ability to develop and grow a medical cannabis business in Canada.

Adult-use cannabis was legalized in October 2018 and the full effect of that on the Canadian medical cannabis market remains unknown. If medical-use consumers decide to purchase products available in the adult-use market instead of continuing to purchase them under the medical use regime, our ability to develop and grow a medical cannabis business in Canada may be negatively affected.

We, or the cannabis industry more generally, may receive unfavorable publicity or become subject to negative consumer or investor perception.

We believe that the cannabis industry is highly dependent upon positive consumer and investor perception regarding the benefits, safety, efficacy and quality of cannabis and cannabis products. Such categories of products having previously been commonly associated with various other narcotics, violence and criminal activities, and there is a risk that our business might attract negative publicity. Perception of the cannabis industry and cannabis products, currently and in the future, may be significantly influenced by scientific research or findings, regulatory investigations or proceedings, litigation, political statements, media attention and other publicity (whether or not accurate or with merit) both in Canada and in other countries relating to the benefits and risks of consuming cannabis or cannabis products, including unexpected safety or efficacy concerns or the activities of industry participants. There can be no assurance that future scientific research, findings, regulatory investigations or proceedings, litigation, political statements, media attention or other research findings or publicity will be favorable to cannabis or cannabis products. Adverse future scientific research reports, findings, regulatory investigations or proceedings, and political statements, that are, or litigation, media attention or other publicity that is, perceived as less favorable than, or that questions, earlier research reports, findings or publicity (whether or not accurate or with merit) could result in a significant reduction in the demand for cannabis or cannabis products. Further, adverse publicity reports or other media attention regarding the use of cannabis for medical purposes or consumption of cannabis with physical or mental illness or other negative effects or events, the safety, efficacy and quality of cannabis or cannabis products generally, as well

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as our current or future products and facilities, specifically could adversely affect us. Adverse publicity could arise even if the adverse effects associated with cannabis-use resulted from consumers’ failure to use such products legally, appropriately or as directed.

There is also a risk that the actions of other companies and service providers in the cannabis industry may negatively affect the reputation of the industry as a whole and, thereby, negatively impact our reputation. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share negative opinions and views in Canada and elsewhere in regard to our activities and the cannabis industry in general, whether true or not. The legal restrictions with respect to labelling and marketing cannabis may exacerbate these risks by increasing the influence of social media users and prohibiting us from effectively responding to negative publicity.

We do not ultimately have direct control over how we or the cannabis industry is perceived by others. Reputational issues may result in decreased investor confidence, declines in our stock price, litigation, difficulty in obtaining financing, increased challenges in developing and maintaining community relations and present an impediment to our overall ability to advance our business strategy and grow our business.

The vape market is a new market that is still evolving and is subject to significant uncertainty, including as a result of recent negative press and regulatory scrutiny of vape products in the United States.

In connection with Cannabis 2.0, we have begun selling vape products in Canada. In Canada, vape products are regulated under the Cannabis Act and associated regulations, and such regulations were drafted prior to the recent reports of vaping-related deaths and illnesses in the United States. As a result, Health Canada or the individual provinces may amend or further review the rules governing vape products and restrict or prohibit sales of such products. For example, the AGLC delayed the legalization of vaping products in Alberta and, currently, vaping products are illegal in Quebec and Newfoundland. There can be no assurance that we will be able to meet any additional compliance requirements or regulatory restrictions, or remain competitive in the face of unexpected changes in market conditions.

There is a limited history and volume of research on the health effects of vaping, electronic cigarettes and other similar products. If the medical community were to determine that vaping or use of any of related products caused or posed a risk of long-term health risks, market demand for these products and their use could materially decline. Such a determination could expose us to litigation and result in increased regulation. Furthermore, vaping products sold on the illicit market that contain harmful chemicals or other ingredients may adversely impact the demand for such products in the legal market and create the perception that such products were dangerous. In addition, regulators may prohibit the sale of vaping products all together or severely restrict their use. A decline in the market demand for our vaping products, product liability claims and increased regulation could have a material adverse effect on our business.

We may not be able to store or transport our cannabis products to customers in a safe, timely and cost-efficient manner, and we may experience breaches of security at our facilities or loss as a result of theft of our products.

Because of the nature of our products and the limited legal channels for distribution, as well as the concentration of inventory in our facilities, we are subject to a heightened risk of theft of our product and other security breaches.

Canadian adult-use distribution rules take various forms on a jurisdiction-by-jurisdiction basis and often require us to employ third parties to deliver our products to central government sites. Any prolonged disruption of third-party transportation services could have a material adverse effect on our sales volumes or our end users’ satisfaction with our products. Rising costs associated with third-party transportation services used by us to ship our products may also adversely impact our profitability.

The security of our products during transportation to and from our facilities is of the utmost concern. A breach of security at our Olds Facility, Rocky View Facility or, once completed, one of our future facilities, or during transport or delivery, could result in the significant loss of product as well as customers and may expose us to additional liability, including regulatory fines, litigation or increased expenses relating to the resolution and future prevention of similar events. Any failure to take steps necessary to ensure the safekeeping of our cannabis could also have an impact on our ability to continue operating under our existing licences, to renew or receive amendments to our existing licences or to receive required new licences.

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There has been limited study on the health effects of cannabis and cannabis products, including vaping products, and future clinical research studies may lead to conclusions that dispute or conflict with our understanding and belief regarding the benefits, viability, safety, efficacy, dosing and social acceptance of such products.

Research in Canada, the United States and internationally regarding the benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids, such as CBD and THC, remains in relatively early stages. Few clinical trials on the benefits and risks of cannabis or isolated cannabinoids have been conducted.

Future research and clinical trials may draw opposing conclusions to statements contained in the articles, reports and studies currently favored, or could reach different or negative conclusions regarding the benefits, viability, safety, efficacy, dosing or other facts and perceptions related to medical or adult-use cannabis, which could adversely affect social acceptance of cannabis and the demand for our cannabis products.

We may not be successful at transitioning and growing the business of Bridge Farm or leveraging Bridge Farm’s existing retail relationships, and we may not be able to recoup our investment in Bridge Farm.

Transitioning and growing the business of Bridge Farm over the longer-term will require continued investment in Bridge Farm’s operations, which may be significant. We currently intend to proceed with the completion of phase 2 of Bridge Farm’s Clay Lake facility located in Spalding, Lincolnshire, United Kingdom, the (“Clay Lake Phase 2 facility”), and we may invest incremental capital into Bridge Farm’s production facilities to transition certain facilities to the cultivation of hemp plants and high-THC cannabis. There is no assurance that we will be able to successfully transition Bridge Farm’s facilities to the cultivation of hemp and high-THC cannabis plants or complete the Clay Lake Phase 2 facility on a timely manner or within budget or successfully develop CBD or medical cannabis products from such plants. Although Bridge Farm has longstanding relationships with retailers in the United Kingdom, we may not be able to maintain and leverage such relationships or such relationship, may change. Retailers with which Bridge Farm has existing commercial relationships have not agreed to and may choose not to sell our CBD products or may only sell our products on terms that we do not view as advantageous. Moreover, retailers could choose to sell our CBD products in the United Kingdom but not in other countries. In addition, although Bridge Farm currently cultivates hemp in a portion of one of its facilities, it has not previously manufactured, produced or sold hemp or CBD products. Such efforts may not prove successful or profitable. In addition, we do not currently have extraction capabilities and, until we develop such capabilities, we will be reliant on third parties to extract CBD for use in various product offerings. Such third-party extraction may cost more than we anticipate, which would negatively impact our margins. In addition, such third-party extraction may not be delivered on schedule, meet our standards of quality or comply with applicable regulatory requirements, any of which may cause inventory shortages and cause us to fail to deliver certain offerings on a timely basis or at all. Furthermore, we will need additional licences to commercialize any future CBD products in the United Kingdom or elsewhere.

Bridge Farm’s business and future capital requirements will depend on many factors, including: the successful integration of Bridge Farm and its personnel, our ability to transition certain of Bridge Farm’s facilities to the cultivation of hemp and high-THC cannabis and production of CBD, consumer trends in the United Kingdom, European Union and elsewhere regarding the use of CBD products, regulatory developments with respect to the cannabis industry in the United Kingdom, European Union and elsewhere, the development of new products and offerings and maintaining and expanding customer relationships. We may not have sufficient capital to fund these activities and may not be able to obtain financing on acceptable terms or at all.

The Company is currently conducting a strategic review of Bridge Farm, including, but not limited to, a sale of all of its assets. There is no guarantee that we will be able to complete a transaction with respect to Bridge Farm on terms acceptable to us or at all. In addition, it is unlikely we will be able to recoup our investment in Bridge Farm as part of such process.

We will be exposed to risks relating to the laws of various countries as a result of any international expansion.

We may expand our operations to various countries, including the United Kingdom and other European countries. As a result of these expansions, we may become exposed to various levels of political, economic, legal, regulatory and other risks and uncertainties associated with operating in or exporting to these jurisdictions. These risks and uncertainties include changes in the laws, regulations and policies governing the production, sale and use of cannabis and cannabis-based products, political instability, currency controls, fluctuations in currency exchange rates and rates of inflation, labor unrest, changes in taxation laws, regulations and policies, restrictions on foreign exchange and repatriation and changing political conditions and governmental regulations relating to foreign investment and the cannabis business more generally.

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Changes, if any, in the laws, regulations and policies relating to the advertising, production, sale and use of cannabis and cannabis-based products or in the general economic policies in these jurisdictions, or shifts in political attitude related thereto, may adversely affect the operations or profitability of our international operations in these countries. Specifically, our operations may be affected in varying degrees by government regulations with respect to labelling, branding, marketing, health warnings, production, price controls, export and import controls, controls on currency remittance, increased income taxes, restrictions on foreign investment, land and water use restrictions and government policies rewarding contracts to local competitors or requiring domestic producers or vendors to purchase supplies from a particular jurisdiction. Failure to comply strictly with applicable laws, regulations and local practices could result in additional taxes, costs, civil or criminal fines or penalties or other expenses being levied on our international operations, as well as other potential adverse consequences such as the loss of necessary permits or governmental approvals or the inability to grow our business in these jurisdictions.

Furthermore, although we may expand production of hemp at certain of Bridge Farm’s facilities in the United Kingdom with a view toward facilitating exports of future CBD products to countries in the European Union, there is no assurance that these countries will authorize the import of our CBD products from the United Kingdom, or that the United Kingdom will authorize or continue to authorize such exports, or that an ability to export products from the United Kingdom into the European Union will provide us with any advantage. In February 2020, the UK Food Standards Agency (FSA) stated that CBD suppliers must receive a “novel food” approval by March 31, 2021 to sell CBD products in retail locations or such products will be removed from stores. New entrants, like Bridge Farm, will not be able to sell products without first receiving approval. There is no guarantee that Bridge Farm will receive such approval and any failure to receive such approval may materially adversely affect our business. Each country in the European Union (or elsewhere) may impose restrictions or limitations on imports that require the use of, or confer significant advantages upon, producers within that particular country. As a result, we may be required to establish production facilities similar to Bridge Farm in one or more countries in the European Union where we wish to distribute our products in order to gain access to these markets or to take advantage of the favorable legislation offered to producers in these countries.

We must rely on international advisors and consultants in the foreign countries in which we intend to operate.

The legal and regulatory requirements in the foreign countries in which we intend to operate with respect to the cultivation and sale of cannabis, banking systems and controls, as well as local business culture and practices are different from those in Canada. Our officers and directors must rely, to a great extent, on local legal counsel and consultants in order to keep abreast of material legal, regulatory and governmental developments as they pertain to and affect our business operations, and to assist with governmental relations. We must rely, to some extent, on those members of management and the board of directors who have previous experience working and conducting business in these countries, if any, to enhance our understanding of and appreciation for the local business culture and practices. We also rely on the advice of local experts and professionals in connection with current and new regulations that develop in respect of the cultivation and sale of cannabis as well as in respect of banking, financing, labor, litigation and tax matters in these jurisdictions. Any developments or changes in such legal, regulatory or governmental requirements or in local business practices are beyond our control.

The United Kingdom’s departure from the European Union could adversely affect our ability to execute on our plans for the Bridge Farm facilities.

In June 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union, commonly referred to as “Brexit,” which was consummated on January 31, 2020. The United Kingdom has until December 31, 2020 to reach and ratify a new agreement with the European Union which, among other things, would include terms of trade. However, there can be no assurance regarding the duration of such negotiations or the terms thereof. Any withdrawal agreement reached could significantly disrupt the free movement of goods, services, and people between the United Kingdom and the European Union, and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe. There may be similar referendums or votes in other European countries in which we may do business. The uncertainty surrounding the terms of the United Kingdom’s withdrawal and its consequences, as well as the impact of any similar circumstances that may arise elsewhere in Europe, could increase our costs and adversely impact consumer and investor confidence, and the level of consumer discretionary purchases, including purchases of our products. Furthermore, regulatory changes could harm our interest in Bridge Farm by raising the cost of input goods, increasing the cost to export or import between the United Kingdom and the European Union, or imposing other limits on the movement of goods or services.

The hemp and CBD product markets are new and heavily regulated with rules subject to rapidly changing laws and uncertainty, compliance with which may come with significant cost.

The markets for the production of hemp and CBD products are competitive and evolving. Continued development of the hemp and CBD product markets within the broader cannabis industry will be dependent upon new legislative authorization of such products. Any number of events or occurrences could slow or halt progress altogether in these industries. While the progress of the hemp and

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CBD product markets is currently encouraging, growth of such markets is not assured. Numerous factors may impact or negatively affect the lawmaking process within the various jurisdictions where we have business interests. Any one of these factors could slow or halt the use of hemp or CBD products, which could negatively impact our business and possibly cause us to discontinue the related operations as a whole.

In Canada, the new Industrial Hemp Regulations, or IHR, under the Cannabis Act replaced the previous Industrial Hemp Regulations under the Controlled Drugs and Substances Act on October 17, 2018. The regulatory scheme for industrial hemp largely remains the same; however, the IHR permits the sale of hemp to federally licensed cannabis processors under certain circumstances, and licensing requirements were softened in accordance with the perceived lower risk posed by industrial hemp. The IHR defines industrial hemp as a cannabis plant, or any part of that plant, in which the concentration of THC is 0.3% by weight or less in the flowering heads and leaves. In Canada, cannabis products containing CBD are subject to the Cannabis Act and the Cannabis Regulations. Not every activity involving industrial hemp falls within the scope of the IHR. For example, the extraction of CBD or another phytocannabinoid from the flowering heads, leaves and branches of the plant falls under the Cannabis Regulations and requires a cannabis processing licence.

In the EU, legislative approaches to the regulation of CBD products vary country by country, including local regulations with respect to THC content, and continue to evolve; however, EU-wide rules require products to contain no more than 0.2% THC. There is no assurance that any EU country will authorize or continue to authorize exports, imports, cultivation or production of hemp or CBD products. If any of these local laws or regulations prevent or discourage us from achieving our business goals, they may have an adverse effect upon our operations or restrict our ability to produce or sell products in the future.

In the United States, the Agriculture Improvement Act of 2018, or the Farm Bill, removed hemp-derived CBD containing less than 0.3% THC from the list of scheduled narcotics in December 2018 if certain conditions relating to its production are satisfied; however, the U.S. Food and Drug Administration (the “FDA”), and the United States Department of Agriculture have asserted their authority to regulate hemp-derived products in the United States. In addition, many states regulate hemp and hemp-derived products, including CBD. In particular, the FDA has declared that it is illegal under the U.S. Federal Food, Drug, and Cosmetic Act to market or sell CBD products as dietary supplements or to market or sell food to which CBD has been added, absent the issuance of an authorizing regulation by the FDA. In March 2019, the FDA formed a task force to develop legislation proposals regarding the regulation of CBD. Until regulations surrounding hemp and hemp-derived products are clarified in the United States, there will be substantial uncertainty around hemp and hemp-derived CBD, and the viability of the market for any such products.

The shifting compliance environment with respect to the hemp and CBD products and the need to build and maintain robust systems to comply with different regulations in multiple jurisdictions increases the possibility that we may violate one or more of the requirements. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines or the curtailment or restructuring of our operations.

 

The hemp and CBD product markets in Canada, the European Union and elsewhere are also subject to many of the same risks as the adult-use cannabis industry and market.

The hemp and CBD product markets in Canada, the European Union and elsewhere are subject to many of the same risks that are applicable to the broader cannabis industry and adult-use cannabis market, including risks related to the need for regulatory approvals, the early status and uncertain growth of the industry, agricultural farming, consumer acceptance and perception of hemp-derived products, competition, regulations regarding labelling, branding and marketing and the lack of clinical studies regarding the benefits, viability, safety, efficacy and dosing of such products.

Third parties with whom we do business may perceive themselves as being exposed to reputational risk as a result of their relationship with us.

The parties with whom we do business, or would like to do business with, may perceive that they are exposed to reputational risk as a result of our business activities relating to cannabis, which could hinder our ability to establish or maintain business relationships or raise capital. These perceptions relating to the cannabis industry may interfere with our relationship with service providers in Canada and other countries.

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We may seek to enter into extraction agreements, co-packing agreements, joint ventures, licensing arrangements or other relationships, or expand the scope of currently existing relationships, with third parties that we believe will have a beneficial impact on us, and there are risks that such strategic alliances or expansions of our currently existing relationships may not enhance our business in the desired manner.

We currently have, and may expand the scope of, and may in the future enter into, extraction agreements, co-packing agreements, joint ventures, licensing arrangements or other relationships with third parties that we believe will complement or augment our existing business and create additional revenue streams, including leasing any unused or excess facility space to other licensed producers. Our ability to complete additional arrangements is dependent upon, and may be limited by, among other things, the availability of suitable candidates and capital. In addition, such third-party arrangements could present unforeseen integration obstacles or costs, may not enhance our business and may involve risks that could adversely affect us, including the investment of significant amounts of management time that may be diverted from operations in order to pursue and complete such transactions or maintain such relationships. Future third-party arrangements could result in the incurrence of debt, costs and contingent liabilities, cross-contamination, damage to our products or facilities and harm to our brand, and there can be no assurance that future such arrangements will achieve, or that our existing arrangements will continue to achieve, the expected benefits to our business or that we will be able to consummate future arrangements on satisfactory terms, or at all.

Our contracts with other licensed producers may expose us to additional costs and negatively impact our results of operations.

We derive a significant portion of our revenue from sales of cannabis flower to other licensed producers in Canada. Our supply contracts with these other licensed producers contain provisions governing, among other things, the quality and THC-content of the cannabis supplied and the manner, time and place of such delivery. We have experienced issues with such supply agreements, including a legal dispute with one of our customers resulting from our failure to timely deliver product and the provision of additional product at no cost to another customer due to a disagreement over the THC-content of product supplied. In addition, we have a contract with another licensed producer to purchase a minimum amount of cannabis every month until 2038 at agreed upon prices and subject to certain revenue sharing arrangements. Such contract requires us to purchase such cannabis even if we have an excess supply of inventory (as we are currently experiencing). Issues with our contracts, including disagreements with our counterparties and any resulting publicity, and failure to comply with such agreements may have an material adverse impact on our results of operation and business. In addition, we are exposed to the credit risk of the licensed producers to which we sell. If any of our licensed producer-customers were to suffer financial difficulty, including bankruptcy, our business and liquidity may be materially adversely affected.

We may not be able to successfully identify and execute future acquisitions or dispositions or to successfully manage the impacts of such transactions on our operations.

We may seek strategic acquisitions in the future. Our ability to identify, consummate and integrate effectively any future potential acquisitions on terms that are favorable to us may be limited by the number of attractive acquisition targets, internal demands on our resources and, to the extent necessary, our ability to obtain financing on satisfactory terms, if at all. Any such activities may require, among other things, various regulatory approvals, licences and permits and there is no guarantee that all required approvals, licences and permits will be obtained in a timely fashion or at all. Acquisitions may expose us to additional risks including: difficulties in integrating administrative, financial reporting, operational and information systems; difficulties in managing newly acquired operations and improving their operating efficiency; difficulties in maintaining uniform standards, controls, procedures and policies through all our operations; difficulties entering into markets in which we have little or no direct experience; difficulties in retaining key employees of the acquired operations; and disruptions to our ongoing business. In addition, future acquisitions could result in the incurrence of additional debt, costs, and contingent liabilities. For example, we incurred a $100.3 million goodwill impairment related to our acquisition of Bridge Farm. We may also incur costs for and divert management attention to potential acquisitions that are never consummated. For acquisitions that are consummated, expected synergies may not materialize.

 

We are subject to risks inherent in an agricultural business, including the risk of crop failure.

The cultivation of cannabis, herbs and ornamental flowers are agricultural processes. As such, our business is subject to the risks inherent in the agricultural business, including risks of crop failure presented by weather, insects, fire, plant diseases and similar agricultural risks. Although we currently grow our products indoors under climate-controlled conditions, there can be no assurance that natural elements, such as extreme weather, insects and plant diseases, will not entirely interrupt our production activities or have an adverse effect on our business. In addition, cannabis plants, including cannabis, herbs and ornamental flowers, can be vulnerable to various pathogens including bacteria, fungi, viruses and other miscellaneous pathogens. We have had to dispose of crops in the past due to pathogens. Such instances often lead to reduced crop quality, stunted growth or death of the plant. Moreover, cannabis, including hemp, is “phytoremediative”, meaning that it may extract toxins or other undesirable chemicals or compounds from the ground in which it is planted. Various regulatory agencies have established maximum limits for pathogens, toxins, chemicals and other compounds that may be present in agricultural materials. In addition, we have experienced, and may in the future experience, production issues at our facilities, including poor crop yields, harvests of product with THC concentration that is too low to meet product specifications, fires, floods and contamination of our product from foreign objects. As a result of the foregoing, our products

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may not be suitable for commercialization, our products may be returned to us by our customers, and we may have to destroy the applicable portions of our crops.

Natural disasters, unusual weather, pandemic outbreaks such as COVID-19, boycotts and geo-political events or acts of terrorism could adversely affect our operations and financial results.

The occurrence of one or more natural disasters, such as hurricanes, floods and earthquakes, unusually adverse weather, pandemic outbreaks of influenza and other highly communicable diseases or viruses, such as the COVID-19 virus, boycotts and geo-political events, such as civil unrest in countries in which our operations are located and acts of terrorism, or similar disruptions could adversely affect our business, financial condition, liquidity and results of operations. These events could result in physical damage to one or more of our properties, increases in fuel or other energy prices, the temporary or permanent closure of one or more of our facilities or our customers, the temporary lack of an adequate workforce in a market, the temporary or long-term disruption in the supply of products from suppliers, the temporary disruption in the transport of goods, delay in the delivery of goods to and from our facilities, and disruption to our information systems.

In March 2020, as a result of the COVID-19 pandemic, Alberta declared a state of emergency and ordered the closure of schools and certain other public facilities. Alberta also amended its rules around paid sick leave to allow full and part-time employees to take 14 days of job-protected leave if they are required to self-isolate or caring for a dependent that is required to self-isolate. In addition, Sundial announced enhanced safety protocols at its Canadian and U.K. facilities, staffing measure changes and implemented remote work procedures for its corporate staff. Such measures and 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 Canada may close voluntarily or be forced to close by the provincial governments, reducing our ability to distribute cannabis. 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 producers of goods, such as vape hardware, should they materialize, may make it difficult, more costly, or impossible for Sundial to produce or distribute cannabis, conduct quality testing, extract cannabis oils, or otherwise market and sell its products. For example, we have experienced delays in shipment of vape cartridge hardware for our products from China. 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. Bridge Farm is facing similar challenges, conditions and risks in the United Kingdom, including cancellation of deliveries of flowers and plants by retailers, which has resulted in lost revenue. In addition, at least one employee at Bridge Farm has tested positive for the COVID-19 virus and is being attended to by health professionals. Although we do not expect to close the Bridge Farm facilities, we have taken additional precautions and plan to reduce operations at Bridge Farm starting April 1, 2020. There can be no guarantee that we will not have to suspend operations at Bridge Farm for a significant period of time. If macroeconomic conditions continue to worsen in Canada, the United Kingdom and the rest of 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. Such volatility has hampered, and may in the future hamper, Sundial’s efforts to secure additional financing or amendments to its credit agreements. 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 financial position, results of operations and liquidity. The longer the pandemic continues, the more severe such impacts may be.

We have undergone changes to management and our board of directors as well as implemented business optimization initiatives — all of which may distract from our operation of the business and may not the be successful.

On January 30, 2020, we announced certain changes to our executive team and board of directors, including the resignation of Torsten Kuenzlen as our Chief Executive Officer and a member of our board of directors, the resignation of Edward Hellard as our Executive Chairman, the appointment of one of our directors, Zach George, as Chief Executive Officer, and the promotion of Andrew Stordeur as President and Chief Operating Officer.

Due to the early-stage nature of our business and our strategy, our success is largely dependent on the performance of our management team as well as our ability to continue to attract, develop, motivate and retain highly qualified and skilled employees. Consequently, the loss of any member of management or other key operational employees may have a substantial effect on our future success or failure. We do not currently maintain key-person insurance on the lives of any of our key employees. Experienced personnel in the

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cannabis industry, or personnel with other industry experience transferrable to the cannabis industry, are in high demand and competition for their talents is intense. As a result of the foregoing, we have incurred, and may incur in the future, significant costs to attract and retain employees.

In addition, in response to slower than expected regulatory approvals of new retail stores and delays in some cannabis 2.0 products, we implemented several cost savings and business optimization initiatives, including the enhancement of facility workflows and processes, realignment of product lines and product formats to areas of stronger demand, workforce optimization and a heightened discipline in cost management. As of the date of this Annual Report, a substantial portion of these initiatives have been implemented, with cost reductions expected to be realized beginning in the first quarter of 2020. As part of the leadership team's focus on improved efficiency, cost management and long-term sustainability, the Company will continue to monitor operations to ensure it remains responsive in the current environment.

A variety of factors could cause us not to realize some or all of the expected cost savings, including, among others, delays in the anticipated timing of activities related to our cost savings programs, lack of sustainability in cost savings over time, unexpected costs associated with operating our business, our ability to reduce headcount and our ability to achieve the efficiencies contemplated by the business optimization initiatives. We may be unable to realize all of these cost savings within the expected timeframe, or at all, and we may incur additional or unexpected costs in order to realize them. In such event, we may have difficulty complying with the terms of our indebtedness. The magnitude of expected cost savings are based upon a number of assumptions and estimates that are in turn based on our analysis of the various factors which currently, and could in the future, impact our business. These assumptions and estimates are inherently uncertain and subject to significant business, operational, economic and competitive uncertainties and contingencies. Certain of the assumptions relate to business decisions that are subject to change, including, among others, our anticipated business strategies, our marketing strategies, our product development and licensing strategies and our ability to anticipate and react to business trends. Other assumptions relate to risks and uncertainties beyond our control, including, among others, the economic environment in which we operate, cannabis regulation and licensing and other developments in our industry as well as capital markets conditions from time to time. The actual results of implementing the various cost savings initiatives may differ materially from our estimates if any of these assumptions prove incorrect. Moreover, our continued efforts to implement these cost savings may divert management attention from the rest of our business and may preclude us from seeking attractive new product and other opportunities.  Additionally, former employees may file lawsuits against us, which may be expensive to defend and could potentially result in adverse judgements against us. Any of the foregoing may materially and adversely affect our business, results of operations and liquidity.

Directors and certain key employees of a licensed producer must obtain and maintain a security clearance from Health Canada. Certain of our directors and key employees have not yet obtained such clearance. There is no assurance that any of our existing directors or employees who presently or may in the future require a security clearance will be able to obtain or renew such clearances in a timely manner or at all, or that new personnel who require a security clearance will be able to obtain one.

Each director and certain key employees of a company that holds a licence for cultivation, processing or sale under the Cannabis Regulations is subject to the requirement to obtain and maintain a security clearance from Health Canada. Certain additional key personnel are also required to obtain and maintain a security clearance. Under the Cannabis Regulations, a security clearance cannot be valid for more than five years and must be renewed before the expiry of a current security clearance. All of our directors and executive officers have obtained security clearance from Health Canada with the exception of Greg Mills and Bryan Pinney (two of our directors) and Zach George (our Chief Executive Officer and director).  There is no assurance that any of our existing personnel who presently or may in the future require a security clearance will be able to obtain or renew such clearances in a timely manner or at all, or that new personnel who require a security clearance will be able to obtain one. A failure by an individual in a key operational position to maintain or renew his or her security clearance could result in a reduction or complete suspension of our operations or loss of our licences. In addition, if an individual in a key operational position leaves us, and we are unable to find a suitable replacement who is able to obtain a security clearance required by the Cannabis Act in a timely manner, or at all, we may not be able to conduct our operations at planned production volume levels or at all. Furthermore, the Cannabis Regulations require us to designate a qualified individual in charge who is responsible for supervising transactions with cannabis, which individual must meet certain educational and security clearance requirements. Moreover, depending on the activity, under current regulations a qualified person in charge or an individual with security clearance must be physically present in a space where other individuals are conducting activities with cannabis. If our current designated qualified person in charge fails to maintain his security clearance, or if our current designated qualified person in charge leaves us and we are unable to find a suitable replacement who meets these requirements, we may no longer be able to conduct activities with respect to the cultivation, production or sale of cannabis

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Significant interruptions in our access to certain key inputs such as labor, raw materials, electricity, water and other utilities may impair our growing operations and materially affect our business.

Our business is dependent on a number of key inputs and their related costs, including raw materials, supplies and equipment related to our operations, as well as electricity, water and other utilities. Any significant interruption, price increase or negative change in the availability or economics of the supply chain for key inputs and, in particular, loss of any energy subsidies, rising or volatile energy costs could curtail or preclude our ability to continue production and may have a material adverse impact on our business and results of operations. Certain of our energy subsidies were contingent on our ability to meet certain milestones by January 31, 2020. While we believe we have met all milestones and have made application for all subsidies, there is no assurance that subsidies will continue or that our outstanding applications will be approved. In addition, our operations could be significantly affected by a prolonged power outage. Furthermore, our cultivation operations require a significant amount of electricity as a result it may be difficult for us to locate areas to construct additional cultivation operations as we grow.

Our ability to compete and grow cannabis and other plants is dependent on us having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts and components. No assurances can be given that we will be successful in maintaining our required supply of labor, equipment, parts and components.

Our headquarters, Olds Facility and Rocky View Facility, are in Alberta, a province whose economy has historically relied heavily on the oil and gas industry. As we are currently in an oil and gas downturn, we may temporarily have increased access to labor and benefit from lower employment expenses. If the oil and gas industry recovers and begins hiring in large numbers, we may face increased competition for employees, which could harm our ability to attract and retain employees or increase our compensation costs.

The valuation of our biological assets is subject to certain assumptions and estimates.

Pursuant to IFRS, we measure the value of our biological assets (consisting of plants in various stages of vegetation) using the income approach at fair value less costs to sell up to the point of harvest. As market prices are generally not available for biological assets while they are growing, we are required to make assumptions and estimates relating to, among other things, expected harvest yields, selling prices and costs to sell. The assumptions and estimates used to determine the fair value of biological assets, and any changes to such prior estimates, directly affect our reported results of operations. If actual yields, prices, costs, market conditions or other results differ from our estimates and assumptions, there could be material adjustments to our results of operations. In addition, the use of these future estimated metrics differs from US GAAP. As a result, our financial statements and reported earnings are not directly comparable to those of similar companies in the United States.

Failure in our quality control systems may adversely impact our sales volume, market share and profitability.

The quality and safety of our products are critical to the success of our business and operations. As such, it is imperative that our (and our service providers’) quality control systems operate effectively and successfully. Quality control systems can be negatively impacted by the design of the quality control systems, the quality training program, and adherence by employees to quality control guidelines. Although we strive to ensure that all of our service providers have implemented and adhere to high caliber quality control systems, we could experience a significant failure or deterioration of such quality control systems. If, as a result of a failure in our (or our service providers’) quality control systems, contamination of, or damage to, our inventory or packaged products occurs, we may incur significant costs in replacing, destroying or repurposing such inventory, providing replacement products to our customers or recalling such products. We may be unable to meet customer demand and may lose customers who have to purchase alternative brands or products. In addition, consumers may lose confidence in our products whether affected or not and our brand may be materially damaged. A loss of sales volume from a contamination event may occur, and such a loss may affect our ability to supply our current customers and to recapture their business in the event they are forced to switch products or brands, even if on a temporary basis. We may also be subject to legal action as a result of a contamination, which could result in negative publicity and negatively impact our results of operations. During this time, our competitors may benefit from an increased market share that could be difficult and costly to regain.

Our products may be subject to recalls or returns for a variety of reasons, which could require us to expend significant management and capital resources.

Manufacturers and distributors of consumer goods products are sometimes subject to the recall or return of their products for a variety of reasons, including public health and public safety risks, product defects, such as contamination, adulteration, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure. Although we have detailed procedures in place for testing our finished products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid product returns, recalls, regulatory action or lawsuits, whether frivolous or otherwise. While we have not been subject to a recall to date, if any of the products produced by us are recalled in the future due to an

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alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. In addition, from time to time we have customers return our products alleging, among other things, contamination and failure to meet designated specifications. As a result of any such recall or return, we may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall or return may require significant management attention, expose us to liabilities or damage our reputation and goodwill or that of our products or brands.

Additionally, product recalls and returns may lead to increased scrutiny of our operations by Health Canada or other regulatory agencies, requiring further management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses. Any product recall affecting the cannabis industry more broadly, whether or not involving us, could also lead consumers to lose confidence in the safety and security of such products, including products sold by us.

We may be subject to product liability claims or regulatory action if our products are alleged to have caused significant loss, injury or death, which is exacerbated by the fact that cannabis use may increase the risk of serious adverse side effects.

As a manufacturer and distributor of products which are ingested or otherwise consumed by humans, we face the risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused loss, injury or death. We may be subject to these types of claims due to allegations that our products caused or contributed to injury, illness or death, made false, misleading or impermissible claims, failed to include adequate labelling and instructions for use or failed to include adequate warnings concerning possible side effects or interactions with other substances. This risk is exacerbated by the fact that cannabis use may increase the risk of developing schizophrenia and other psychoses, symptoms for individuals with bipolar disorder, and other side effects. Previously unknown adverse reactions resulting from human consumption of cannabis products alone or in combination with other medications or substances could also occur. In addition, the manufacture and sale of cannabis products, like the manufacture and sale of any ingested or consumable product, involves a risk of injury to consumers due to tampering by unauthorized third parties or product contamination. We may in the future have to recall certain of our cannabis products as a result of potential contamination and quality assurance concerns. A product liability claim or regulatory action against us could result in increased costs and could adversely affect our reputation and goodwill with our consumers. There can be no assurance that we will be able to maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could result in us becoming subject to significant liabilities that are uninsured and also could adversely affect our commercial arrangements with third parties.

We may be subject to liability claims as a result of positive testing for THC or banned substances.

Our products are made from cannabis and contain varying levels of THC. THC is banned in many jurisdictions and heavily regulated in many others. Moreover, regulatory frameworks for legal amounts of consumed THC is evolving. Whether or not ingestion of THC (at low levels or otherwise) is permitted in a particular jurisdiction, there may be adverse consequences to end users who test positive for trace amounts of THC attributed to use of our products, including future CBD products. Positive tests may adversely affect the end user’s reputation, ability to obtain or retain employment and participation in certain athletic or other activities. A claim or regulatory action against us based on such positive test results could adversely affect our reputation.

We rely on third-party distributors to distribute our products, and those distributors may not perform their obligations.

We rely on third-party distributors, including provincial regulatory boards and private retailers, and may in the future rely on other third parties, to distribute and sell our products to consumers. If these distributors do not successfully carry out their contractual duties, if there is a delay or interruption in the distribution of our products or if these third parties damage our products, it could negatively impact our revenue from product sales. Furthermore, any damage to our products, such as product spoilage, could expose us to potential product liability, damage our reputation and the reputation of our brands or otherwise harm our business and results of operations.

We may not be able to obtain adequate insurance coverage in respect of the risks we and our business face, the premiums for such insurance may not continue to be commercially justifiable or there may be coverage limitations and other exclusions which may result in such insurance not being sufficient to cover potential liabilities that we face.

We currently have insurance coverage, including product liability, business interruption and property insurance, protecting many, but not all, of our assets and operations. Our insurance coverage is subject to coverage limits and exclusions and may not be available for the risks and hazards to which we are exposed. In addition, no assurance can be given that such insurance will be adequate to cover our liabilities, including potential litigation and product liability claims, or will be generally available in the future or, if available, that premiums will be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance

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or were in excess of policy limits, we may be exposed to material uninsured liabilities that could impede our liquidity, profitability or solvency.

If we are not able to comply with all safety, health and environmental regulations applicable to our operations and industry, we may be held liable for any breaches of those regulations.

Safety, health and environmental laws and regulations affect nearly all aspects of our operations, including product development, working conditions, waste disposal, emission controls, the maintenance of air and water quality standards and land reclamation, and, with respect to environmental laws and regulations, impose limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Compliance with safety, health and environmental laws and regulations can require significant expenditures, and failure to comply with such safety, health and environmental laws and regulations may result in the imposition of fines and penalties, the temporary or permanent suspension of operations, the imposition of clean-up costs resulting from contaminated properties, the imposition of damages and the loss of or refusal of governmental authorities to issue permits or licences to us. Exposure to these liabilities may arise in connection with our existing operations, our historical operations and operations that may in the future be closed or sold to third parties. We could also be held liable for worker exposure to hazardous substances and for accidents causing injury or death. There can be no assurance that we will at all times be in compliance with all safety, health and environmental laws and regulations notwithstanding our attempts to comply with such laws and regulations.

Changes in applicable safety, health and environmental standards may impose stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. We are not able to determine the specific impact that future changes in safety, health and environmental laws and regulations may have on our industry, operations or activities and our resulting financial position; however, we anticipate that capital expenditures and operating expenses will increase in the future as a result of the implementation of new and increasingly stringent safety, health and environmental laws and regulations. Further changes in safety, health and environmental laws and regulations, new information on existing safety, health and environmental conditions or other events, including legal proceedings based upon such conditions or an inability to obtain necessary permits in relation thereto, may require increased compliance expenditures by us.

We are, and may become, subject to litigation, regulatory or agency proceedings, investigations and audits.

We are, and may in the future become, subject to litigation, regulatory or agency proceedings, investigations and audits from time to time, some of which may adversely affect our business. Should any litigation, regulatory or agency proceeding, investigation or audit in which we become involved be determined against us, such a decision could adversely affect our ability to continue operating, the value or market price for the common shares and could require the use of significant resources. Even if we are involved in litigation, regulatory or agency proceedings, investigations and audits and are ultimately successful, they can require the redirection of significant resources and may also create a negative perception of our brand.

For example, in 2019, we entered into a settlement agreement with another licensed cannabis producer in connection with our non-delivery of cannabis under a supply agreement and agreed to pay penalties in the amount of $1.7 million.

Additionally, we have received notice of a legal proceeding commenced against us in the province of Quebec by another licensed cannabis producer alleging breach of a supply agreement and have filed a statement of defence. We have recorded a reserve in the amount of $1.5 million at December 31, 2019 in respect of this matter.

In connection with our initial public offering (“IPO”), we and certain of our current and former officers and directors, as well as the underwriters of our IPO, were named as defendants in several putative shareholder class action lawsuits filed between September 9, 2019 and November 1, 2019. The cases have been consolidated in two separate actions depending on the court in which they were first filed, one in the Supreme Court of New York, New York County, captioned In re Sundial Growers Inc. Securities Litigation, Index No. 655178/2019, and the other in the United States District Court for the Southern District of New York, captioned In re Sundial Growers Inc. Securities Litigation, Master Case No. 1:19-cv-08913-ALC. The complaints in each of the two consolidated actions assert claims under Sections 11, 12(a)(2), and 15 of the U.S. Securities Act of 1933, as amended (the “Securities Act”). They generally allege that the we made material misstatements and omissions in the prospectus and registration statement in connection with the IPO with respect to, among other things, the failure to disclose systemic quality control issues as well as the return of cannabis and termination of the supply agreement by one of the Company’s customers. Additionally, we have received a threat of litigation from an investor in our Senior Convertible Notes.

While we intend to defend ourselves vigorously in all pending and future legal proceedings, we may settle certain matters for strategic reasons, as a part of a resolution of other matters or in order to avoid potentially worse consequences arising from inherently uncertain

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judicial or administrative processes. Moreover, regardless of the merits of our defenses, if we are unable to resolve certain legal proceedings or regulatory actions, indirect consequences arising from unproven allegations or appealable regulatory findings may have adverse consequences to us. The outcome of any litigation, regulatory or agency proceedings investigations and audits is inherently uncertain. Unfavorable rulings, judgments or settlement terms could have a material adverse impact on our business, liquidity and results of operations.

We are incorporated in the Province of Alberta and enforcement of actions may be difficult.

We are incorporated under the laws of the Province of Alberta and our head office is located in the Province of Alberta. All of our directors and officers and some of the experts named in this Annual Report are residents of Canada or otherwise reside outside of the United States, and a substantial portion of their assets and our assets are located outside the United States. Consequently, it may be difficult for investors in the United States to bring an action against such directors, officers or experts or to enforce against those persons or us a judgment obtained in a United States court predicated upon the civil liability provisions of U.S. federal securities laws or other laws of the United States.

 

We may be subject to risks related to our information technology systems, including the risk that we may be the subject of a cyberattack and the risk that we may be in non-compliance with applicable privacy laws.

We have entered into agreements with third parties for hardware, software, telecommunications and other information technology, or IT, services in connection with our operations. Our operations depend, in part, on how well we and our vendors protect networks, equipment, IT systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism or theft. Our operations also depend on the timely maintenance, upgrade and replacement of networks, equipment and IT systems and software, as well as preemptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays or increases in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact us.

We are subject to various laws relating to the use of customer information and other personal and confidential information and any non-compliance may result in material adverse consequences to our business.

We collect, process, maintain and use data, including sensitive personal information on individuals, available to us through online activities and other customer interactions with our business. Our current and future marketing programs may depend on our ability to collect, maintain and use this information, and our ability to do so is subject to evolving laws and enforcement trends in Canada and other jurisdictions. There are a number of laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the privacy rules under the Personal Information Protection and Electronic Documents Act (“PIPEDA”), and similar laws in other jurisdictions, protect medical records and other personal health information by limiting their use and the disclosure of health information to the minimum level reasonably necessary to accomplish the intended purpose. We collect and store personal information about our patients and are responsible for protecting that information from privacy breaches. A privacy breach may occur through a procedural or process failure, an IT malfunction or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly patient lists and preferences, is an ongoing risk whether perpetrated through employee collusion or negligence or through deliberate cyberattack. Moreover, if we are found to be in violation of the privacy or security rules under PIPEDA or other laws protecting the confidentiality of patient health information, including as a result of data theft and privacy breaches, we could be subject to sanctions and civil or criminal penalties, which could increase our liabilities and harm our reputation.

Certain of our marketing practices rely upon e-mail, social media and other means of digital communication to communicate with consumers on our behalf. We may face risk if our use of e-mail, social media or other means of digital communication is found to violate applicable laws. We post our privacy policy and practices concerning the use and disclosure of user data on our website. Any failure by us to comply with our posted privacy policy, anti-spam legislation or other privacy-related laws and regulations could result in proceedings which could potentially harm our business. In addition, as data privacy and marketing laws change, we may incur additional costs to ensure we remain in compliance. If applicable data privacy and marketing laws become more restrictive at the international, federal, provincial or state levels, our compliance costs may increase, our ability to effectively engage customers via personalized marketing may decrease, our investment in our e-commerce platform may not be fully realized, our opportunities for growth may be curtailed by our compliance burden and our potential reputational harm or liability for security breaches may increase.

We and Bridge Farm have had material weaknesses in our internal control over financial reporting and our management may not be able to successfully implement adequate internal control over financial reporting or disclosure controls and procedures.

Proper systems of internal control over financial reporting and disclosure controls and procedures are critical to the operation of a public company. However, we do not expect that our internal control over financial reporting or disclosure controls and procedures

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will prevent all errors and remove all risk of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Furthermore, the design of a control system must reflect the fact that there are resource constraints and the benefits of such controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

In connection with the audit of our consolidated financial statements for the fiscal periods ended December 31, 2019 and 2018, our management and independent auditors concluded that there were material weaknesses in our internal control over financial reporting. A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal control over financial reporting such that it is reasonably possible that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified included a lack of segregation of duties related to the review and approval of journal entries. It was noted that there is no review process in place to approve journal entries by someone other than the preparer. Similar material weaknesses were identified at Bridge Farm by the independent auditors thereof prior to our acquisition of Bridge Farm. We are currently implementing a remediation plan and taking the measures necessary to address the underlying causes of this material weaknesses and expect to remediate this material weaknesses for the fiscal year ending December 31, 2020. Remediation may take longer than we expect, the costs to be incurred in connection with remediation may be higher than we expect, and our efforts may not prove to be successful in remediating these material weaknesses.

If we fail to establish and maintain adequate internal controls, including by remediating the aforementioned material weaknesses, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information and we may not be able to comply with the applicable covenants in our financing arrangements. As a result, we may be subject to costly litigation and shareholder actions, our access to the capital markets may be limited or adversely affected, our results of operations may be adversely affected and the trading price of our common shares may decline. Additionally, ineffective internal controls could expose us to an increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchanges on which we list or to other regulatory investigations and civil or criminal sanctions. Furthermore, we may be the subject of negative publicity focusing on the restatement of our previously issued financial results and related matters, and may be adversely impacted by negative reactions from our shareholders, creditors, or others with whom we do business. This negative publicity may impact our ability to attract and retain customers, employees and suppliers.

Pursuant to Section 404 (“SOX 404”) of the Sarbanes Oxley Act of 2002 (“SOX”), we will be required, beginning with the second annual report that we file with the SEC, to furnish a report by our management on our internal control over financial reporting, which, after we are no longer an emerging growth company, must be accompanied by an attestation report on such internal controls issued by our independent auditors. To achieve compliance with SOX 404 within the prescribed period, we will document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent auditors will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by SOX 404.

We recognized a goodwill impairment charge for the year ended December 31, 2019 and may be required to recognize additional goodwill and intangible asset impairment charges in the future.

In connection with the accounting for the Bridge Farm acquisition, we recorded goodwill and other intangible assets. Under IFRS, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other indefinite-lived intangible assets has been impaired. Amortizing intangible assets will be assessed for impairment in the event of an impairment indicator. Events or changes indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include reduced future cash flow estimates, slower growth rates in industry segments in which we participate and a decline in our stock price and market capitalization. We may be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively affecting our results of operations and shareholders’ equity. For the year ended December 31, 2019, we recorded $100.3 million in non-cash charges for the impairment of goodwill for our acquisition of Bridge Farm based on an impairment in Bridge Farm’s ability to generate revenue from the cultivation, processing and distribution of CBD products as a result of significant delays and uncertainties in the licensing and regulatory requirements in the United Kingdom. The goodwill impairment was recognized in relation to the portion of goodwill assigned to Bridge Farm’s CBD business.

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We may be subject to credit risk.

Credit risk is the risk that the counterparty to a financial instrument fails to meet its contractual obligations, resulting in a financial loss to us. We have credit risk exposure based on the balance of our cash, accounts receivable, subscriptions receivable, and taxes recoverable. There are no assurances that our counterparties or customers will meet their contractual obligations to us.

Our financing agreements contain covenants that limit our ability to seek additional financing or perform desired business operations.

We have various loans, credit facilities and financing arrangements that impose certain covenants, including but not limited to and subject to certain exceptions, forbidding consolidation, amalgamation or merger, the incurrence of any debt not specifically permitted, the amendment or termination of certain supply agreements, the acquisition of any company not specifically permitted, the making of any capital expenditure not specifically permitted and the requirement to maintain a certain working capital and leverage ratios. For example, so long as at least $75.0 million principal amount of loans is outstanding under the SAF Credit Agreement, we are subject to certain financial covenants, including certain leverage ratios and covenants requiring us to (i) maintain at least 60% of the square footage of Bridge Farm’s existing facilities in the United Kingdom, representing approximately 900,000 of the total 3.6 million square feet of expected capacity following the completion of our planned expansion of Bridge Farm’s facilities, dedicated to non-CBD plant production and inventory and (ii) achieve certain minimum gross margin targets in respect of Bridge Farm’s non-CBD plant business for the three months ending December 31, 2019 and the three months ending March 31, 2020. Our ability to maintain the required gross margin depends on a number of factors outside our control, including known and unforeseen risks relating to our production volumes and operating expenses. Management believes that we will be able to meet the requirement of this minimum gross margin covenant. However, there is no assurance that we will be able to do so. In the event that we do not meet the required specified minimum gross margin for any reason, we will be in default of the SAF Credit Agreement, if not cured prior to the applicable deadline. In addition, the availability of incremental borrowings under our current or future debt facilities are subject to conditions precedent, including the achievement of certain operating results. See “Liquidity and Capital Resources—Debt—Term Debt Facility” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

At December 31, 2019, the Syndicated Credit Agreement, as written, contained certain financial covenants to maintain:

 

(i)

An available cash balance to March 31, 2020;

 

(ii)

A certain interest coverage ratio as at December 31, 2019;

 

(iii)

A certain senior funded debt to EBITDA ratio as at March 31, 2020 and as at the end of every fiscal quarter thereafter; and

 

(iv)

A fixed charge coverage ratio at March 31, 2020 and as at the end of every fiscal quarter thereafter.

At December 31, 2019 the Company was not in compliance with the interest coverage ratio covenant, which caused a cross-acceleration of its Term Debt Facility. Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020. In addition, we anticipate that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar waivers in the past; however, there is no guarantee that we will be able to do so in the future. See “Liquidity and Capital Resources—Debt—Syndicated Credit Agreement” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

Certain of these financing arrangements are secured by, among others, security agreements including but not limited to, liens over all our present and future assets. Events beyond our control, including changes in general economic and business conditions, may affect our ability to observe or satisfy these covenants, which could result in a default or event of default under one or more of our financing arrangements. If an event of default under one or more of our financing arrangements occurs, the lender or lenders thereto could elect to declare all principal amounts outstanding at such time under such financing arrangements to be immediately due. An event of default under one of our financing arrangements may also constitute a cross-default under one or more of our other financing arrangements, resulting in a default or event of default with respect to additional financing arrangements. In such an event, we may not have sufficient funds to repay amounts owing under such financing arrangements and we could lose all of our assets.

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We are an emerging growth company and intend to take advantage of reduced disclosure requirements applicable to emerging growth companies, which could make our common shares less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have total annual gross revenue of US$1.07 billion or more; (ii) December 31, 2024 (the last day of the fiscal year ending after the fifth anniversary of the date of the completion of the our IPO); (iii) the date on which we have issued more than US$1.0 billion in non-convertible debt securities during the prior three-year period or (iv) the last day of the fiscal year during which we meet the following conditions: (x) the worldwide market value of our common equity securities held by non-affiliates as of our most recently completed second fiscal quarter is at least US$700 million, (y) we have been subject to U.S. public company reporting requirements for at least 12 months and (z) we have filed at least one annual report as a U.S. public company. For so long as we remain an emerging growth company, we are permitted to and intend to rely upon exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

not being required to comply with the auditor attestation requirements of SOX 404;

 

not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis);

 

being permitted to present only two years of audited financial statements in contrast to other reporting companies that must provide audited financial statements for three fiscal years;

 

reduced disclosure about executive compensation arrangements; and

 

exemptions from the requirements to obtain a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute arrangements not previously approved.

We may take advantage of some, but not all, of the available exemptions described above. We have taken advantage of reduced reporting burdens in this Annual Report. We cannot predict whether investors will find our common shares less attractive if we rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.

We are a foreign private issuer and intend to take advantage of less frequent and detailed reporting obligations.

We are a “foreign private issuer”, as such term is defined in Rule 405 under the Securities Act, and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the U.S. Exchange Act of 1934, as amended (the “Exchange Act”), we will be subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. As a result, we will not file the same reports that a U.S. domestic issuer would file with the SEC, although we will be required to file or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws. In addition, our officers, directors, and principal shareholders are exempt from the reporting and “short swing” profit recovery provisions of Section 16 of the Exchange Act. Therefore, our shareholders may not know on as timely a basis when our officers, directors and principal shareholders purchase or sell shares, as the reporting deadlines under the corresponding Canadian insider reporting requirements are longer.

As a foreign private issuer, we will be exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements. We will also be exempt from Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. While we will comply with the corresponding requirements relating to proxy statements and disclosure of material non-public information under Canadian securities laws, these requirements differ from those under the Exchange Act and Regulation FD and shareholders should not expect to receive the same information at the same time as such information is provided by U.S. domestic companies. In addition, we will have more time than U.S. domestic companies after the end of each fiscal year to file our annual report with the SEC and will not be required under the Exchange Act to file quarterly reports with the SEC.

In addition, as a foreign private issuer, we have the option to follow certain Canadian corporate governance practices, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following and describe the Canadian practices we follow instead. We may in the future elect to follow home country practices in Canada with regard to certain corporate governance matters. As a result, our shareholders may not have the same protections afforded to shareholders of U.S. domestic companies that are subject to all corporate governance requirements.

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We may in the future lose our foreign private issuer status.

We may in the future lose our foreign private issuer status if a majority of our shares are held in the United States and we fail to meet the additional requirements necessary to avoid loss of foreign private issuer status, such as if: (i) a majority of either our directors or executive officers, considered as separate groups, are either U.S. citizens or residents; (ii) a majority of our assets are located in the United States; or (iii) our business is administered principally in the United States. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer will be significantly more than the costs incurred as a Canadian foreign private issuer. If we are not a foreign private issuer, we would not be eligible to use foreign issuer forms and would be required to file periodic and current reports and registration statements on U.S. domestic issuer forms with the SEC, which are generally more detailed and extensive than the forms available to a foreign private issuer. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on the Nasdaq that are available to foreign private issuers.

 

Tax and accounting requirements may change in ways that are unforeseen to us and we may face difficulty or be unable to implement or comply with any such changes.

We are subject to numerous tax and accounting requirements, and changes in existing accounting or taxation rules or practices, or varying interpretations of current rules or practices, could have a significant adverse effect on our financial results, the manner in which we conduct our business or the marketability of any of our products. We currently have international operations and plan to expand such operations in the future. These operations, and any expansion thereto, will require us to comply with the tax laws and regulations of multiple jurisdictions, which may vary substantially. Complying with the tax laws of these jurisdictions can be time consuming and expensive and could potentially subject us to penalties and fees in the future if we were to fail to comply.

Fluctuations in foreign currency exchange rates could harm our results of operations.

We may be exposed to fluctuations of the Canadian dollar against certain other currencies because we publish our financial statements in Canadian dollars, while a portion of our assets, liabilities, revenues and costs are or will be denominated in other currencies, including the British pound sterling and euros. Exchange rates for currencies of the countries in which we intend to operate in the future, which currently include the United Kingdom and countries located within the Eurozone, may fluctuate in relation to the Canadian dollar, and such fluctuations may have a material adverse effect on our earnings or assets when translating foreign currency into Canadian dollars.

We may be subject to risks related to the protection and enforcement of our intellectual property rights, or intellectual property we license from others, and may become subject to allegations that we or our licensors are in violation of intellectual property rights of third parties.

The ownership, licensing and protection of trademarks and other intellectual property rights are significant aspects of our future success.

It is possible that we or Pathway Rx Inc. (“Pathway Rx”), as applicable, will not be able to make non-provisional applications, register, maintain registration for or enforce all of our intellectual property, including trademarks, in all key jurisdictions. The intellectual property registration process can be expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable intellectual property applications at a reasonable cost or in a timely manner or may obtain intellectual property registrations which are invalid. It is also possible that we will fail to identify patentable aspects of inventions made in the course of their development and commercialization activities before it is too late to obtain patent protection for them. Further, changes in either intellectual property laws or interpretation of intellectual property laws in Canada, and other countries may diminish the value of our intellectual property rights or narrow the scope of our intellectual property protection. As a result, our current or future intellectual property portfolio may not provide us with sufficient rights to protect our business, including our products, processes and brands.

Termination or limitation of the scope of any intellectual property licence may restrict or delay or eliminate our ability to develop and commercialize our products, which could adversely affect our business. We cannot guarantee that any third-party technology we license will not be unenforceable or licensed to our competitors or used by others. In the future, we may need to obtain licences, renew existing licence agreements in place at such time or otherwise replace existing technology. We are unable to predict whether these licence agreements can be obtained or renewed or the technology can be replaced on acceptable terms, or at all.

Unauthorized parties may attempt to replicate or otherwise obtain and use our products, brands and technology. Policing the unauthorized use of our current or future trademarks, patents or other intellectual property rights could be difficult, expensive, time consuming and unpredictable, as may be enforcing these rights against unauthorized use by others. Identifying the unauthorized use of intellectual property rights is difficult as we may be unable to effectively monitor and evaluate the products being distributed by our competitors, including parties such as unlicensed dispensaries and black market participants, and the processes used to produce such

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products. In addition, in any infringement proceeding, some or all of our trademarks or other intellectual property rights or other proprietary know-how, or those we license from others, or arrangements or agreements seeking to protect the same for our benefit, may be found invalid, unenforceable, anti-competitive or not infringed; may be interpreted narrowly; or could put existing intellectual property applications at risk of not being issued.

In addition, other parties may claim that our products, or those we license from others, infringe on their intellectual property, including their proprietary or patent protected rights. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources and legal fees, result in injunctions or temporary restraining orders or require the payment of damages. As well, we may need to obtain licences from third parties who allege that we have infringed on their lawful rights. Such licences may not be available on terms acceptable to us, or at all. In addition, we may not be able to obtain or utilize on terms that are favorable to us, or at all, licences or other rights with respect to intellectual property that we do not own. In the event that we licence our intellectual property to a third party, including a third party manufacturer, such third party could misappropriate our intellectual property or otherwise violate the terms of our licence. If any of the foregoing events were to occur, it could have a material adverse effect on our business, results of operations and financial condition.

We also rely on certain trade secrets, technical know-how and proprietary information that are not protected by patents to maintain our competitive position. Our trade secrets, technical know-how and proprietary information, which are not protected by patents, may become known to or be independently developed by competitors.

Research and development and clinical trials may be protracted and require substantial resources.

Clinical trials of cannabis-based medical products and treatments are novel and there is a limited or non-existant history of clinical trials relating to cannabis generally. Clinical trials relating to our current or future products are or will be, subject to extensive and rigorous review and regulation by numerous government authorities in Canada and in other countries where we intend to test our products and product candidates. The process of obtaining regulatory approvals for pre-clinical testing and clinical trials can take many months or years and require the expenditure of substantial resources. We are subject to the risk that a significant portion of these development efforts may not be successfully completed, required regulatory approvals may not be obtained, or our products are may not be commercially successful.

 

Ownership of our common shares may be considered unlawful in some jurisdictions and holders of our common shares may consequently be subject to liability in such jurisdictions.

Cannabis-related financial transactions, including investment in the securities of cannabis companies and receipt of any associated benefits, such as dividends, are currently subject to anti-money laundering and a variety of other laws that vary by jurisdiction, many of which are unsettled and still developing. While the interpretation of these laws are unclear, in some jurisdictions, such as the United Kingdom, financial benefit directly or indirectly arising from conduct that would be considered unlawful in such jurisdiction may be viewed to be within the purview of these laws, and persons receiving any such benefit, including investors in an applicable jurisdiction, may be subject to liability under such laws. Each prospective investor should therefore contact his, her or its own legal advisor regarding the ownership of our common shares and any related potential liability.

The price of our common shares in public markets may experience significant fluctuations.

The market price for our common shares has been and may in the future be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including the following: (i) actual or anticipated fluctuations in our quarterly results of operations; (ii) recommendations by securities research analysts; (iii) changes in the economic performance or market valuations of other issuers that investors deem comparable to us; (iv) the addition or departure of our executive officers and other key personnel; (v) the release or expiration of lock-up or other transfer restrictions on our common shares; (vi) sales or perceived sales, or expectation of future sales, of our common shares or instruments convertible or exercisable for our common shares; (vii) significant dispositions, acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; and (viii) news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other related issues in our industry or target markets.

Financial markets have experienced significant price and volume fluctuations which have affected the market prices of equity securities of public entities. Companies in the cannabis sector have also experienced extreme volatility in their trading prices. In many cases, these fluctuations, and the effect that they have on market prices, have been unrelated to the operating performance, underlying asset values or prospects of such entities. Accordingly, the market price of our common shares may decline even if our operating results or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed not to be temporary, which may result in impairment losses to us. Furthermore, certain investors may base their

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investment decisions on considerations of our environmental, governance and social practices or our industry as a whole, and our performance in these areas against such institutions’ respective investment guidelines and criteria. The failure to satisfy such criteria may result in limited or no investment in our common shares by those institutions, which could materially adversely affect the trading price of our common shares.

There can be no assurance that continuing fluctuations in the price and volume of equity securities will not occur and affect the trading price of our common shares.

If we fail to meet applicable listing requirements, Nasdaq (as defined below) may delist our common shares from trading, in which case the liquidity and market price of our common shares could decline.

Our common stock is listed on the Nasdaq. In order to maintain that listing, we must satisfy minimum financial and other requirements including, without limitation, a requirement that our closing bid price be at least US$1.00 per share. In March 2020, the price of one of our common shares fell below US$1.00.  If our common shares were to trade below US$1.00 per share for 30 consecutive business days, we will receive a notification letter from Nasdaq and will have 180 calendar days (subject to extension in some circumstances) to regain compliance with the minimum bid price rule.  To regain compliance, the closing bid price of our common shares must be at least US$1.00 per share for a minimum of ten consecutive business days (or such longer period of time as the Nasdaq may require in some circumstances). If we fail to regain compliance with the minimum bid price rule or fail to maintain compliance with all other applicable Nasdaq continued listing requirements, Nasdaq may determine to delist our common stock, at which time our common stock would be quoted on the over-the-counter markets. If we fail to comply with the applicable listing standards and Nasdaq delists our common shares, we and our shareholders could face significant material adverse consequences, including:

 

a limited availability of market quotations for our common shares;

 

reduced liquidity for our common shares;

 

a determination that our common shares are “penny stock”, which would require brokers trading in our common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common shares;

 

a limited amount of news about us and analyst coverage of us;

 

defaults or breaches of covenants in our financing agreements; and

 

a decreased ability for us to issue additional equity securities or obtain additional equity or debt financing in the future.

We cannot assure you that we will be able to meet the continued listing standards of Nasdaq in the future.

 

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common shares to drop significantly, even if our business is doing well.

Sales of a substantial number of our common shares in the public market could occur at any time. Although a significant percentage of our outstanding shares of common stock remain subject to lock-up arrangements entered into in connection with our IPO (including voluntarily extensions by certain current and former officers and directors), those lock-up arrangements will allow for the release of significant portions of shares of common stock in the first, second and third quarters of 2020. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common shares and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common shares.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our share price and trading volume could decline.

The trading market for our common shares will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our shares would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our shares or publish inaccurate or unfavorable research about our business, our share price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our shares could decrease, which might cause our share price and trading volume to decline.

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Our articles permit us to issue an unlimited number of common shares without additional shareholder approval.

Our articles permit the issuance of an unlimited number of common shares, and shareholders will have no pre-emptive rights in connection with such further issuance. Additional issuances of our securities may involve the issuance of a significant number of common shares at prices less than the current market price for the common shares. Issuances of substantial numbers of common shares, or the perception that such issuances could occur, may adversely affect prevailing market prices of our common shares. Any transaction involving the issuance of previously authorized but unissued common shares, or securities convertible into common shares, would result in dilution, possibly substantial, to security holders.

Holders of our common shares may be subject to dilution resulting from future offerings of common shares and the issuance of equity-based compensation by us.

We may raise additional funds in the future by issuing equity securities. Holders of our common shares will have no preemptive rights in connection with such further issuances. Our board of directors has the discretion to determine if an issuance of our shares is warranted, the price at which such issuance is effected and the other terms of any future issuance of shares. In addition, additional common shares may be issued by us in connection with the exercise of options granted by us or as part of an employee compensation plan or agreement. Such additional equity issuances could, depending on the price at which such securities are issued, substantially dilute the interests of the holders of our common shares.

As of December 31, 2019, there were 623,850 stock options, 9,816,800 simple warrants and 5,798,822 performance warrants outstanding, of which 22,500 stock options, 5,110,400 simple warrants, and 4,456,422 performance warrants, were vested and exercisable into an aggregate number of 9,589,322 common shares, at weighted average exercise prices of $3.12, $1.28 and $1.02, respectively. In addition, restricted and deferred share units of 416,807 were outstanding and are exchangeable for an equal number of common shares.

It is not anticipated that any dividends will be paid to holders of our common shares for the foreseeable future.

No dividends on our common shares have been paid to date. We anticipate that, for the foreseeable future, we will retain future earnings and other cash resources for the operation and development of our business. Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including our earnings, operating results, financial condition and current and anticipated cash needs. In addition, our ability to pay cash dividends on our common shares is limited by the terms of our financing arrangements. As a result, investors may not receive any return on an investment in our common shares unless they are able to sell their shares for a price greater than that which such investors paid for them.

Our by-laws, and certain Canadian legislation, contain provisions that may have the effect of delaying or preventing a change in control.

Certain provisions of our by-laws, together or separately, could discourage potential acquisition proposals, delay or prevent a change in control and limit the price that certain investors may be willing to pay for our common shares. For instance, our by-laws contain provisions that establish certain advance notice procedures for nomination of candidates for election as directors at shareholders’ meetings. A non-Canadian must file an application for review with the minister responsible for the Investment Canada Act and obtain approval of the minister prior to acquiring control of a “Canadian business” within the meaning of the Investment Canada Act, where prescribed financial thresholds are exceeded. Furthermore, limitations on the ability to acquire and hold our common shares may be imposed by the Competition Act (Canada). This legislation permits the Commissioner of Competition to review any acquisition or establishment, directly or indirectly, including through the acquisition of shares, of control over or of a significant interest in us. Otherwise, there are no limitations either under the laws of Canada or Alberta, or in our articles on the rights of non-Canadians to hold or vote our common shares. Any of these provisions may discourage a potential acquirer from proposing or completing a transaction that may have otherwise presented a premium to our shareholders.

Our by-laws provide that any derivative actions, actions relating to breach of fiduciary duties and other matters relating to our internal affairs will be required to be litigated in Canada, which could limit investors’ ability to obtain a favorable judicial forum for disputes with us.

We have adopted a forum selection by-law that provides that, unless we consent in writing to the selection of an alternative forum, the Alberta Court of Queen’s Bench of the Province of Alberta, Canada and appellate Courts therefrom (or, failing such Court, any other “court” as defined in the ABCA, having jurisdiction, and the appellate Courts therefrom), will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf; (2) any action or proceeding asserting a breach of fiduciary duty owed by any of our directors, officers or other employees to us; (3) any action or proceeding asserting a claim arising pursuant to any provision of the ABCA or our restated articles or by-laws; or (4) any action or proceeding asserting a claim otherwise related to our “affairs” (as defined in the ABCA), provided that the by-law does not apply to any action brought to enforce any liability or duty

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created by the Exchange Act or the Securities Act, including the respective rules and regulations promulgated thereunder, or any other claim under U.S. securities law for which the United States federal or state courts have exclusive jurisdiction. Our forum selection by-law also provides that our securityholders are deemed to have consented to personal jurisdiction in the Province of Alberta and to service of process on their counsel in any foreign action initiated in violation of our by-law. Therefore, it may not be possible for securityholders to litigate any action relating to the foregoing matters outside of the Province of Alberta.

Our forum selection by-law seeks to reduce litigation costs and increase outcome predictability by requiring derivative actions and other matters relating to our affairs to be litigated in a single forum. While forum selection clauses in corporate charters and by-laws are becoming more commonplace for public companies in the United States and have been upheld by courts in certain states, they are untested in Canada. It is possible that the validity of our forum selection by-law could be challenged and that a court could rule that such by-law is inapplicable or unenforceable. If a court were to find our forum selection by-law inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions and we may not obtain the benefits of limiting jurisdiction to the courts selected.

The regulated nature of our business may impede or discourage a takeover, which could reduce the market price of our common shares.

We require and hold various government licences to operate our business, which would not necessarily continue to apply to an acquiror of our business following a change of control. In addition, our directors, officers and certain other personnel are required to obtain, and maintain, security clearances from Health Canada. These licensing and security clearance requirements could impede a merger, amalgamation, takeover or other business combination involving us or discourage a potential acquiror from making a tender offer for our common shares, which, under certain circumstances, could reduce the market price of our common shares.

We may become a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors.

Based on the past and projected composition of our income and assets, and the valuation of our assets, including goodwill, we do not believe we are a passive foreign investment company (“PFIC”), for the most recent taxable year, and we do not expect to become a PFIC in the current taxable year, although there can be no assurance in this regard. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets, from time to time. Specifically, for any taxable year, we will be classified as a PFIC for U.S. federal income tax purposes if either: (i) 75% or more of our gross income in that taxable year is passive income, or (ii) the average percentage of our assets by value in that taxable year which produce or are held for the production of passive income is at least 50%. The calculation of the value of our assets is expected to be based, in part, on the quarterly market value of our shares, which is subject to change. See “Item 10E Taxation—Certain U.S. Federal Income Tax Considerations for U.S. Persons—PFIC Rules”.

If we are or were to become a PFIC, such characterization could result in adverse U.S. federal income tax consequences to U.S. investors. For example, if we are a PFIC, U.S. investors may become subject to increased tax liabilities under U.S. federal income tax laws and regulations and will become subject to burdensome reporting requirements. We cannot assure U.S. investors that we will not be a PFIC for the current taxable year or any future taxable year. U.S. Holders should consult their tax advisor concerning the U.S. federal income tax consequences of holding and disposing shares of a PFIC, including the possibility of making any election that may be available under the PFIC rules (including a mark-to-market election) which may mitigate the adverse U.S. federal income tax consequences of holding shares of a PFIC. See “Item 10E Taxation—Certain U.S. Federal Income Tax Considerations for U.S. Persons—PFIC Rules”.

 

 

The agreements governing our indebtedness contain covenants that reduce our financial flexibility and could impede our ability to operate.

 

The agreements governing our indebtedness each impose significant operating and financial restrictions on us. These restrictions will limit our and our subsidiaries’ ability to, among other things:

• incur or guarantee additional debt or issue disqualified stock or preferred stock;

• pay dividends and make other distributions on, or redeem or repurchase, capital stock;

• make certain investments;

• incur certain liens;

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• enter into transactions with affiliates;

• merge or consolidate; and

• transfer or sell assets.

In addition, such agreements subject us and our subsidiaries to covenants, representations and warranties, and our Syndicated Credit Agreement and our Term Debt Facility, each as amended, include various financial and other maintenance covenants. See the section entitled “Selected Annual Information—Debt” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement. As a result, as at December 31, 2019, the full principal amount of the Syndicated Credit Agreement and the Term Debt Facility, which was cross-accelerated, was classified as a current liability on the Company’s balance sheet. Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.

In addition, we anticipate that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar amendments in the past; however, there is no guarantee that we will be able to do so in the future.

As a result of these restrictions, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to fund our operations, compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants.

Our failure to comply with the restrictive covenants described above as well as the terms of any future indebtedness from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date and may result in the acceleration of any other debt that is subject to an applicable cross-acceleration or cross-default provision.

Furthermore, if we were unable to repay the amounts due and payable under the Syndicated Credit Agreement and our Term Debt Facility, those lenders could proceed against the collateral securing such indebtedness. In the event our lenders accelerate the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness or if we are forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our results of operations and financial condition could be adversely affected.

 

 

 

 

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Item 4. Information on the Company

A.

History and development of the company.

Sundial was incorporated under the Business Corporations Act (Alberta) on August 19, 2006. On July 22, 2019, we filed articles of amendment to effect a 1 to 1.6 share split. We have 14 direct and indirect subsidiaries, all of which are wholly-owned, and a 50% interest in Pathway Rx. On August 1, 2019, our common shares commenced trading on the Nasdaq under the symbol “SNDL”.

Our headquarters, principal executive and registered offices are located at #200, 919 – 11 Avenue SW, Calgary, Alberta, Canada T2R 1P3. Our phone number is +1 (403) 948-5227. Our website is www.sndlgroup.com. The information on or accessible through our website is not part of and is not incorporated by reference into this Annual Report, and the inclusion of our website address in this Annual Report is only for reference.

We are subject to the informational requirements of the Exchange Act and are required to file reports and other information with the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.

 

Over the three most recently completed fiscal years and for the current fiscal year, we have undertaken and/or completed several business acquisitions and capital expenditures, including, among others, the following:

 

Business acquisitions

 

On July 2, 2019, the Company, through its wholly owned subsidiary, Sundial UK Limited, acquired all the issued and outstanding shares of Project Seed Topco Limited (“Bridge Farm”) a private company located in the United Kingdom of Great Britain and Northern Ireland (“UK”). Bridge Farm was acquired to expand the Company’s business to cannabidiol (“CBD”) extraction and production, with the intent to sell CBD products in the UK, subject to certain regulatory, licensing and other restrictions. The acquisition consideration was comprised of:

 

 

Cash consideration in the amount of £45.0 million;

 

 

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

 

 

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

At December 31, 2019, the Company recorded a goodwill impairment of $100.3 million based on significant delays and uncertainties in the CBD licensing and regulatory framework in the UK.

On March 13, 2019, the Company signed a share purchase agreement with Darryl Hudson, Olga Kovalchuk and Igor Kovalchuk, who is our non-executive employee, to acquire 50% of the issued and outstanding shares of Pathway Rx in consideration for an aggregate of 296,800 of our common shares.

Concurrently with the acquisition of our interest in Pathway Rx, we entered into a license agreement (the “Pathway Rx License Agreement”), which granted us an exclusive right to use Pathway Rx’s intellectual property in exchange for:

 

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

 

 

the grant of up to 280,000 of warrants to purchase our common shares at an exercise price of $1.81 per share, subject to achievement of certain milestone gross revenues derived from the Pathway Royalty Activities;

 

 

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

 

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a fixed payment of $1.4 million, payable in quarterly installments of $87,500 over the first four years of the term of the Pathway Rx License Agreement.

The initial term of the Pathway Rx License Agreement is ten years, and it is automatically renewable for consecutive one year terms unless we notify Pathway Rx of the intention not to renew the agreement at least 30 days prior to the expiration of the initial term or the applicable renewal term.

 

Capital expenditures

 

Olds Facility

 

Capital expenditures in 2019 totaled $138.1 million of which $98.8 million was spent continuing the construction and expansion of our flagship facility in Olds, Alberta. Furthermore, the Company has commenced construction of an extraction and processing facility, estimated to be approximately 20,000 square feet at our Olds facility. The full build out of the Olds facility is expected to cost approximately $190 million, of which approximately $5 to $10 million remains to be invested.

 

Capital expenditures of $76.3 million during the ten months ended December 31, 2018 and $7.6 million during the year ended February 28, 2018 were primarily related to the construction and development of our Olds Facility, which commenced in July 2017. Remaining capital spending was directed toward renovations and upgrades to our Rocky View facility along with the purchase of land and equipment to support construction and expansion efforts.

 

 

Merritt Facility

 

Construction of our Merritt facility began in March 2019 with capital spending totaling approximately $10 million in 2019; however, construction of the Merritt facility has been temporarily deferred pending increases in market demand and availability of appropriate financing. The Merritt facility, if constructed and licensed, will serve as the primary production facility of our BC Weed Co. brand. The amount of remaining capital expenditures at the Merritt facility will vary depending on the scale of the facility that will be constructed. A mini-pod is expected to cost $15 million to construct, while a larger facility with extraction capabilities is expected to cost up to $30 million to complete.

 

Clay Lake Facilities

 

Following the acquisition of Bridge Farm on July 2, 2019, we incurred $27.8 million of capital expenditures primarily related to the construction and development of the Clay Lake Phase 2 facility. We expect to spend an additional $10 million to complete the development of Clay Lake Phase 2 facility resulting in a total cost of approximately $42 million. We expect to complete construction in the second quarter of 2020.

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” filed herewith as Exhibit 15.1 for information about significant financing transactions.

 

 

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B.

Business overview.

Our Company

Sundial is a licensed producer that grows cannabis using state-of-the-art indoor facilities.

Sundial’s Canadian operations cultivate cannabis using an individualized “room” approach, in approximately 470,000 square feet of total space. In the United Kingdom, the Company grows traceable plants, including hemp, ornamental flowers and edible herbs in approximately 1.75 million square feet of environmentally friendly facilities. Sundial is headquartered in Calgary, Alberta, with operations in Olds, Alberta, and Rocky View County, Alberta.

In Canada, Sundial currently produces and markets cannabis products for the adult-use market. Sundial’s purpose-built indoor modular grow rooms create consistent, highly controlled cultivation environments and are the foundation of the Company’s production of high-quality, strain-specific cannabis products. The Company has established supply agreements with or has been approved to supply cannabis directly to retailers in nine Canadian provinces, with approval recently received from Quebec. Once supply agreement with Quebec is finalized, Sundial’s distribution network will cover 98% of the national recreational industry.

The Company’s primary focus has been on producing and distributing premium inhalable products and brands (flower, pre-rolls and vapes). On October 24, 2019, the Company received a licence from Health Canada to sell cannabis oil products and began the sale and distribution of cannabis vape products in December 2019. The Company plans to expand to edibles, extracts, topicals and other products which became legally permitted in the fourth quarter of 2019.

The Company is currently marketing its adult-use products under its Top Leaf (Premium), Sundial Cannabis (Premium Core), Palmetto (Core) and Grasslands (Value) brands and intends to introduce new products under these brands as it expands its brand portfolio.

The Company also continues to enter into agreements to supply other licensed producers in Canada. Although in 2019 most of the Company’s sales were to other licensed producers, the Company expects these sales to decrease as a percentage of total sales going forward assuming retail market capacity in Canada expands.

In July 2019, the Company acquired Bridge Farm, a grower of ornamental plants and herbs, based in the United Kingdom, with the intention of converting Bridge Farm’s existing facilities to the cultivation, processing and distribution of CBD products. Bridge Farm has several state-of-the-art, fully operational facilities and established relationships with a number of large U.K. and multi-national retailers. Bridge Farm holds an industrial hemp cultivation licence and a high-THC research and development licence, which enables it to conduct research and development for phenotyping exercises and to refine extraction methods to produce CBD extracts from the controlled parts of the cannabis plants. Upon receipt of a commercial controlled substances licence, Bridge Farm will have the ability to produce cannabis derived products at low cost, driven by Bridge Farm’s scale, automation and energy subsidies. The Company is currently conducting a strategic review of Bridge Farm, including, but not limited to, a sale of all of its assets.

To enhance and differentiate the Company’s medical cannabis offerings, Sundial is working to build research capabilities, proprietary strains and novel extracts for the use of cannabis-based medical treatments. The Company has established partnerships with a number of private and public Canadian research institutions to facilitate a research-informed approach to identify and develop strain-specific treatments and novel extracts for targeted medicinal use. In addition, in 2019, the Company acquired a 50% interest in Pathway Rx, which uses advanced technology and an extensive library of cannabis strains to identify and customize targeted treatments for a wide range of medical conditions.

Our Industry

Adult-use Cannabis

We are currently serving the adult-use cannabis industry in Canada. In October 2018, Canada became the first major industrialized nation to legalize adult-use cannabis at the federal level. On October 17, 2019, the Canadian government has amended the Cannabis Regulations and Schedules to the Cannabis Act, to permit the production and sale of cannabis edibles, extracts and topicals by holders of federal licenses specific for these product classes. Products in the new classes were made available for sale to provincially or territorially authorized distributors beginning in December 2019. We expect that additional countries will also legalize adult-use

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cannabis, creating the opportunity for us to serve the adult-use market in those other countries in the future, although we cannot predict whether and when this will occur.

CBD

The World Health Organization has recently recommended that CBD should no longer be classified as a controlled substance, a move supported by the European Parliament. Certain CBD products have recently been added to the European Union’s Novel Food Catalogue, which will help provide a regulatory framework for EU member states to follow. CBD products have become available in the United Kingdom, Germany, Spain and other European countries. Further to designation of CBD as a “novel food” in the European Union, the United Kingdom recently moved to introduce a regulatory framework for CBD products. In February 2019, the UK Food Standard Agency (“FSA”) issued a statement requiring suppliers of CBD-infused food products to submit a novel food authorization application by March 31, 2021, after which date any CBD products without a valid application submitted will not be permitted to stay on the market.

Furthermore, although we do not currently have plans to address the U.S. CBD market in the near term, recently adopted U.S. federal legislation has legalized hemp-derived CBD products, subject to certain conditions, including compliance with state and federal regulations.

Medical Cannabis

As of December 31, 2019, 41 countries have legalized medical cannabis in some form. In addition, the European Parliament passed a resolution calling for the European Union to distinguish between medical and other uses of cannabis, increase funding for research regarding medical cannabis and require insurance coverage for effective cannabis-based medication.

Our Brands and Products

We offer and continue to develop cannabis brands for the adult-use market. Currently, we sell dried flower cannabis, pre-rolls and vapes and intend to sell additional products in a wide-range of formats, such as edibles, oils, capsules and sublinguals, in accordance with existing regulations.

Sundial is marketing our adult-use products under the following brand portfolio:

Sundial – The Sundial product line encompasses five experiences: Calm, Ease, Flow, Lift and Spark. Initial sales consisted primarily of two whole flower products sold under our Sundial brand: Zen Berry, which is a indica-dominant whole dried flower under the Calm series, and Daydream, which is a hybrid whole dried flower under the Flow series. During the second half of 2019, we introduced Lemon Riot and Citrus Punch as part of our Lift series and introduced Berry Bliss and Twilight as part of our Calm series. Sundial plans to continue the launch of new product formats and strains under the Ease and Spark series, while launching vape formats under our Lift, Calm and Flow series going forward in 2020.

Grasslands - To maximize the value of our cultivation assets, Sundial developed and deployed the Grasslands brand during the fourth quarter of 2019. The Grasslands brand focuses on value-driven inhalable products and provides Sundial with increased flexibility in the Company’s production and distribution strategies and practices. The Grasslands brand has released multiple products to British Columbia, Alberta, Saskatchewan and Manitoba markets and will continue to expand distribution to other provincial jurisdictions in 2020.

Palmetto – Launched during the fourth quarter of 2019, the Palmetto brand offers convenient, ready-to-use products to accommodate consumers looking for a user-friendly cannabis experience. Palmetto's initial strain offering for pre-rolls is Agent Orange, a sativa-dominant hybrid with the distinct smell and taste of fresh Florida oranges. Additional product formats under the Palmetto brand, including vape pens, along with additional strain offerings, will continue to be developed and offered going forward into 2020.

Top Leaf – In the fourth quarter of 2019, Sundial launched its Top Leaf brand with the release of Strawberry Cream whole flower, with initial shipments to Alberta, British Columbia and Nova Scotia. Distribution of Top Leaf products is expected to continue to expand to other provincial jurisdictions in 2020, along with the release of several new Top Leaf products including Strawberry Cream and Jager OG whole flower and vape cartridges.

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Our Operations

Our purpose-built indoor modular grow rooms enable us to produce large volumes of cannabis in small batches. Our individual room-based cultivation format affords us several advantages compared to other growing methods, including optimized and customizable environments for each one of our strains, efficient scaling of our production capacity, higher and more predictable yields and real-time collection of cultivation data and multiple harvests per day. Different strains may have different harvest cycles and different harvest yields. Our modular cultivation rooms have been designed with the objective of improving our ability to learn, experiment and improve our cultivation process and end products. This approach also helps mitigate the risk of crop loss.

We do not operate our own retail stores. We use analytics based on customer and consumer data and research to develop and market our branded products. In the long term, we intend to develop value-add tools which would include digital kiosks with interactive content, point-of-sale materials, cannabis journals and customized strain descriptions designed to educate and enhance consumer engagement in compliance with applicable regulations.

Bridge Farm’s current facility footprint is approximately 1.7 million square feet and plans are in place to complete expansion to approximately 2.4 million square feet by the end of the second quarter of 2020. Bridge Farm has highly automated, state-of-the-art facilities with advanced plant movement and monitoring technology. Through its use of biomass fuel for heating, Bridge Farm qualifies for a U.K. government credit that more than offsets its energy costs. In addition, Bridge Farm has existing distribution relationships with retailers in the United Kingdom. Over time, as the global CBD regulatory landscape continues to evolve, we may leverage such relationships to launch CBD product sales in the United Kingdom as well as establish new partnerships with international retailers to expand globally.

Bridge Farm holds a hemp cultivation licence at its Homestead Facility, making it one of the few indoor producers licensed to cultivate hemp in the United Kingdom. Bridge Farm currently cultivates hemp in approximately 40,000 square feet at the Homestead Facility. Bridge Farm also holds a high THC research and development licences which enables us to conduct research and development for phenotyping exercises and refine extraction methods to produce CBD extracts from the controlled parts of the cannabis plants.  

We continue to operate Bridge Farm’s existing herbs and ornamental flower business and cultivation operations in compliance with debt covenants and expect to do so until such time as we may need to transition more space to hemp cultivation and CBD extraction in order to meet demand for our future CBD products, subject to available capital resources as well as certain regulatory, licensing and other restrictions.

The Company is currently conducting a strategic review of Bridge Farm, including, but not limited to, a sale of all of its assets.

Our Research and Innovation

We own a 50% interest in Pathway Rx, a company that uses advanced technologies, including machine learning approaches, to screen an extensive library of cannabis strains with the ultimate goal of being able to identify and customize treatments for symptoms associated with a wide range of medical conditions. In the future, we intend to leverage Pathway Rx’s cannabis strains to develop cannabis-based pharmaceutical drugs, including strains targeted towards symptoms associated with cancer, skin disorders, skin protection and rejuvenation, and inflammatory processes. To date, neither we nor Pathway Rx have submitted any potential drug candidates to any regulatory body for approval. If we submit drug candidates for approval to the applicable drug regulatory authorities, the approval process will be lengthy and may not be successful.

In addition, we are working to build partnerships with leading research institutions, including the University of Saskatchewan’s Cannabinoid Research Initiative of Saskatchewan (“CRIS”) and the University of Calgary’s Cumming School of Medicine, to facilitate a research-informed approach to identify and develop cannabis strains for medical use.

Regulatory Framework in Canada

Background to the Cannabis Act and Regulations

On December 13, 2016, the Task Force on Cannabis Legalization and Regulation, which was established by the Canadian federal government to seek input on the design of a new system to legalize, regulate and restrict access to cannabis, published its report outlining its recommendations. On April 13, 2017, the Canadian federal government released Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts, which proposed the enactment of the Cannabis Act to regulate the production, distribution and sale of cannabis for unqualified adult use.

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On October 17, 2018, the Cannabis Act, together with its accompanying regulations, including the Cannabis Regulations and the IHR and, together with the Cannabis Regulations, the Regulations, came into force. The Regulations, among other things, outline the rules for the legal cultivation, processing, research, testing, distribution, sale, importation and exportation of cannabis and hemp in Canada, including the various classes of licences that can be granted, and set standards for cannabis products that became available for legal sale on October 17, 2018.

Pursuant to the regulatory framework, each province and territory in Canada is also permitted to adopt its own laws governing the distribution, sale and consumption of cannabis and cannabis accessory products within the province or territory. See “—Provincial and Territorial Regulatory Framework for Adult-Use Cannabis” below.

Given that the Cannabis Act and the Regulations were only recently enacted and are still developing, the impact of the regulatory framework on our business is uncertain. See “Risk Factors—Risks Related to Our Business and Our Industry—Cannabis for adult use only recently became legal in Canada. As a result, the industry and the regulations governing the industry are rapidly developing, and if they develop in ways that differ from our expectations, our business and results of operations may be adversely impacted”.

Adult-Use Cannabis

The Cannabis Act provides a licensing and permitting scheme for the cultivation, processing, research, testing, distribution, sale, importation and exportation of cannabis for non-medicinal use (i.e., adult use), to be implemented by regulations made under the Cannabis Act.

In particular, among other things, the Cannabis Act:

 

Restricts the amounts of cannabis that individuals can possess and distribute, public consumption and use, and prohibits the sale of cannabis unless authorized by the Cannabis Act.

 

Permits individuals who are 18 years of age or older to cultivate, propagate, and harvest up to and including four cannabis plants in their dwelling-house, propagated from a seed or plant material authorized by the Cannabis Act.

 

Restricts (but does not strictly prohibit) the promotion and display of cannabis, cannabis accessories and services related to cannabinoids to consumers, including restrictions on branding and a prohibition on false or misleading promotion and on sponsorships.

 

Permits the informational promotion of cannabis by entities licensed to produce, sell or distribute cannabis in specified circumstances to individuals 18 years and older.

 

Introduces packaging and labelling requirements for cannabis and cannabis accessories, and prohibits the sale of cannabis or cannabis accessories that could be appealing to young persons.

 

 

Provides the designated minister with the power to recall any cannabis or class of cannabis on reasonable grounds that such a recall is necessary to protect public health or public safety.

 

Permits the establishment of a national cannabis tracking system.

 

Provides powers to inspectors for the purpose of administering and enforcing the Cannabis Act and a system for administrative monetary penalties.

Cannabis for Medical Purposes

Effective October 17, 2018, the Cannabis Act and the Cannabis Regulations replaced the Controlled Drugs and Substances Act’s Access to Cannabis for Medical Purposes Regulation (“ACMPR”), as the governing regulations in respect of the production, sale and distribution of medical cannabis and related oil products in Canada. Transitional provisions of the Cannabis Act provide that every licence to produce and sell cannabis issued under the ACMPR that was in force immediately before the day on which the Cannabis Act came into force was deemed to be a licence issued under the Cannabis Act, and that such licence will continue in force until it is revoked or expires.

The Cannabis Regulations set out the regime for medical cannabis following legalization, which is substantively the same as the ACMPR with adjustments to create consistency with rules for non-medical use, improve patient access, and reduce the risk of abuse within the medical access system. Patients who have the authorization of their healthcare provider continue to have access to cannabis under the Cannabis Act and Cannabis Regulations, either purchased directly from a federally licensed entity under the Cannabis Act and the Cannabis Regulations, or by registering to produce a limited amount of cannabis for their own medical purposes, or designating someone to produce cannabis for them in the manner prescribed.

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Licences, Permits and Authorizations

The Cannabis Regulations establish six classes of licences:

 

licence for cultivation;

 

licence for processing;

 

licence for analytical testing;

 

licence for sale for medical purposes;

 

licence for research; and

 

a cannabis drug licence.

The Cannabis Regulations also create sub-classes for cultivation licences (standard cultivation, micro-cultivation and nursery) and processing licences (standard processing and micro-processing). Different licences, and each sub-class therein, carry differing rules and requirements that are intended to be proportional to the public health and safety risks posed by each licence category and each sub-class. Producers holding production and sales licences under the ACMPR were transferred to similar licences under the Cannabis Act. Licences issued under the Cannabis Regulations have associated expiry dates and are subject to renewal requirements.

As of May 8, 2019, Health Canada will require new applicants for cannabis licences under the Cannabis Act to have a fully built site that meets all requirements of the Cannabis Regulations at the time of their application. Existing applicants will not be substantively reviewed until the facilities associated with a licence application are fully constructed and accepted by Health Canada as to have met all requirements of the Cannabis Regulations.

Security Clearances

Certain people associated with cannabis licensees, including individuals occupying “key positions”, such as directors, officers, individuals who exercise, or are in a position to exercise, direct control over the corporation licensee, and individuals identified by the Canadian Federal Minister of Health (the “Minister of Health”), must hold a valid security clearance issued by the Minister of Health. Under the Cannabis Regulations, the Minister of Health may refuse to grant security clearances to individuals with associations to organized crime or with past convictions for, or an association with, drug trafficking, corruption or violent offences. Individuals who have histories of nonviolent, lower-risk criminal activity (for example, simple possession of cannabis, or small-scale cultivation of cannabis plants) are not precluded from participating in the legal cannabis industry. However, grant of security clearance to such individuals is at the discretion of the Minister of Health and such applications will be reviewed on a case-by-case basis.

All of our directors and executive officers have obtained security clearance from Health Canada with the exception of Greg Mills, and Bryan Pinney (two of our directors) and Zach George (our Chief Executive Officer and director). Failure by an individual in a key operational position to maintain or renew his or her security clearance could result in a reduction or complete suspension of our operations. See “Item 3D Risk Factors—Risks Related to Our Business and Our Industry—Our future success is dependent on our ability to attract or retain key personnel”.

Cannabis Tracking System

Under the Cannabis Act, the Minister of Health is authorized to establish and maintain a national cannabis tracking system. The purpose of this system is to track cannabis throughout the supply chain, to help prevent cannabis from being diverted to an illicit market or activity and to help prevent illicit cannabis from being a source of supply of cannabis in the legal market. Pursuant to the Ministry of Health’s Cannabis Tracking System Order, holders of a federal licence for cultivation, a licence for processing or a licence for sale for medical purposes that authorizes the possession of cannabis, must report monthly to the Minister of Health with specific information about their authorized activities with cannabis (e.g. cannabis inventory quantities), in the form and manner specified by the Minister of Health. The order also provides for monthly reporting by provincial bodies and provincially authorized private retailers of certain information in the form and manner specified by the Minister of Health.

Cannabis Products

The Cannabis Regulations set out the requirements for the sale of cannabis products at the retail level, including the THC content and serving size of cannabis products and cannabis products containing CBD. As of October 17, 2019, the Cannabis Act and the Cannabis Regulations permit the sale, subject to certain transitional periods, of only dried cannabis, fresh cannabis, edible cannabis, cannabis extracts, cannabis topicals, cannabis plants and cannabis plant seeds, each as defined in the Cannabis Act.

Prior to the coming-into-effect of the amended forms of the Cannabis Act and Cannabis Regulations, which occurred on October 17, 2019, the Cannabis Act only permitted the sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants and cannabis plant

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seeds. The amended forms of the Cannabis Act and Cannabis Regulations (i) remove cannabis oil from the list of permitted classes of cannabis products and (ii) authorize and regulate the production and sale of edible cannabis, cannabis extracts and cannabis topicals.

The amended forms of the Cannabis Act and Cannabis Regulations introduced restrictions on product composition specific to each of edible cannabis, cannabis extracts and cannabis topicals, including specific THC limits. Examples of other class-specific restrictions include:

 

Edible cannabis: must be shelf stable; only food and food additives will be allowed to be used as ingredients in edible cannabis and the use of food additives will need to be in accordance with the limits and purposes that are prescribed for foods; must not have caffeine added, however the use of ingredients containing naturally occurring caffeine will be permitted in edible cannabis products provided that the total amount of caffeine in each immediate container does not exceed 30 milligrams; must not contain alcohol in excess of 0.5% w/w; must not contain anything that would cause the sale of the edible cannabis, if it was a food regulated under the Food and Drugs Act (Canada), to be prohibited and must not be fortified with vitamins or mineral nutrients.

 

 

Cannabis extracts: must not contain ingredients that are sugars, sweeteners or sweetening agents, nor any ingredient listed on Column 1 of Schedule 2 to the Tobacco and Vaping Products Act (Canada) (which is a list of ingredients that are prohibited in vaping products) except if those ingredients and their levels are naturally occurring in an ingredient used to produce the extract.

 

 

Cannabis topicals: must not contain anything that may cause injury to the health of the consumer when the product is used as intended or in a reasonably foreseeable way.

As is the case for cannabis oil, a processing licence is required in order to legally produce edible cannabis, cannabis extracts and cannabis topicals. Though a processing licence is required in order to package and label all types of cannabis products for sale to consumers. Holders of processing licences issued prior to October 17, 2019, were required to amend their processing licences before they could begin manufacturing products constituting edible cannabis, cannabis extracts or cannabis topicals. The Cannabis Regulations require the filing of a notice with Health Canada at least 60 days before releasing a new cannabis product to the market. As a result, mid-December 2019, was the earliest date that any products constituting edible cannabis, cannabis extracts or cannabis topicals could be made available for sale to consumers.

In addition, if a holder of a processing licence chooses to process edible cannabis and food products on the same site, then the production, packaging, labelling, and storage of cannabis and the production, packaging, and labelling of food products must be conducted in distinctly separate portions of the holder’s licensed facility. All cannabis production is required to occur in a sufficiently separate area from any food production.

Packaging, Labeling and Advertising

The Cannabis Regulations set out requirements pertaining to the packaging and labelling of cannabis products. These requirements are intended to promote informed consumer choice and allow for the safe handling and transportation of cannabis, while also reducing the appeal of cannabis to youth. The Cannabis Regulations require all cannabis products to be packaged in a manner that is tamper-proof and child-resistant.

Limits are also imposed on the use of colors, graphics, and other special characteristics of packaging. For example, all-over packaging wraps must be clear, and the interior surface and exterior surface of any container in which a cannabis product is packaged must be one uniform color. Cannabis package labels must include specific information, such as (i) product source information, including brand name, the class of cannabis and the name, phone number and email of the licensed processor or cultivator, (ii) mandatory warnings, including rotating health warning messages on Health Canada’s list of standard health warnings; (iii) the Health Canada standardized cannabis symbol; and (iv) information specifying THC and CBD content. Amendments to the Cannabis Regulations effective as of October 17, 2019 impose additional packaging and labelling requirements for all classes of cannabis production.

A cannabis product’s brand name may only be displayed once on the principal display panel or, if there are separate principal display panels for English and French, only once on each principal display panel. It can be in any font style and any size, so long as it is equal to or smaller than the health warning message. The font must not be in metallic or fluorescent color. In addition to the brand name, only one other brand element can be displayed. Such brand element must meet the same requirements as the brand name, noted above, and if an image, it must be in a size equal to or smaller than the surface area of the standardized cannabis symbol.

Promotion of cannabis is strictly regulated in Canada. For example, promotion is largely restricted to the place of sale and subject to prescribed conditions set out in the Cannabis Act and the Cannabis Regulations. Also, among other restrictions, the Cannabis Act prohibits testimonials and endorsements, lifestyle branding, depictions of a person, character or animal, whether real or fictional, and promotion that is appealing to young persons.

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Health Products Containing Cannabis

Health Canada is taking a scientific, evidenced-based approach for the oversight of health products with cannabis that are approved with health claims, including prescription drugs. Under the current regulatory framework, these health products are subject to the Food and Drugs Act (Canada) and its regulations, in addition to the Cannabis Act and the Regulations. For many of these products, such as drugs, pre-market approval is required.

Drug Approval Process

Manufacturers of prescription drugs must receive authorization from Health Canada before prescription drugs may be sold. In order to obtain such authorization, a manufacturer must file a robust regulatory submission with evidence of safety, efficacy and quality of the proposed drug. As part of the approval process, Health Canada reviews the evidence submitted to ensure that the product complies with applicable safety, efficacy and quality requirements. Health Canada’s review of the evidence and a manufacturer’s response to Health Canada’s inquiries can take several years from the date that the manufacturer files its regulatory submission. A manufacturer is prohibited from marketing its product claiming to provide a health benefit, until Health Canada issues the authorization to the manufacturer for the product for the health benefit. There is no assurance that Health Canada will issue an authorization for a product. The typical regulatory process for prescription drug approval from pre-market to post-market in Canada, involves (1) pre-clinical studies, using for example, laboratory studies involving cell or tissue samples, or tests conducted on animals, to collect preliminary safety and efficacy data, (2) clinical trials on human subjects, which require authorization by Health Canada to collect further safety and efficacy data, (3) a drug submission with Health Canada, (4) drug submission review by Health Canada, (5) market authorization decision by Health Canada, and (6) post-market authorization public access to the drug product, subject to surveillance, inspection and investigation by Health Canada. In the United States, drug approval is regulated by the FDA and follows a similar process.

Import and Export Permits for Medical or Scientific Purposes

Pursuant to the Cannabis Act, import and export licences and permits will only be issued for medical or scientific purposes, or for industrial hemp. The Cannabis Regulations set out the process by which a licence holder may apply for an import or export permit for medical or scientific purposes. A permit must be obtained for each shipment of cannabis. An application for an import or export permit must contain specific information including the name and address of the holder, licence number and specifics of the particular shipment including the intended use of the cannabis and specific shipment details. The Cannabis Regulations contain reporting requirements in respect of the import and export of cannabis in reliance on a permit issued under the Cannabis Regulations.

Provincial and Territorial Regulatory Framework for Adult-Use Cannabis

Pursuant to the regulatory framework, each province and territory in Canada is also permitted to adopt its own laws governing the distribution, sale and consumption of adult-use cannabis and cannabis accessory products within the province or territory. As a result, provincial and territorial governments may choose to set lower maximum permitted quantities for individuals and higher age requirements. Currently, each of the Canadian provincial and territorial jurisdictions has established a minimum age of 19 years old for the consumption of adult-use cannabis, except for Québec and Alberta, where the minimum age is 18.

Retail-distribution models vary nationwide from one province and territory to another. All Canadian provinces and territories have implemented mechanisms for the distribution and sale of cannabis for adult-use purposes within their jurisdictions. Quebec, New Brunswick, Nova Scotia and Prince Edward Island have adopted government-run models for retail and distribution. Ontario, British Columbia, Alberta, Manitoba and Newfoundland have adopted hybrid models, with some aspects, including stores, distribution and online retail being government-run, while allowing for private retail. Saskatchewan has implemented a private retail system. Yukon, Northwest Territories and Nunavut have adopted a model that resembles their government-run liquor distribution model. As the laws continue to evolve, and the distribution models mature, there is no assurance that provincial and territorial legislation enacted for the purpose of regulating adult-use cannabis will continue to allow, or be conducive to, our business model. Differences in provincial and territorial regulatory frameworks could result in, among other things, increased compliance and supply costs.

Municipal and regional governments may also choose to impose additional requirements and regulations on the sale of adult-use cannabis, adding further uncertainty and risk to our business. Municipal by-laws may restrict the number of adult-use cannabis retail outlets that are permitted in a certain geographical area, or restrict the geographical locations wherein such retail outlets may be opened. See “Item 3D Risk Factors—Risks Related to Our Business and Our Industry—Any failure on our part to comply with applicable regulations could prevent us from being able to carry on our business, and there may be additional costs associated with any such failure.”

As of the date of this Annual Report, we believe we are in compliance in all material respects with the Cannabis Act and the Regulations, and all other applicable Canadian federal and provincial laws and regulatory requirements relating to cannabis, with the exception of obtaining security clearance from Health Canada for certain of our executive officers and directors, which we are

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working to obtain. In addition, our directors, officers and certain other key employees are subject to security regulations due to the nature of our industry, which may make it more difficult for us to attract, develop and retain talent. See “Item 3D Risk Factors—Risks Related to Our Business and Our Industry—Our future success is dependent on our ability to attract or retain key personnel.”

 

Regulatory Framework in the United Kingdom

CBD Regulation—Overview

Cannabis, cannabis resin, cannabinol and other cannabinol derivatives (among others) are listed as Class B controlled drugs under Schedule 2, of the Misuse of Drugs Act 1971, (the “MDA”), based on a harms assessment. They are also listed under Schedule 1 to the Misuse of Drugs Regulations 2001, the (“MDR”), together with other chemical constituents such as the cannabinoid THC (defined below). As such, it is unlawful to cultivate, possess, supply, produce, import or export these controlled drugs except under licence. The Hemp (Third Country Imports) Regulations 2002 also require, except in specified circumstances, that hemp from non-EU countries be imported under a licence and, in the case of hemp seeds other than for sowing, under an authorization.

CBD is one of the main chemical compounds found in the cannabis plant, together with THC. CBD, as an isolated substance (i.e containing no THC) is not a controlled drug under the MDA/MDR. Unlike CBD, THC is the main ‘psychoactive’ component of cannabis and is a controlled drug.

A CBD product containing THC (in any amount), or any other controlled cannabinoid under the regulations can not be practically prescribed, administered or supplied to the public unless it is an ‘exempt product’ or a cannabis based product for medicinal use in humans (“CBPM”). CBPMs are subject to further regulation and licencing given the medicinal purpose for which they are marketed and prescribed.

The U.K. Home Office (specifically, the Drugs & Firearms Licensing Unit (“DFLU”)) prescribes two separate licencing regimes relating to cannabis cultivation, according to whether the varieties are high THC (above 0.2% THC content) or low THC (below 0.2% THC content). A licence is required to cover both cultivation and possession.

The sale of CBD products (i.e the “finished products” following extraction and processing of CBD into products) is subject to additional regulations and licencing regimes – see below CBD Extraction for General Commercial Purposes and CBD Extraction for Medicinal Purposes for a more detailed discussion.

Low-THC Cultivation Licence (Industrial Hemp)

Cultivation of low-THC cannabis (known as industrial hemp) is permitted under licence in the United Kingdom. Under the MDA, where low-THC cannabis is grown for the commercial production of industrial hemp fiber or the pressing of seed for oil, only the non-controlled parts of the plant can be used, i.e., seeds and fibre/mature stalk. The controlled parts of the plant (i.e., the flowers and leaves, which produce higher concentrations of CBD) must be retted at the licensed location or otherwise lawfully disposed of after harvesting. There needs to be a defined commercial end use and the Home Office only issued licences for cultivation of plants from approved seed types with a THC content not exceeding 0.2%.

Prospective licensees must first register with the Home Office and submit an online application form known as a “MD 29 Application” which provides inter alia the following details: the field location numbers, hectarage details, farm map and seed type, THC content and confirmation of whether the respective seed is an EU-approved seed. Applicants must also undergo a check by the U.K. Disclosure and Barring Service (“DBS”) (formerly, the Criminal Records Bureau) to be eligible for a licence and may be subject to a compliance visit. The licence must be issued before a grower can commence cultivation. It may contain conditions and restrictions, such as where the crop may be grown, and is typically issued for a term of three growing seasons. Bridge Farm currently holds a hemp cultivation licence granted by the U.K. Home Office at one of its facilities and cultivates hemp in a portion of this facility.

High-THC Cultivation Licence

Cultivation of high-THC cannabis (where the THC content exceeds 0.2%) is also permitted under licence in the U.K. These licences may be issued by the Home Office to cultivate, produce and supply high THC for research purposes and to enable the lawful extraction of controlled cannabinoids.

 

Extraction of a higher concentration of CBD (which is an uncontrolled drug in its pure form) often requires use of the controlled parts of a cannabis plant (i.e., flowers and leaves). Where a proposal of this nature is made, it would be considered by the Home Office within the remit of their high-THC cultivation licensing policy.

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Controlled Drugs Licence

Companies wishing to possess, supply, produce/manufacture, import or export ‘controlled drugs’ can only lawfully do so under a Controlled Drugs Licence issued by the Home Office.

Applications for a controlled drug licence are submitted online and prospective licensees are advised that it can take up to 16 weeks for the Home Office to review and ensure that various security and record- keeping requirements have been met. Where an enhanced DBS check has been obtained within the last three years for all persons named on the application, such checks do not need to be repeated. The DFLU may also conduct site visits, where needed. The term of the licence is typically one year from the date of issuance and is not renewable.

CBD Extraction for General Commercial (Retail) Purposes

CBD products such as CBD oil are becoming increasingly prevalent in the U.K. retail market. Where a CBD product contains a controlled drug (in any quantity) such as THC, the product needs to satisfy the requirements for an ‘exempt product’ under the MDR to be lawfully available to the public.

In general, an exempt product is a product containing a controlled drug that is: (a) not designed to be administered to a human being or animal, (b) not packaged in such a way that it can be recovered by readily applicable means, and (c) does not contain more than 1 mg (per container) of the controlled drug. All three elements are required to be established, including significant testing by an independent and licensing U.K. company and the provision of comprehensive and independently verifiable research and information. Notably, the 0.2% THC threshold for the cultivation of industrial hemp does not apply to CBD finished products, Rather, only 1 mg of THC (per container) is permissible in any given product that is placed on the U.K. market.

CBD Extraction for Medicinal Purposes (Medical Cannabis)

CBPMs are preparations or products that are: (a) or contain cannabis or other cannabinol derivatives, (b) produced for medicinal use in humans, and (c) a medicinal product, substance or preparation for use as an ingredient in a medicinal product. A CBD preparation or product containing controlled cannabinoids (e.g., THC) which meets the three elements of this definition may be a CBPM.

Companies wishing to possess, supply and or import/export CBPMs will require a controlled drug licence in addition to a high-THC cannabis cultivation licence if they are involved in production/manufacturing, which are both issued by the Home Office, unless an exemption applies to that licensing requirement.

In addition, the regulation of CBPMs in the U.K. is undertaken by the Medicines and Healthcare Products Regulatory Agency (the “MHRA”). The MHRA is responsible for ensuring all medicines and medical devices in the U.K. are safe and appropriate in accordance with the Human Medicines Regulations 2012 (SI 2012/1916) (“HMR”). Under the HMR, CBPMs must be manufactured and assembled in accordance with the specifications of a doctor listed on the General Medical Council Specialist Register and must meet a ‘special’ clinical need of the individual patient.

The manufacturer or assembler of a CBPM must also hold a Manufacturer’s “Specials” Licence granted by the Licencing Authority (specifically, the UK Ministers designated under the HMR). The manufacturing and/or assembly site and its operations will be inspected for compliance with the European Union’s ‘good manufacturing practice’ and the conditions of the licence. These require that the manufacture or assembly is carried out under the supervision of appropriately qualified staff, including a named quality controller and production manager, who are acceptable to the Licensing Authority. Licence applications are submitted online to the MHRA and take approximately 90 business days to process.

 

CBD Sales and “Novel Food” Status

In the United Kingdom, the sale of CBD products falls under the regulatory purview of the FSA. The FSA, in turn, follows the guidance and regulations set by the European Union, specifically the European Food Standards Agency, the EFSA, and the European Commission (the “EC”), respectively.

In November 2015, the European Parliament and the Council of the European Union adopted a new regulation on novel food, Regulation (EU) 2015/2283 (the “Novel Food Regulation”), with the intent of making the novel food authorization process more efficient while ensuring high standards of food safety for consumers. The Novel Food Regulation came into force on January 1, 2018.

The Novel Food Regulation provides that a food is “novel” if it has not been used for human consumption to a significant degree within the European Union before May 15, 1997. The regulations further provide that a food stuff will be authorized only if it can be demonstrated that the product is safe, properly labeled so as to not mislead consumers and is not nutritionally disadvantageous.

47


On January 15, 2019, the EC updated the European Union’s Novel Foods Catalogue, specifically, the entries relating to cannabis sativa and cannabinoids, to include other cannabinoids extracts used in food and food supplements and hemp-derived products in food.

While the Novel Foods Catalogue is non-exhaustive and carries no legal effect, it is frequently updated and amended with input from Member States and is used as reference by authorities in EU countries to aid enforcement of the Novel Food Regulation.

A novel food can only be sold in the European Union once it has successfully gone through the authorization process (involving a safety risk assessment) and an implementing act is published authorizing the addition of the novel food to the Novel Foods Catalogue. This process can take up to 18 months from receipt of the initial application. As of the date of this Annual Report, there was one application pending to authorize CBD food supplements in the European Union for adults with a daily intake of up to 130 mg. This application was made by Cannabis Pharma s.r.o, a company from the Czech Republic and is based on publicly available safety and toxicology information and toxicity reviews. A final opinion from the EFSA was expected in March of 2019, but has not yet been provided. If approved, the EC must draft an implementing act authorizing the use of the product within seven months. Any other company that can meet the conditions of use stated in the authorization of the approved product would be able to market CBD food supplements in the European Union.

In March 2019, the Novel Foods Commission met in Brussels to discuss the EC’s classification of CBD as a “novel food”. Various industry groups presented at this meeting and lobbied for a reversal of the decision. As a result, the EFSA is reviewing its original decision to classify CBD as a novel food. A decision is expected “imminently” but there has been no further clarification on this timing. Neither the EFSA nor the FSA have released official guidance in this regard.

To date, the FSA has stated that it accepts the clarification from the European Union that CBD extracts are considered novel foods. In February 2020, the FSA introduced a regulatory framework for CBD, issuing a statement requiring suppliers of CBD-infused food products to submit a novel food authorization application by March 31, 2021, after which date any CBD products without a valid application submitted will not be permitted to stay on the market. See “Risk Factors—Risks Related to Our Business and Our Industry—The United Kingdom’s impending departure from the European Union could adversely affect our ability to execute on our plans for the Bridge Farm facilities”.

It is expected that Brexit will not affect the novel foods status of CBD as under the United Kingdom’s proposed Withdrawal Act, the Novel Food Regulations will be adopted as U.K. law.

 

C.

Organizational structure.

Below, and attached as Exhibit 8.1 to this Annual Report, is the list of our significant subsidiaries as at December 31, 2019, each of which is directly or indirectly wholly-owned by Sundial unless otherwise indicated.

 

48


Subsidiaries

Jurisdiction of incorporation

Percentage ownership

Sprout Technologies Inc.

Alberta, Canada

100%

KamCan Products Inc.

British Columbia, Canada

100%

2011296 Alberta Inc.

Alberta, Canada

100%

Sundial Deutschland GmbH

Germany

100%

Sundial Portugal, Unipessoal LDA

Portugal

100%

Pathway Rx Inc.

Alberta, Canada

50%

2082033 Alberta Ltd.

Alberta, Canada

100%

SGI Managing Partner Inc.

Alberta, Canada

100%

SGI Partnership(1)

Alberta, Canada

100%

Sundial UK Limited

England and Wales

100%

Project Seed Topco

England and Wales

100%

Project Seed Bidco

England and Wales

100%

Bridge Farm Nurseries Limited

England and Wales

100%

Neame Lea Nursery Limited

England and Wales

100%

Neame Lea Marketing Limited

England and Wales

100%

Neame Lea Fresh Limited

England and Wales

100%

Zyon UK Flowers and Plants Limited

England and Wales

100%

 

(1)

Sundial. owns 99.99% of this entity and the remaining 0.01% is held by SGI Managing Partner Inc. which is wholly owned by Sundial.

 

D.

Property, plants and equipment.

Information regarding our material tangible fixed assets are as follows:

 

 

 

 

 

 

 

Olds,
Alberta

 

Rocky View,
Alberta

 

Merritt,
British Columbia

 

Bridge Farm,
United Kingdom

 

Format

Indoor Modular

Indoor

Indoor Modular

Greenhouses

Primary Purpose

Cultivation and
Extraction

Research and
Development

Cultivation and
Extraction

Cultivation and
Extraction

Capital expenditures to December 31, 2019

$180 million

$8 million

$10 million

$65 million

Capital expenditures remaining (approximately)

$5 - $10 million

$15 - 30 million(6)

$64 million

 

 

 

 

 

 

Facility Size at December 31, 2019 (Sq. Ft.)

428,000

31,000

1,596,000(3)

Additional Facility Size (Sq. Ft.)

20,000(1)

35,000(2)

1,991,000(4)

 

 

 

 

 

Projected Facility Size (Sq. Ft.)

448,000

31,000

35,000

3,587,000

Current Maximum Annual Capacity in Canada(5)

75 million grams

 

 

 

Current Utilized Annual Capacity in Canada(5)

37 million grams

 

 

 

 

(1)

People and processing building (20,000 sq. ft.).

(2)

Subject to construction and licensing.

(3)

Bridge Farm has received a cultivation licence to grow hemp from the U.K. government at its Homestead Facility and currently cultivates hemp in a portion of this facility. We plan to convert a further portion of the Homestead Facility and certain other of Bridge Farm’s existing and planned facilities to hemp and high-THC cannabis cultivation operations subject to the terms of the Term Debt Facility and subject to increases in market demand and availability of appropriate financing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity—Term Debt Facility”.

(4)

Subject to construction and licensing of Clay Lake Phase 2 (807,000 sq. ft.) and Phase 3 (1,184,000 sq. ft.). Construction of Clay Lake Phase 3 has been temporarily deferred pending availability of appropriate financing.

(5)

Maximum capacity is based on utilization of all licensed 114 flowering grow rooms. The Company is currently utilizing 55 flowering grow rooms.  

49


(6)

The amount of remaining capital expenditures at the Merritt Facility will vary depending on the scale of the facility that will be constructed. A mini-pod, which is an approximately 35,000 square foot facility with eight flowering rooms, is expected to cost a further $15 million to construct, while a larger facility with extraction capabilities is expected to cost up to $30 million to complete. Construction of the Merritt facility has been temporarily deferred pending increases in market demand and availability of appropriate financing.

 

Bridge Farm Facilities

The Clay Lake Facility is located on our property in Spalding, Lincolnshire, United Kingdom. Clay Lake Phase 1 is an 893,000 square foot facility that was completed in March 2019.

Prior to our acquisition of Bridge Farm, it had completed planning for Clay Lake Phase 2, which is approximately 807,000 square feet, and Clay Lake Phase 3, which is approximately 1.2 million square feet. Following the acquisition of Bridge Farm on July 2, 2019, we continued with the development and construction of Clay Lake Phase 2 through the remainder of 2019 and into the first quarter of 2020. Phase 2 is expected to be completed in the second quarter of 2020. Construction of Clay Lake Phase 3 has been temporarily deferred pending availability of appropriate financing.

The Homestead Facility, located in Spalding, Lincolnshire, United Kingdom, is approximately 218,000 square feet with approximately 110,000 square feet of high-quality and efficient growing sites. We lease the land on which the Homestead Facility is located from Bridge Farm Holdings Ltd, for a term of 30 years from October 8, 2017. Bridge Farm holds a licence to cultivate hemp at the Homestead Facility and cultivates hemp in a portion of this facility.

The Horseshoe Facility, also located in Spalding, Lincolnshire, United Kingdom, is a 484,000 square foot facility with approximately 286,000 square feet of grow space that was completed in March 2016 and provided proof of concept for the energy-efficient, automated and low-cost production model of ornamental plants. We lease the land on which the Horseshoe Facility is located from Bridge Farm Holdings Ltd, for a term of 30 years from October 8, 2017.

 

Asset Optimization Initiatives

The Company has temporarily suspended construction of its Merritt facility in British Columbia and is evaluating all options to maximize the value of its asset base. In January 2020, the Company entered into an agreement to sell its Kamloops, British Columbia, property for $2.1 million. The transaction closed on March 27, 2020. Sundial plans to limit capital expenditures to essential expenditures required to complete its Olds facility and Clay Lake Phase 2 facility, subject to available capital resources and liquidity. The Company is currently conducting a strategic review of Bridge Farm, including, but not limited to, a sale of all of its assets.

Item 4A. Unresolved Staff Comments

None.

 

Item 5. Operating and Financial Review and Prospects

 

 

A.

Operating Results

Refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1 filed herewith for a discussion of our financial condition and results of operations as of and for the year ended December 31, 2019 as compared to the fiscal year ended December 31, 2018. A discussion of liquidity and capital resources as of and for the year ended December 31, 2018 as compared to the fiscal year ended February 28, 2018 can be found in the section entitled “Management’s Discussion and Analysis of Financial Results of Operations—Results of Operations—Fiscal Year Ended December 31, 2018 Compared to Fiscal Year Ended February 28, 2018” in our prospectus filed with the SEC on August 1, 2019.

 

B.

Liquidity and Capital Resources

For a discussion of liquidity and capital resources as of and for the year ended December 31, 2019 as compared to December 31, 2018, refer to the sections entitled “Cash Flow Summary” and “Liquidity and Capital Resources” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1. A discussion of liquidity and capital resources as of and for the year ended December 31, 2018 as compared to the fiscal year ended February 28, 2018 can be found in the section entitled “Management’s Discussion and Analysis of Financial Results of Operations—Cash Flows for the Fiscal Years ended December 31, 2018 and February 28, 2018” in our prospectus filed with the SEC on August 1, 2019.

50


 

C.

Research and Development, Patents and Licenses, etc.

See “Item 4.B –Business Overview—Our Research” above.

 

D.

Trend Information

See “Item 4.B –Business Overview—Our Industry” and the section entitled “Strategy & Outlook” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

 

E.

Off-Balance Sheet Arrangements

None.

 

F.

Tabular Disclosure of Contractual Obligations

 

See the section entitled “Contractual Commitments and Contingencies” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

Item 6. Directors, Senior Management and Employees

 

A.

Directors and senior management.

The following table sets forth certain information regarding our directors and executive officers as of the date of this Annual Report. The terms of office of each of our directors expires on the date of the next annual meeting of our shareholders. The business address for our directors and executive officers is c/o Sundial Growers Inc., #200, 919 – 11 Avenue SW, Calgary, Alberta, Canada T2R 1P3.

 

 

 

 

Name, Province or State and

Country of Residence

 

Age

 

Position/Title

 

Zachary George(2)(3)

Connecticut, USA

41

Chief Executive Officer and Director

 

 

 

James Keough

Alberta, Canada

55

Chief Financial Officer

 

 

 

Andrew Stordeur

Alberta, Canada

40

President and Chief Operating Officer

 

 

 

Ryan Hellard

British Columbia, Canada

31

Chief Marketing and Product Officer

 

 

 

Charlotte Collett

Alberta, Canada

44

Chief People Officer

 

 

 

Louise Motala

Lincolnshire, UK

45

Managing Director UK

 

 

 

Greg Mills(1)(2)(3)

Ontario, Canada

57

Non-Executive Chairman and Director

 

 

 

Edward Hellard

British Columbia, Canada

64

Director

 

 

 

Gregory Turnbull(1)

Alberta, Canada

64

Director

 

 

 

Elizabeth Cannon

Alberta, Canada

57

Director

 

 

 

Bryan Pinney(1)(2)(3)

Alberta, Canada

66

Director

 

 

(1)

Independent director for the purposes of National Instrument 58-101 – Disclosure of Corporate Governance Practices (the “NI 58-101”), of the Canadian Securities Administrators and the Nasdaq Stock Market Rules (the “Nasdaq Rules”). See “—Corporate Governance—Director Independence”.

 

(2)

Subject to an undertaking to resign if unable to obtain security clearance as required by the Cannabis Regulations and Health Canada.

51


 

(3)

Awaiting security clearance as required by the Cannabis Regulations and Health Canada and subject to termination if unable to obtain the required security clearance pursuant to his or her employment agreement.

 

Biographical Information Regarding Our Directors and Executive Officers

Zachary George – Chief Executive Officer and Director

Mr. George joined Sundial as director in November 2019 and was appointed Chief Executive Officer in January 2020. Mr. George has spent more than 15 years evaluating catalyst-based investment opportunities across the capital structure of North American companies with a focus on real assets. Mr. George has worked in a management capacity, including as a chief executive officer, with numerous corporate boards to turn around operations, affect corporate action and implement governance policies in order to maximize shareholder value.

James Keough – Chief Financial Officer

Mr. Keough joined Sundial as Chief Financial Officer in May 2018. Mr. Keough began his career with KPMG and Ernst & Young in Canada and Europe. Prior to joining Sundial, he was a sole practitioner as a Chartered Accountant (“CA”), for two and a half years. Prior to that role, he served for 20 years as Chief Financial Officer of a diversified private company with operations in energy, real estate and hospitality. Mr. Keough holds a Bachelor of Commerce degree from the University of Calgary. He holds chartered public accountant (“CPA”), CA, and CPA (USA) designations.

Andrew Stordeur – President and Chief Operating Officer

Mr. Stordeur joined the Company as Chief Commercial Officer in March 2018 and became President – Canada in May 2019 and President and Chief Operating Officer in January 2020. From August 2011 to March 2018, Mr. Stordeur held increasingly senior sales-related positions, including Chief Sales and Customer Officer, at Molson Coors, and has also spent time at Mars Canada. Mr. Stordeur completed a Bachelor of Arts degree (sociology) at the University of Calgary and a Master of Business Administration degree at Queen’s University.  

Ryan Hellard – Chief Marketing and Product Officer

Mr. Hellard joined the Company as the Chief Marketing and Product Officer in March 2018. From 2012 and until joining Sundial, he held increasingly senior roles, including as President, at AppColony, an agency that develops marketing strategies and digital solutions for Canadian companies. Mr. Hellard completed a Bachelor of Commerce degree at the University of Calgary. Mr. Hellard is the son of one of our directors, Mr. Edward Hellard.

Charlotte Collett – Chief People Officer

Ms. Collett joined the Company as Chief People Officer in June 2018. Most recently, she was Principal Consultant at her company, Charlotte Collett Consulting. Prior to that, she was VP Human Resources at Tervita Corporation. Ms. Collett completed a Business Commerce degree at the University of Calgary. She is a Chartered Professional in Human Resources (“CPHR”), and is a standing member of the CPHR of Alberta.

Louise Motala – Managing Director UK

Ms. Motala was Commercial Director of Bridge Farm when acquired and was subsequently promoted to Managing Director UK in October 2019. Most recently, Ms. Motala was Category Manager at IPL (part of Walmart).  Prior to that, she was Category Buying Manager for three major retailers: Morrisons, Waitrose and Asda, and was Business Unit Manager at World Flowers.  Ms. Motala completed a BSc (Hons) (1st Class) degree in Business Management from South Bank University, London.

Greg Mills – Non-Executive Chairman and Director

Mr. Mills joined our board of directors in June 2019. Mr. Mills has 34 years of experience in capital markets, including 20 years with RBC Dominion Securities Inc. Mr. Mills has extensive leadership experience, having served as managing director of RBC Capital Markets’ Global Equities division and on RBC Capital Markets’ Spending and Global Risk committees. Mr. Mills is currently a director of RISE Life Sciences Corp. and was previously a director of RBC USA Holdco Corporation. Mr. Mills holds a Bachelor of Science degree in geology from the University of Windsor.

52


Edward Hellard – Director

Mr. Hellard joined our board of directors in January 2018 and served as Executive Chairman from January 2018 to January 2020. Mr. Hellard has founded various companies. In 1996, he founded Critical Mass, a digital marketing agency based in Calgary, Alberta. From 2009 to 2010, Mr. Hellard was Managing Partner and co-owner of the Calgary Stampeders Football Club. In 2012, he founded AppColony, a mobile software creator, where he continues to work today as Managing Partner. Mr. Hellard holds a bachelor’s degree in education from the University of Calgary. Mr. Hellard is the father of our Chief Marketing and Product Officer.

Gregory Turnbull – Director

Mr. Turnbull joined our board of directors in October 2018. Mr. Turnbull is a partner in the Calgary office of McCarthy Tétrault LLP. He has worked as a lawyer since 1980, having held a variety of roles with firms including Gowlings LLP, Donahue LLP and MacKimmie Matthews. In addition to being a director of the Company, Mr. Turnbull is a director of Storm Resources, Target Capital, and 420 Investments. Throughout his career, Mr. Turnbull has served as an officer or director of many other public and private companies. He is a member of the Law Society of Alberta, the Canadian Bar Association and the Calgary Bar Association. He holds a Bachelor of Arts degree (with honors) from Queen’s University and a Bachelor of Law degree from the University of Toronto. He has also previously been chair of the Calgary Zoo.

Elizabeth Cannon – Director

Ms. Cannon joined our board of directors in July 2019. Since January 2019, Ms. Cannon has been President Emerita and Professor of Geomatics Engineering at the University of Calgary. From July 2010 to December 2018, Ms. Cannon was President and Vice Chancellor of the University of Calgary. Ms. Cannon serves on the board of Mancal Corporation. She holds a Bachelor of Applied Science degree in mathematics from Acadia University, as well as Bachelor of Science, Master of Science and Doctor of Philosophy degrees in geomatics engineering from the University of Calgary.

Bryan D. Pinney – Director

Mr. Pinney joined our board of directors in December 2019. Bryan was a partner with Deloitte between 2002 and 2015. He served as Calgary Managing Partner from 2002 through 2007, as National Managing Partner of Audit & Assurance from 2007 to 2010, and Vice-Chair until 2015. Prior to joining Deloitte, Bryan was a partner with Andersen LLP and served as Calgary Managing Partner from 1991 through May of 2002. Bryan is currently a Board Member with TransAlta Corporation, serving on their Audit and HR Compensation Committees. He is also the lead Board Director for North American Energy Partners Inc. and a Board Director on a Hong Kong listed oil and gas company, Persta Resources Inc. Previously, Bryan served as Chair of the Board of Governors of Mount Royal University and on numerous other non-profit boards. He is also a director on one private company. He is a Fellow of the Institute of Chartered Accountants, a Chartered Business Valuator and is a graduate of the Ivey Business School at the University of Western Ontario with an honours degree in Business Administration. He is also a graduate of the Canadian Institute of Corporate Directors.

B.

Compensation.

 

Overview

In order to succeed in the highly competitive and evolving market in which we operate, we need to attract, retain and motivate a highly talented executive team. Our executive compensation program is designed to achieve the following objectives:

 

provide compensation opportunities in order to attract and retain talented, high-performing and experienced executive officers, whose knowledge, skills and performance are critical to our success;

 

 

motivate our executive team to achieve our strategic business and financial objectives;

 

 

align the interests of our executive officers with those of our shareholders by tying a meaningful portion of compensation directly to the long-term value and growth of our business; and

 

 

provide incentives that encourage appropriate levels of risk-taking by our executive team.

We currently offer our executive officers, including our NEOs’ cash compensation in the form of base salary and annual short-term and long-term incentives that will reward participants for the achievement of pre-established corporate, team and individual goals and

53


objectives. From time to time, our board of directors may also grant discretionary cash bonuses to our executives to reward them for exemplary performance. Long-term annual incentives may consist of stock options, performance share units (“PSUs”) and/or restricted share units (“RSUs”).

Our compensation philosophy is to motivate our employees to participate directly in the value that their efforts create for shareholders because our employees are also shareholders. We believe that equity-based compensation awards motivate our executive officers to achieve our strategic business and financial objectives, and also align their interests with the long-term interests of our shareholders.

We continue to evaluate our compensation philosophy and compensation program on an ongoing basis to ensure that we are providing competitive compensation opportunities for our executive team as a publicly-traded company in this evolving industry. As part of the annual compensation review process, we expect to be guided by the philosophy and objectives outlined above, as well as other factors which may become relevant.

Base Salary

Base salary is provided as a fixed source of compensation for our executive officers. Base salaries are determined on an individual basis, taking into account the scope of the executive officer’s role, responsibilities, expertise and prior experience. Base salaries for our executive officers, including our NEOs, are expected to be reviewed annually by the board of directors and may be adjusted based on the executive officer’s success in meeting or exceeding individual objectives, as well as to maintain market competitiveness. In addition, base salaries can be adjusted by the board of directors throughout the year to reflect promotions or other changes in the scope or breadth of an executive officer’s role or responsibilities.

Short-Term Annual Cash Incentive

Our short-term annual cash incentive plan is designed to reward the achievement of pre-determined corporate, team and personal goals and objectives over the ensuing year, with the intention of aligning compensation with corporate strategies. Annual incentive targets under the plan may be set as a percentage of the relevant executive officer’s base salary and payout of the annual cash incentive (if any) are linked to the achievement of corporate, team and personal performance. In order to further increase alignment with shareholders, executives and employees may also have the ability to elect to receive short-term cash incentive payments in the form of RSUs.

Long-Term Equity Incentives

Stock Option Plan and Restricted and Performance Share Unit Plan

The Sundial Growers Inc. Stock Option Plan and Sundial Growers Inc. Restricted and Performance Share Unit Plan each provides eligible participants with compensation opportunities that will support the achievement of the Company’s performance objectives, align the interests of eligible participants with those of the Company’s shareholders, and attract, retain and motivate eligible participants critical to the long term success of the Company and its subsidiaries.

 

Benefit Plans

We provide our executive officers, including our NEOs, with life, medical, dental and vision insurance programs on the same basis as other employees, or an allowance to purchase individual benefit and insurance coverage. We offer these benefits consistent with local market practice.

Perquisites

Other than living expense allowances provided for in the employment agreements for our former Chief Executive Officer and former Executive Chairman, we do not offer significant perquisites as part of our compensation program.

Executive Share Ownership Guidelines

Our executive share ownership guidelines are intended to further align the interests of our executive officers with those of our shareholders. The ownership guidelines establish minimum equity ownership levels for executive officers based on a multiple of their base salary and their level of seniority. Executive officers are expected to meet the prescribed ownership levels within five years of the later of our initial offering and the date of their appointment to an executive position.

54


The following table shows the expected ownership guideline for the executive officers:

 

 

 

Level

 

Base Salary
Multiple

 

Chief Executive Officer

3x

Other Executive Officers

2x

 

Summary Compensation Table

Our NEOs for the fiscal year ended December 31, 2019 were our former Chief Executive Officer, Torsten Kuenzlen, Chief Financial Officer, James Keough, former Executive Chairman, Edward Hellard, President and Chief Operating Officer, Andrew Stordeur, and Chief Marketing and Product Officer Ryan Hellard. For the fiscal year ended December 31, 2019, the aggregate compensation and benefits in kind accrued or paid to our then serving executive officers for services in all capacities was $19,282,528, and the aggregate compensation paid to each of our NEOs is set forth below.

 

 

 

 

 

 

 

 

 

Name and Principal Position

 

Year

 

Salary(1)

 

Share-
Based
Awards

 

Option-
Based
Awards(2)

 

Annual
Incentive
Plans(3)

 

All Other
Compensation(4)

 

Total
Compensation

 

Zachary George(10)

Chief Executive Officer and Director

2019

 

 

 

 

 

 

 

 

Torsten Kuenzlen(5)

Former Chief Executive Officer

2019

$358,125

$6,517,736

$882,768(6)

$7,758,629

 

 

 

 

 

 

 

 

James Keough

Chief Financial Officer

2019

$191,667

$1,455,856

$50,000

$1,697,523

 

 

 

 

 

 

 

 

Edward Hellard(5)

Former Executive Chairman

2019

$272,977(7)

$5,501,658

$364,575

$218,425(8)

$6,357,635

 

 

 

 

 

 

 

 

Andrew Stordeur

President and Chief Operating Officer

2019

$254,167

$1,256,129

$446,143(9)

$1,956,438

 

 

 

 

 

 

 

 

Ryan Hellard

Chief Marketing and Product Officer

2019

$206,250

$1,256,052

$50,000

$—

$1,512,302

 

Notes:

 

(1)

Represents the base salary paid in Fiscal 2019.

 

(2)

Reflects the grant date fair value of warrants that were granted in Fiscal 2019 (determined in accordance with the Black-Scholes valuation model, assuming a risk-free rate of 1.875% and an expected volatility of 106%).

 

(3)

Amounts reflect annual target bonus for each NEO. For Mr. Hellard, this represent 250,000 EUR at an exchange rate of 1.4583.

 

(4)

None of our NEOs, other than Messrs. Kuenzlen and Hellard, are entitled to perquisites or other personal benefits which, in aggregate, are worth over $50,000 or over 10% of their base salary.

 

(5)

On January 28, 2020, Mr. Kuenzlen resigned as the Company’s Chief Executive officer and stepped down as a director, Mr. Hellard stepped down from his role as Executive Chairman and continues to serve on the Board of Directors.

 

(6)

Represents a monthly living allowance, taxable vehicle benefit and a performance bonus for 2019.

 

(7)

Mr. Hellard commenced employment as the Company’s Executive Chairman on April 1, 2019. Mr. Hellard’s compensation is earned and paid to him in Euros. The amount included in the summary compensation table is in Canadian dollars, which was calculated using the Bank of Canada’s closing exchange rate on December 31, 2019 (€1 to $1.4583).

 

(8)

Represents a monthly living allowance and reimbursement for an annual medical examination.

 

(9)

Represents a signing bonus.

 

(10)

Mr. George joined Sundial as director in November 2019 and did not earn any executive compensation in 2019 other than amounts paid as a director, which amounted to $34,551 Please see “Item 6B—Compensation” for information regarding directors compensation. Mr. George was appointed Chief Executive Officer in January 2020.

The table below shows the incremental payments that would be made to our NEOs under the terms of their employment agreements upon the occurrence of certain events.

 

 

55


Name and Principal
Position

 

Event

 

Severance

 

Option-
Based
Awards(1)

 

Other
Payments

 

Total

 

Torsten Kuenzlen

Termination without cause

$377,500

$1,049,600

$11,325

$1,438,425

Former Chief Executive Officer(2)

 

 

 

 

 

 

James Keough

Termination without cause

$500,000

$7,500

$507,500

Chief Financial Officer

Termination and change of control

$500,000

$7,500

$507,500

 

 

 

 

 

 

Edward Hellard

Termination without cause

$377,450

$11,324

$388,774

Former Executive Chairman(2)

 

 

 

 

 

 

Andrew Stordeur

President and Chief Operating Officer

Termination without cause

$600,000

$9,000

$609,000

Termination and change of control

$600,000

$9,000

$609,000

 

 

 

 

 

 

Ryan Hellard

Termination without cause

$500,000

$7,500

$507,500

Chief Marketing and Product Officer

Termination and change of control

$500,000

$7,500

$507,500

 

Notes:

 

(1)

The value of unexercised in-the-money option-based awards is calculated based on the December 31, 2019 price of USD$3.01 (CAD$3.91) per common share.

 

(2)

On January 28, 2020, Mr. Kuenzlen resigned as the Company’s Chief Executive officer and stepped down as a director. On January 29, 2020, Mr. Hellard stepped down from his role as Executive Chairman and continues to serve on the Board of Directors. Negotiations regarding actual settlement payment pursuant to Messrs. Kuenzlen and Hellard’s resignation with their respective roles are ongoing and may be higher or lower than as disclosed in this table. The receipt of which will be conditions on each of Messrs. Kuenzlen and Hellard’s execution of a release of claims in favor of the Company.

 

Outstanding Share-Based Awards and Option-Based Awards

The following table sets out information on the outstanding warrants and other option-based awards held by each of our NEOs as at December 31, 2019. None of our NEOs hold any share-based awards.

 

Name

 

Number of
common shares
underlying
unexercised
option-based
awards

 

Exercise
price

 

Expiration date

 

Value of
unexercised in-the-
money option-
based awards(1)

 

Torsten Kuenzlen

Former Chief Executive Officer

144,000

 

160,000

1,349,333

160,000

160,000

720,000

160,000

160,000

160,000

$0.63

 

0.63

0.63

0.63

0.63

6.25

0.63

0.63

0.63

February 1, 2023

 

February 1, 2024

August 1, 2024

January 20, 2025

January 20, 2026

January 11, 2027

January 20, 2027

January 20, 2028

January 20, 2029

$472,320

 

524,800

4,425,812

524,800

524,800

524,800

524,800

524,800

 

 

 

 

 

James Keough

Chief Financial Officer

80,000

 

108,000

160,000

$2.97

 

2.97

6.25

August 14, 2023

 

August 1, 2024

June 15, 2027

$75,200

 

101,520

 

 

 

 

 

Edward Hellard

Former Executive Chairman

480,000

 

480,000

480,000

240,000

240,000

240,000

$0.63

 

0.63

0.63

6.25

6.25

6.25

September 1, 2023

 

September 1, 2024

September 1, 2025

January 11, 2025

January 11, 2026

January 11, 2027

$1,574,400

 

1,574,400

1,574,400

 

 

 

 

 

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Name

 

Number of
common shares
underlying
unexercised
option-based
awards

 

Exercise
price

 

Expiration date

 

Value of
unexercised in-the-
money option-
based awards(1)

 

Andrew Stordeur

President and Chief Operating Officer

38,400

 

38,400

115,200

160,000

192,000

192,000

$0.63

 

0.63

0.63

6.25

0.63

3.13

March 6, 2023

 

March 6, 2024

August 1, 2024

January 11, 2027

5 years from vest date

5 years from vest date

$125,952

 

125,952

377,856

629,760

149,760

 

 

 

 

 

Ryan Hellard

Chief Marketing and Product Officer

38,400

 

38,400

115,200

160,000

192,000

192,000

$0.63

 

0.63

0.63

6.25

0.63

3.13

March 1, 2023

 

March 1, 2024

August 1, 2024

January 11, 2027

5 years from vest date

5 years from vest date

$125,952

 

125,952

377,856

629,760

149,760

 

Notes:

 

(1)

The value of unexercised in-the-money option-based awards is calculated based on the December 31, 2019 closing price of US$3.01 ($3.91) per common share.

 

 Incentive Plan Awards – Value Expected to be Vested or Earned During the Year

The following table sets out, for each of our NEOs, the value of the option-based awards that vested in accordance with their terms as of December 31, 2019. As of December 31, 2019, none of our NEOs hold any share-based awards.

 

 

 

Name and Principal Position

 

Option-Based Awards
– Value Vested During 2019(1)

 

Torsten Kuenzlen

Former Chief Executive Officer

$6,525,012

 

 

James Keough

Chief Financial Officer

$101,520

 

 

Edward Hellard

Former Executive Chairman

$3,148,800

 

 

Andrew Stordeur

President and Chief Operating Officer

$503,808

 

 

Ryan Hellard

Chief Marketing and Product Officer

$503,808

 

Notes:

 

(1)

The value of unexercised in-the-money option-based awards is calculated based on the December 31, 2019 closing price of US$3.01 ($3.91) per common share.

 

 

 

 

 

 

 

 

 

 Management Agreements

Employment Agreements

The Company has entered into employment agreements with each of our NEOs. The material terms of the employment agreements are discussed below.

 

Zachary George, Chief Executive Officer

The Company may terminate Mr. George at any time, without cause, and the Company will be required to provide him with his accrued but unpaid annual base salary, vacation pay and business expenses up to the termination date (the “Accrued Obligations”),

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plus (i) termination notice of one (1) year (which may be provided as pay in lieu of notice), (ii) a lump sum payment in lieu of benefits equivalent to 3% of his annual base salary, and (iii) any unvested stock options or restricted share units will immediately vest on the termination date. The receipt of the separation package is conditioned on Mr. George’s execution of a release of claims.

Pursuant to Mr. George’s employment agreement, if a change of control occurs, and his employment with the Company is subsequently or contemporaneously terminated by the Company, Mr. George will be entitled to receive, within thirty (30) days after such termination, a lump sum payment equal to (i) the Accrued Obligations, (ii) one time his annual base salary, and (iii) 3% of his annual base salary in lieu of benefits.

Mr. George’s employment agreement also contains a customary confidentiality covenant and certain covenants that will continue to apply following the termination of his employment, including non-competition and non-solicitation provisions which are in effect during Mr. George’s employment and for the twelve (12) months following the termination of his employment (collectively, the “Restrictive Covenants”).

James Keough, Chief Financial Officer

The Company may terminate Mr. Keough at any time without cause and the Company will be required to provide him with his accrued but unpaid annual base salary, pay for accrued and unused vacation and business expenses up to the cessation date (the “Accrued Obligations”), plus (i) termination notice of two years (which may be provided as pay in the form of base salary in lieu of notice), and (ii) a lump sum payment in lieu of benefits equivalent to 3% of his annual base salary. Additionally, subject to the terms of the applicable equity plan and of any applicable agreement, any issued but unvested stock options, simple warrants and performance warrants previously granted to Mr. Keough will immediately vest on the cessation date. The receipt of the separation package is conditioned on Mr. Keough’s execution of a release of claims.

Pursuant to Mr. Keough’s employment agreement, if a change of control occurs and his employment is subsequently or contemporaneously terminated by the Company or its successor, Mr. Keough will be entitled to receive, within 30 days after such termination, a sum of money equal to (i) the Accrued Obligations, (ii) one times his annual base salary, and (iii) 3% of his annual base salary in lieu of benefits.

Mr. Keough’s employment agreement also contains the Restrictive Covenants.

Andrew Stordeur, President and Chief Operating Officer, former President – Canada

The Company may terminate Mr. Stordeur at any time without cause and the Company will be required to provide him with his Accrued Obligations, plus (i) termination notice of two years (which may be provided as pay in the form of base salary in lieu of notice), (ii) a lump sum payment in lieu of benefits equivalent to 3% of his annual base salary, and (iii) all of his outstanding performance warrants will immediately vest on the cessation date. Additionally, subject to the terms of the applicable equity plan and of any applicable agreement, any issued but unvested stock options, simple warrants and performance warrants previously granted to Mr. Stordeur will immediately vest on the cessation date. The receipt of the separation package is conditioned on Mr. Stordeur’s execution of a release of claims.

Pursuant to Mr. Stordeur’s employment agreement, if a change of control occurs and his employment is subsequently or contemporaneously terminated by the Company or its successor, Mr. Stordeur will be entitled to receive, within 30 days after such termination, a sum of money equal to (i) the Accrued Obligations, (ii) two times his annual base salary, and (iii) 3% of his annual base salary in lieu of benefits, and all of his outstanding performance warrants will immediately vest on the cessation date.

Mr. Stordeur’s employment agreement also contains the Restrictive Covenants, except that if Mr. Kuenzlen ceases to be employed by the Company at the same time or within the preceding 30 days of Mr. Stordeur’s cessation of employment, then Mr. Stordeur will not be subject to a non-competition restriction.

Ryan Hellard, Chief Marketing and Product Officer

 

The Company may terminate Mr. Hellard at any time without cause and the Company will be required to provide him with his Accrued Obligations, plus (i) termination notice of two years (which may be provided as pay in the form of base salary in lieu of notice), (ii) a lump sum payment in lieu of benefits equivalent to 3% of his annual base salary, and (iii) all of his outstanding performance warrants will immediately vest on the cessation date. Additionally, subject to the terms of the applicable equity plan and of any applicable agreement, any issued but unvested stock options, simple warrants and performance warrants previously granted to

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Mr. Hellard will immediately vest on the cessation date. The receipt of the separation package is conditioned on Mr. Hellard’s execution of a release of claims.

 

Pursuant to Mr. Hellard’s employment agreement, if a change of control occurs and his employment is subsequently or contemporaneously terminated by the Company or its successor, Mr. Hellard will be entitled to receive, within 30 days after such termination, a sum of money equal to (i) the Accrued Obligations, (ii) two times his annual base salary, and (iii) 3% of his annual base salary in lieu of benefits, and all of his outstanding performance warrants will immediately vest on the cessation date.

Edward Hellard, Former Executive Chairman

Mr. Hellard’s employment agreement is for a three-year fixed term, commencing as of April 1, 2019 (subject to extension or earlier termination). On January 29, 2020, Mr. Hellard stepped down from his role as Executive Chairman and continues to serve on the Board of Directors. Negotiations regarding settlement payments pursuant to Mr. Hellard’s resignation as Executive Chairman are ongoing and the receipt of his separation package is conditioned on Mr. Helland’s execution of a release of claims.

Mr. Hellard’s employment agreement also contains the Restrictive Covenants.

Torsten Kuenzlen, Former Chief Executive Officer

Mr. Kuenzlen’s employment agreement was for a three-year fixed term commencing as of April 1, 2019 (subject to extension or earlier termination). On January 28, 2020, Mr. Kuenzlen resigned as the Company’s Chief Executive officer and stepped down as a director. Negotiations regarding settlement payments pursuant to Mr. Kuenzlen’s resignation are ongoing and the receipt of his separation package is conditioned on Mr. Kuenzlen’s execution of a release of claims.

Mr. Kuenzlen’s employment agreement also contains the Restrictive Covenants.

Director Compensation

Our board of directors, on the recommendation of our compensation committee, is responsible for reviewing and approving any changes to the directors’ compensation arrangements.

In consideration for serving on our board of directors, each director, other than directors who are employees of the Company (the “Excluded Directors”), is paid an annual cash retainer of $75,000. In addition, for serving during the Company’s first year as a publicly traded company, Messrs Turnbull and Mills and Ms. Cannon each received $175,000 payable in deferred share units at the IPO price in equal installments on September 30, 2019, December 31, 2019, March 31, 2020 and June 30, 2020. Mr, Tamkee received $43,750 in deferred share units at the IPO price prior to his resignation from the board effective December 14, 2019. Upon joining the board on November 27, 2019, Mr. George became entitled to receive $350,000 during the time he serves as Chair of the Operating and Capital Committee and 250,000 deferred share units in equal installments on December 1, 2019, March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021 and March 31, 2022. Upon joining the board on December 16, 2019, Mr. Pinney is entitled to $175,000 in deferred share units payable in equal installments on March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020. The number of deferred share units issuable are determined by the installment payment divided by the fair market value of our common shares at each installment date.

If a change of control occurs, all of these equity grants (except those granted to Mr. Mills and Mr. Turnbull) will immediately vest.

In addition, to reflect the additional workload required in respect of special projects performed, Mr. George was entitled to receive 500,000 warrants (subsequently amended to an entitlement to 500,000 stock options in accordance with the Company Stock Option Plan, in equal installments on , March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021, March 31, 2022 and June 30, 2022. Mr. George’s compensation as a director (if unvested) was terminated when he became Chief Executive Officer on January 29, 2020.

In addition, to reflect the additional workload and responsibilities of his position as Non-Executive Chairman of our board of directors, Greg Mills is entitled to receive $600,000 during our first year as a publicly traded company payable in deferred share units at the IPO price comprised of quarterly installments of $150,000 which were paid on September 30, 2019 and December 31, 2019 with the remaining installments payable on March 31, 2020 and June 30, 2020. In addition, Mr. Mills was issued 720,000 warrants on July 1, 2019 to purchase our common shares, with an exercise price of $6.25 per warrant. Under the terms of Mr. Mills’ director services agreement, those warrants vest in three equal annual installments in the event Mr. Mills assumes the position of Executive Chairman and will expire five years from the vesting date; however, if Mr. Mills does not assume the position of Executive Chairman

59


by December 31, 2021, then all of such warrants will expire. In addition, if Mr. Mills were to assume the position of Executive Chairman, he would receive an annual salary of $500,000 payable quarterly in equal installments. Mr. Mills’ director services agreement contemplates that he may assume the position of Executive Chairman as early as July 2020. Although, our former Executive Chairman, Mr. Hellard, resigned from his position on January 29, 2020, our board of directors has not agreed to nominate Mr. Mills, nor has Mr. Mills agreed to serve in such position as of the date of this Annual Report.

Furthermore, on July 1, 2019, Mr. Mills was issued warrants to purchase 80,000 of our common shares, with an exercise price of $7.50 per warrant, which vest if, during the term of Mr. Mills’ director services agreement, the equity market capitalization value of the Company (as calculated in accordance with the agreement) exceeds $5.5 billion. These warrants expire three years following the vesting date.

If a change of control occurs, Mr. Mills will be entitled to receive any unpaid portion of the annual cash retainer for the calendar year in which the change of control occurs and any unpaid portion of the $600,000 fee payable in deferred share units referred to above. In addition, if a change of control occurs, all outstanding warrants held by Mr. Mills and Mr. Turnbull will immediately vest.

All directors will be reimbursed for their reasonable out-of-pocket expenses incurred while serving as directors.

 

The aggregate of compensation and benefits in kind, accrued or paid to our directors in the year ended December 31, 2019 for services in all capacities was $187,532 (2018 - $230,580).

Director Share Ownership Guidelines

We have director share ownership guidelines for directors (other than Excluded Directors) to further align the interests of such directors with those of our shareholders. The ownership guidelines have established minimum equity ownership levels for each of our directors, other than Excluded Directors, based on a multiple of their annual retainer. Such directors are expected to meet the prescribed ownership levels within five years of the later of (i) the completion of the IPO and (ii) the date of their appointment to the board of directors. Common shares and other equity-based awards will be included in determining an individual’s equity ownership value. The expected ownership guideline for these directors is 3x their annual retainer.

 

C.

Board practices.

Composition of our Board of Directors

Under our amended articles of incorporation, our board of directors consists of a minimum of one and a maximum of 15 directors as determined from time to time by the directors. Our board of directors is comprised of six directors, and under the ABCA, as a reporting issuer, we must have no fewer than three directors. Under the ABCA, a director may be removed with or without cause by a resolution passed by a majority of the votes cast by shareholders present in person or by proxy at a meeting and who are entitled to vote. The directors are appointed at the annual general meeting of shareholders and the term of office for each of the directors expires at the time of our next annual shareholders meeting. Our articles of incorporation  provide that, between annual general meetings of our shareholders, the directors may appoint one or more additional directors, but the number of additional directors may not at any time exceed one-third of the number of directors who held office at the expiration of the last meeting of our shareholders. Under the ABCA, at least one quarter of our directors must be resident Canadians as defined in the ABCA.

Majority Voting Policy

We have a majority voting policy to the effect that a nominee for election as a director of the Company who does not receive a greater number of votes “for” than votes “withheld” with respect to the election of directors by shareholders will be expected to offer to tender his or her resignation to the chairman of our board of directors promptly following the meeting of shareholders at which the director was elected. The nominating and corporate governance committee will consider such offer and make a recommendation to our board of directors about whether to accept it or not. Our board of directors will promptly accept the resignation unless it determines, in consultation with the nominating and corporate governance committee, that there are exceptional circumstances that should delay the acceptance of the resignation or justify rejecting it. Our board of directors will make its decision and announce it in a press release within 90 days following the meeting of shareholders. A director who tenders a resignation pursuant to our majority voting policy will not participate in any meeting of our board of directors or the nominating and corporate governance committee at which the resignation is considered. Our majority voting policy will not apply for contested meetings at which the number of directors nominated for election is greater than the number of seats available on the board.

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Director Term Limits and Other Mechanisms of Board Renewal

Our board of directors has not adopted director term limits or other automatic mechanisms of board renewal. Rather than adopting formal term limits, mandatory age-related retirement policies and other mechanisms of board renewal, the nominating and corporate governance committee of our board of directors is developing a skills and competencies matrix for our board of directors as a whole and for individual directors. The nominating and corporate governance committee will also conduct a process for the assessment of our board of directors, each committee and each director regarding his or her effectiveness and contribution, and will report evaluation results to our board of directors on a regular basis.

Director Independence

Under the Nasdaq Rules, independent directors must comprise a majority of a listed company’s board of directors. For purposes of the Nasdaq Rules, an independent director means a person other than an executive officer or employee of the company who, in the opinion of the board of directors, has no relationship with the company that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Under National Instrument 58-101 – Disclosure of Corporate Governance Practices (“NI 58-101”), a director is considered to be independent if he or she is independent within the meaning of Section 1.4 of National Instrument 52-110—Audit Committees (“NI 52-110”). Section 1.4 of NI 52-110 generally provides that a director is independent if he or she has no direct or indirect relationship with the issuer which could, in the view of the issuer’s board of directors, be reasonably expected to interfere with the exercise of the director’s independent judgment.

Our board of directors has undertaken a review of the independence of each director. Based on information provided by each director concerning his or her background, employment and affiliations, [our board of directors has determined that as of December 31, 2019, Messrs. Mills, Turnbull and Pinney, and Ms. Cannon, representing four of the six members of our board of directors, are “independent” as that term is defined under the Nasdaq Rules and NI 58-101. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our shares by each non-employee director. As of December 31, 2019, Messrs. Hellard and Kuenzlen were not independent by reason of the fact that Mr. Hellard was our Executive Chairman and Mr. Kuenzlen was our Chief Executive Officer. On January 28, 2020, Mr. Kuenzlen resigned as the Company’s Chief Executive officer and stepped down as a director. Mr.  Hellard stepped down from his role as Executive Chairman on January 29, 2020 and continues to serve on the Board of Directors.

Certain members of our board of directors are also members of the boards of other public companies. See “—Biographical Information Regarding Our Directors and Executive Officers”. Our board of directors has not adopted a director interlock policy, but is keeping informed of other public directorships held by its members.

Mandate of the Board of Directors

Our board of directors is responsible for supervising the management of our business and affairs, including providing guidance and strategic oversight to management. Our board adopted a formal mandate that includes the following:

 

appointing our Chief Executive Officer;

 

developing the corporate goals and objectives that our Chief Executive Officer is responsible for meeting and reviewing the performance of our Chief Executive Officer against such corporate goals and objectives;

 

taking steps to satisfy itself as to the integrity of our Chief Executive Officer and other executive officers and that our Chief Executive Officer and other executive officers create a culture of integrity throughout the organization;

 

reviewing and approving our code of conduct and reviewing and monitoring compliance with the code of conduct and our enterprise risk management processes;

 

reviewing and approving management’s strategic and business plans and our financial objectives, plans and actions, including significant capital allocations and expenditures; and

 

reviewing and approving material transactions not in the ordinary course of business.

Meetings of Independent Directors

Our board of directors holds regularly-scheduled quarterly meetings as well as ad hoc meetings from time to time. The independent members of our board of directors also meet, as required, without the non-independent directors and members of management before or after each regularly scheduled board meeting.

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A director who has a material interest in a matter before our board of directors or any committee on which he or she serves is required to disclose such interest as soon as the director becomes aware of it. In situations where a director has a material interest in a matter to be considered by our board of directors or any committee on which he or she serves, such director may be required to absent himself or herself from the meeting while discussions and voting with respect to the matter are taking place. Directors will also be required to comply with the relevant provisions of the ABCA regarding conflicts of interest.

 

Position Descriptions

Our board of directors has written terms of reference for the chairman which sets out his or her key responsibilities, including duties relating to determining the frequency, dates and locations of meetings and setting board of directors meeting agendas, chairing board of directors and shareholder meetings and carrying out any other or special assignments or any functions as may be requested by our board of directors or management, as appropriate.

Our board of directors has written terms of reference for each of the committee chairs which sets out each of the committee chair’s key responsibilities, including duties relating to determining the frequency, dates and locations of meetings and setting committee meeting agendas, chairing committee meetings, reporting to our board of directors and carrying out any other special assignments or any functions as may be requested by our board of directors.

In addition, our board of directors, in conjunction with our Chief Executive Officer, has developed and implemented a written position description for the role of our Chief Executive Officer.

Orientation and Continuing Education

We have implemented an orientation program for new directors under which a new director will meet separately with the chairman of our board of directors, members of the senior executive team and the secretary.

The nominating and corporate governance committee is responsible for coordinating orientation and continuing director development programs relating to the committee’s mandate. The chairman of our board of directors is responsible for overseeing director continuing education designed to maintain or enhance the skills and abilities of our directors and to ensure that their knowledge and understanding of our business remains current.

Code of Conduct

We have adopted a code of conduct applicable to all of our directors, officers and employees, including our Chief Executive Officer and Chief Financial Officer, which is a “code of ethics” as defined in section 406(c) of SOX and which is a “code” under NI 58-101. The code of conduct sets out our fundamental values and standards of behavior that are expected from our directors, officers and employees with respect to all aspects of our business. The objective of the code of conduct is to provide guidelines for maintaining our integrity, reputation and honesty with a goal of honoring others’ trust in us at all times as well as to deter wrongdoing and promote (i) honest and ethical behavior and fair dealing by our directors, officers, employees, consultants and contractors, (ii) full, fair, accurate, timely and understandable disclosure in filings with the SEC and other public communications, (iii) compliance with applicable governmental rules and regulations, and (iv) accountability for adherence to the code of conduct and prompt reporting of its violations.

The full text of the code of conduct has been posted on our website at www.sundialcannabis.com. The information on or accessible through our website is not part of and is not incorporated by reference into this Annual Report, and the inclusion of our website address in this Annual Report is only for reference. If we make any amendment to the code of conduct or grant any waiver therefrom, whether explicit or implicit, to a director or executive officer, we will disclose the nature of such amendment or waiver on our website to the extent required by, and in accordance with, the rules and regulations of the SEC and the Canadian securities regulatory authorities.

 

Monitoring Compliance with the Code of Conduct

Our nominating and corporate governance committee is responsible for reviewing and evaluating the code of conduct at least annually and recommends any necessary or appropriate changes to our board of directors for consideration. The nominating and corporate governance committee assists our board of directors with the monitoring of compliance with the code of conduct, and is responsible for considering any waivers therefrom (other than waivers applicable to members of the nominating and corporate governance committee, which are considered by the audit committee, or waivers applicable to our directors or executive officers, which are subject to review by our board of directors as a whole).

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Requirement for Directors and Officers to Disclose Interest in a Contract or Transaction

In accordance with the ABCA, each director and officer must disclose the nature and extent of any interest that he or she has in a material contract or material transaction whether made or proposed with us, if the director or officer is a party to the contract or transaction, is a director or an officer or an individual acting in a similar capacity of a party to the contract or transaction, or has a material interest in a party to the contract or transaction. Subject to certain limited exceptions under the ABCA, no director may vote on a resolution to approve a material contract or material transaction which is subject to such disclosure requirement.

Benefits upon Termination of Employment

The service contracts with our directors do not provide for any benefits upon termination of employment, other than a “tail” directors and officers insurance policy.

Complaint Reporting

In order to foster a climate of openness and honesty in which any concern or complaint pertaining to a suspected violation of the law, our code of conduct or any of our policies, or any unethical or questionable act or behavior, our code of conduct requires that our employees promptly report the violation or suspected violation. In order to ensure that violations or suspected violations can be reported without fear of retaliation, harassment or an adverse employment consequence, we have adopted a whistleblowing policy which contains procedures that are aimed to facilitate confidential, anonymous submissions of complaints by our directors, officers, employees and others.

Diversity

We believe that having a diverse board of directors can offer a breadth and depth of perspectives that enhance the board’s performance. We value diversity of abilities, experience, perspective, education, gender, background, race and national origin. Recommendations concerning director nominees are based on merit and past performance, as well as expected contribution to the board’s performance and, accordingly, diversity is taken into consideration. As of December 31, 2019, we had one female director, which represents 16% of our board.

We similarly believe that having a diverse and inclusive organization overall is beneficial to our success, and we are committed to diversity and inclusion at all levels of our organization to ensure that we attract, retain and promote the brightest and most talented individuals. We have recruited and selected senior management candidates that represent a diversity of business understanding, personal attributes, abilities and experience. Currently, one out of eight of our executive officers is a woman.

We do not currently have a formal policy for the representation of women on the board of directors or senior management of the company. We already take gender and other diversity representation into consideration as part of our overall recruitment and selection process. We have not adopted targets for gender or other diversity representation, in part due to the need to consider a balance of criteria for each individual appointment. We do not believe that quotas or strict rules set out in a formal policy would result in improved identification or selection of the best candidates. Quotas based on specific criteria would limit our ability to ensure that the overall composition of the board of directors and senior management meets the needs of our organization and our shareholders.

The composition of the board of directors is shaped by the selection criteria established by the nominating and corporate governance committee. This is achieved through developing an evergreen list of potential candidates for anticipated board vacancies who fit the committee’s list of evolving selection criteria, ensuring that diversity considerations are taken into account in senior management, monitoring the level of female representation on the board and in senior management positions, continuing to broaden recruiting efforts to attract and interview qualified female candidates, and committing to retention and training to ensure that our most talented employees are promoted from within our organization, all as part of our overall recruitment and selection process to fill board or senior management positions as the need arises.

Committees of the Board of Directors

We have an audit committee, a compensation committee, a nominating and corporate governance committee, and an operations and capital committee with each committee having a written charter.

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Audit Committee

Our audit committee is comprised of Greg Mills and Elizabeth Cannon, and chaired by Bryan Pinney. Our board of directors has determined that each of Greg Mills, Elizabeth Cannon and Bryan Pinney is financially literate and meets the independence requirements for directors, including the heightened independence standards for members of the audit committee under Rule 10A-3 under the Exchange Act and NI 52-110. Our board of directors has determined that Bryan Pinney is “financially sophisticated” within the meaning of the Nasdaq Rules, “financially literate” within the meaning of NI 52-110, and a “financial expert” as defined by Rule 10A-3 under the Exchange Act. For a description of the education and experience of each member of the audit committee, see “—Biographical Information Regarding Our Directors and Executive Officers”.

Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the audit committee, consistent with the rules of the Nasdaq, the SEC and NI 52-110 and our audit committee reviews the charter annually. The principal purpose of our audit committee is to oversee the accounting and financial reporting processes and audits of the Company and to assist our board of directors in discharging its oversight of:

the quality and integrity of our financial statements and related information;

the independence, qualifications, appointment and performance of our external auditor;

our disclosure controls and procedures, internal control over financial reporting and management’s responsibility for assessing and reporting on the effectiveness of such controls;

our compliance with applicable legal and regulatory requirements; and

our enterprise risk management processes.

Our audit committee is directly responsible for the appointment, retention and compensation of external auditors and for considering their independence and any potential conflicts of interest. Our audit committee has access to all of our books, records, facilities and personnel and is able to request any information about us as it may deem appropriate. It also has the authority in its sole discretion and at our expense, to retain and set the compensation of outside legal, accounting or other advisors as necessary to assist in the performance of its duties and responsibilities.

Our audit committee also reviews our policies and procedures for reviewing and approving or ratifying related-party transactions, and will be responsible for reviewing and approving or ratifying all related-party transactions.

Compensation Committee

Our compensation committee is comprised of Elizabeth Cannon and Bryan Pinney, and is chaired by Greg Mills. Under SEC and the Nasdaq Rules, there are heightened independence standards for members of the compensation committee. Our board of directors has determined that each of Elizabeth Cannon, Bryan Pinney and Greg Mills meet this heightened standard and are also independent for purposes of NI 58-101. For a description of the background and experience of each member of our compensation committee, see “—Biographical Information Regarding Our Directors and Executive Officers”.

Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the compensation committee consistent with the rules of the Nasdaq, the SEC and the guidance of the Canadian securities regulatory authorities and our compensation committee will review the charter annually. The compensation committee’s purpose is to assist the board in its oversight of executive compensation, management development and succession, director compensation and executive compensation disclosure. The principal responsibilities and duties of the compensation committee include:

 

reviewing at least annually our executive compensation plans;

 

 

in the absence of the Chief Executive Officer, evaluating at least once a year our Chief Executive Officer’s performance in light of the goals and objectives established by our board of directors and, based on such evaluation, providing recommendations to our board of directors regarding the Chief Executive Officer’s annual compensation;

 

reviewing on an annual basis the evaluation process and compensation structure for our executive officers and, in consultation with our Chief Executive Officer, reviewing the performance of the other executive officers in order to make recommendations to our board of directors with respect to the compensation for such officers; and

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reviewing and, if appropriate, recommending to our board of directors the approval of any adoption, amendment and termination of our incentive and equity-based incentive compensation plans (and the aggregate number of shares to be reserved for issuance thereunder), and overseeing their administration and discharging any duties imposed on the compensation committee by any of those plans.

Further particulars of the process by which compensation for our executive officers is and will be determined are provided under the heading “Executive Compensation”.

Our compensation committee also has the authority in its sole discretion and at our expense, to appoint, compensate and oversee any compensation consultant, legal counsel or other adviser, upon taking into consideration various factors which could impact such consultant’s, counsel’s or adviser’s independence.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee is comprised of Bryan Pinney and Elizabeth Cannon, and chaired by Gregory Turnbull, each of whom is independent for purposes of NI 58-101 and the Nasdaq Rules.

Our board of directors has establish a written charter setting forth the purpose, composition, authority and responsibility of our nominating and corporate governance committee. The nominating and corporate governance committee’s purpose is to assist our board of directors in:

 

identifying individuals qualified to become members of our board of directors;

 

selecting, or recommending that our board of directors select, director nominees for the next annual meeting of shareholders and determining the composition of our board of directors and its committees;

 

developing and overseeing a process to assess our board of directors, the chairman of the board of directors, the committees of the board of directors, the chairs of the committees, individual directors and management; and

 

developing and implementing our corporate governance guidelines.

In identifying new candidates for our board of directors, the nominating and corporate governance committee considers what competencies and skills our board of directors, as a whole, should possess and assess what competencies and skills each existing director possesses, considering our board of directors as a group, and the personality and other qualities of each director, as these may ultimately determine the boardroom dynamic.

It is the responsibility of the nominating and corporate governance committee to regularly evaluate the overall efficiency of our board of directors and our chairman and all board committees and their chairs. As part of its mandate, the nominating and corporate governance committee conducts the process for the assessment of our board of directors, each committee and each director regarding his, her or its effectiveness and contribution, and report evaluation results to our board of directors on a regular basis..

Operations and Capital Committee

Our operations and capital committee is comprised of Greg Turnbull and Bryan Pinney, and is chaired by Zachary George. Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the operations and capital committee which the operations and capital committee will review annually. The operations and capital committee’s purpose is to assist the board in its oversight of the Company’s financial strategy and capital structure. The principal responsibilities and duties of the operations and capital committee include:

 

optimizing the Company’s debt to equity ratio and assessing current, and future, requirements for additional capital;

 

approving the Company’s negotiations with current and future secured lenders, unsecured lenders and other creditors and other financial advisors, including investment banks;

 

reviewing the Company’s financial efficiencies including ongoing review of its cost structure and cost controls; and

 

reviewing and, if appropriate, recommending to the board of directors the adoption or implementation of any of its recommendations.

Our operations and capital committee will also have the authority in its sole discretion and at our expense, to retain persons having special expertise and/or obtain independent professional advice to assist in fulfilling its responsibilities.

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Mergers and Acquisitions Committee

Our mergers and acquisitions committee is comprised of Greg Mills and Zachary George, and is chaired by Edward Hellard. Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the mergers and acquisitions committee which the mergers and acquisitions committee will review annually. The mergers and acquisitions committee’s purpose is to assist the board in its oversight of the Company’s strategy regarding mergers, acquisitions, investments and dispositions. The principal responsibilities and duties of the mergers and acquisition committee include:

 

 

approving the Company’s proposed mergers, acquisitions, investments and dispositions of material assets or a material portion of any business (a “Material Transaction”), including assessing risks to the Company in connection with Material Transactions, and approving and/or making recommendations to the board to approve Material Transactions, as appropriate;

 

assisting the Company with post-closing analysis of Material Transactions; and

 

reviewing and, if appropriate, making recommendations to the board regarding the adoption or implementation of any of its recommendations.

Our mergers and acquisitions committee also has the authority in its sole discretion and at our expense, to retain persons having special expertise and/or obtain independent professional advice to assist in fulfilling its responsibilities.

 

D.

Employees.

As of December 31, 2019, we employed 1,064 total employees, 868 of whom were full-time employees and 15 were engaged contractors located in Canada, comprised of 747 employees in facility operations and logistics roles, 93 employees in general, administrative and support roles, 28 employees in sales and marketing roles, and 196 employees located in the United Kingdom and employed by Bridge Farm. In 2020, the Company undertook headcount reductions as part of its business optimization initiatives.

We consider relations with our employees to be good and have never experienced a work stoppage. None of our employees are represented by a labor union or subject to a collective bargaining agreement.

 

 

E.

Share ownership.

 

See “Item 7A Major Shareholders and Related Party Transactions—Major Shareholders".

 

See “Item 6B Compensation” for information regarding option-based awards.

Item 7. Major Shareholders and Related Party Transactions

 

A.

Major shareholders.

The following table sets forth information relating to the beneficial ownership of our shares as of March 25, 2020, by:

each person, or group of affiliated persons, known by us to beneficially own more than 5% of our outstanding shares;

each of our current directors;

each of our current executive officers; and

all the foregoing directors and executive officers as a group.

Beneficial ownership is determined in accordance with SEC rules. The information is not necessarily indicative of beneficial ownership for any other purpose. In general, under these rules a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting power or investment power with respect to such security. In addition, the rules include common shares issuable pursuant to the exercise of stock options, warrants or other convertible securities that are either immediately exercisable or exercisable on or before May 24, 2020, which is 60 days after March 25, 2020. These shares are deemed to be outstanding and beneficially

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owned by the person holding those options, warrants or other convertible securities for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person, except with respect to the percentage ownership of all directors and executive officers as a group. The information contained in the following table is not necessarily indicative of beneficial ownership for any other purpose, and the inclusion of any shares in the table does not constitute an admission of beneficial ownership of those shares. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

The percentage of common shares beneficially owned is based on 107,351,145 common shares outstanding as of March 25, 2020. The number and percentage of common shares beneficially owned do not include common shares that may be purchased pursuant to the directed share program. The address for each of our directors and executive officers listed below is c/o Sundial Growers Inc., #200, 919 – 11 Avenue SW, Calgary, Alberta, Canada T2R 1P3.

 

 

 

 

 

Common Shares
Beneficially Owned

 

Name of beneficial owner

Number

 

Percent

 

5% Shareholders(1)

 

 

ETF Managers Group LLC(2)

5,394,795

5.03%

 

 

 

Directors and Executive Officers

 

 

Zachary George

*

*

James Keough

*

*

Andrew Stordeur

*

*

Ryan Hellard(3)

1,094,560

1.02%

Charlotte Collett

*

*

Louise Motala

*

*

Greg Mills

*

*

Edward Hellard(4)

25,213,332

23.49%

Gregory Turnbull(5)

*

*

Elizabeth Cannon

*

*

Bryan Pinney

All current directors and executive officers as a group(6)

29,913,126

27.86%

 

*Represents beneficial ownership of less than one percent.

(1)Certain of our directors and executive officers are also 5% shareholders, as disclosed in the above table. No 5% shareholder has voting rights different from those of other shareholders.

(2)As reported on Schedule 13G filed by ETF Managers Group LLC on February 27, 2020, ETF Managers Group LLC beneficially owned 5,394,795 shares.

(3)On a fully-diluted basis (as defined below), Mr. Ryan Hellard beneficially holds common shares representing 0.84% of the total voting power of our common shares.

(4)Includes: (i) 800,000 shares purchased from Shelley Unser on October 31, 2017; (ii) 800,000 shares purchased from Shelley Unser on March 31, 2018; (iii) 5,600,000 shares purchased from Stanley Swiatek, in three transactions: 2,400,000 shares on October 31, 2017, 800,000 shares on January 5, 2018 and 2,400,000 shares on March 31, 2018; (iv) 7,149,035 shares issued in 2018 in connection with the Investment and Royalty Agreement; (v) 50,963 shares issued in July 2019 in consideration for advancing the remaining funds available to be advanced under the Investment and Royalty Agreement; and (vi) 3,680,000 shares and 480,000 share purchase warrants (each exercisable for one common share at an exercise price of $15.94 for a period of three years from the date of issue) issued in connection with the termination of the Investment and Royalty Agreement. See the section entitled “Results of Operations—Liquidity and Capital Resources—Other Significant Transactions—Investment and Royalty Agreement” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1. In July 2019, Mr. Hellard transferred all of his Convertible Notes to his spouse and to Mr. Ryan Hellard and, therefore, no longer beneficially owns any Convertible Notes, or shares issuable on conversion of such notes. See the section entitled “Selected Annual Information—Debt—Convertible Notes” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1. On a fully-diluted basis (as defined below), Mr. Edward Hellard beneficially holds common shares representing 19.37% of the total voting power of our common shares.

(5)Includes shares held in trust by GMP Securities LP for Mr. Turnbull.

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(6) Fully-diluted basis for purposes of this table means total number of shares outstanding as of December 31, 2019 as adjusted to include all issued and outstanding common shares and common shares issuable pursuant to outstanding warrants and share based compensation awards.

As of March 25, 2020, we had 1,130 record holders of our common shares, with 1,079 record holders in Canada, representing 95.49% of our outstanding common shares, 41 record holders in the United States, representing 3.63% of our outstanding common shares and ten record holders in other foreign jurisdictions, representing 0.88% of our outstanding common shares.

 

B.

Related party transactions.

In addition to the compensation arrangements discussed under “Executive Compensation”, the following is a description of the material terms of those transactions with related parties to which we are party and which we are required to disclose pursuant to the disclosure rules of the SEC.

Agreements with Directors and Officers

Indemnity Agreements

We have entered into indemnity agreements with each of our directors and officers undertaking to indemnify each of them to the fullest extent permitted by law from and against all liabilities, costs, charges and expenses incurred as a result of actions in the exercise of their duties as a director or officer.

 

Please see “Item 6B Compensation” for information regarding details on employment agreements and agreements with directors.

Registration Rights Agreement

Upon completion of the IPO, we entered into a registration rights agreement (the “Registration Rights Agreement”), with Edward Hellard (the “Principal Shareholder”), pursuant to which the Principal Shareholder was granted certain registration rights. We provided the Principal Shareholder with the right to require the Company to use reasonable commercial efforts to file one or more prospectuses or registration statements with applicable securities regulatory authorities qualifying common shares held by the Principal Shareholder or certain permitted affiliates (a “Demand Distribution”). The Principal Shareholder is entitled to request not more than three Demand Distributions per calendar year, and each Demand Distribution must be comprised of such number of common shares that would reasonably be expected to result in gross proceeds of at least $25 million. The Company may also distribute common shares in connection with a Demand Distribution provided that if the Demand Distribution involves an underwriting and the lead underwriter reasonably determines that the aggregate number of common shares to be included in such Demand Distribution should be limited for certain prescribed reasons, the common shares to be included in the Demand Distribution will be first allocated to the Principal Shareholder and certain permitted affiliates. In addition, the Registration Rights Agreement provides the Principal Shareholder with the right (the “Piggy-Back Registration Right”), to require the Company to include common shares held by the Principal Shareholder and/or certain permitted affiliates in any future offerings undertaken by the Company by way of prospectus or registration statement that it may file with applicable securities regulatory authorities, a (“Piggy-Back Distribution”). The Company is required to use reasonable commercial efforts to cause to be included in the Piggy-Back Distribution all of the common shares that the Principal Shareholder requests to be sold, provided that if the Piggy-Back Distribution involves an underwriting and the lead underwriter reasonably determines that the aggregate number of common shares to be included in such Piggy-Back Distribution should be limited for certain prescribed reasons, the common shares to be included in the Piggy-Back Distribution will be first allocated to the Company.

The registration rights described above expires at such time that the Principal Shareholder holds less than 10% of the outstanding common shares. All expenses in respect of a Demand Distribution and a Piggy-Back Distribution will be borne by the Company, except that any underwriting fee on the sale of any common shares by the Principal Shareholder or certain permitted affiliates will be borne by the Principal Shareholder.

As a result of the transfer undertaking in respect of common shares that was adopted following the completion of our IPO pursuant to a plan of arrangement, the demand and Piggy-Back Registration Rights granted pursuant to the Registration Rights Agreement are limited by the restrictions on transfer imposed by the transfer undertaking, unless a waiver of the transfer undertaking is obtained.

 

Equity Awards

 

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We describe our equity awards under “Item 6B Compensation— Long-Term Equity Incentives”.

 

Interest of Management and Others in Material Transactions

On January 15, 2018, we entered into a credit agreement with 2082033 Alberta Ltd., controlled by our Executive Chairman, and subsequently amended and restated this agreement on August 16, 2018, as the Investment and Royalty Agreement. In the fiscal year ended December 31, 2018, a total of $10.9 million had been invested under the Investment and Royalty Agreement in consideration for the issuance of 7,149,035 of our common shares to our Executive Chairman. In July 2019, we issued an additional 50,963 shares to our Executive Chairman in consideration for advancing the remaining funds available to be advanced under the Investment and Royalty Agreement. In addition, in July 2019, we and our Executive Chairman agreed to terminate the Investment and Royalty Agreement for aggregate consideration of 3,680,000 common shares, 480,000 share purchase warrants (each exercisable for one common share at an exercise price of $15.94 for a period of three years from the date of issue) and a cash payment of $9.5 million. Upon completion of our IPO, the purchase was completed resulting in a loss on a financial obligation of $59.6 million based on our IPO price of US$13.00 per share. The cash payment of $9.5 million was made on September 19, 2019. See the section titled “Other Significant Transactions – Investment and Royalty Agreement” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

Additionally, in the fiscal year ended December 31, 2018, we entered into an agreement with 2119694 Alberta Inc., a company controlled by Stanley Swiatek, who resigned as director in connection with the execution of the agreement, to repurchase a total of 9,815,701 common shares, at a weighted average price of $1.69 per common share, for total consideration of $16.5 million, $6.9 million of which was paid by granting an unsecured, subordinated promissory note accruing interest at a rate of 1% per month until repayment. As at March 31, 2019, $14,000 in interest had been accrued on the promissory note, and a balance, including accrued interest, of $6.9 million remained outstanding. The full balance outstanding was repaid in June 2019. See the section titled “Debt—Promissory Note” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations attached to this Annual Report as Exhibit 15.1.

We had entered into a professional services agreement, dated May 8, 2017, with AppColony Inc., a company controlled by our former Executive Chairman and in which our Chief Marketing and Product Officer is a shareholder, for marketing, brand research, development and promotional services. The agreement provided for an initial term of two years, with specific services to be performed and amounts to be charged in respect of such services to be agreed between the parties from time to time pursuant to one or more statements of work. The initial term of this agreement had expired and on July 8, 2019, we have entered into a new professional services agreement with AppColony Inc. for certain information technology project and development services to be agreed between the parties from time to time pursuant to one or more statements of work, for a total monthly retainer of $0.3 million. The term of this agreement is two years. We paid AppColony Inc. $3.1 million during the year ended December 31, 2019, and owed a balance of $0.3 million at December 31, 2019 for services related to this agreement. In the fiscal year ended December 31, 2018, we also paid $2.3 million to AppColony Inc., and owed a balance of $0.3 million relating to services under this agreement as of December 31, 2018.

In the fiscal year ended December 31, 2018, we paid $0.2 million for research and development services and for access and license of certain strains of cannabis for research purposes, with a balance of $19,031 owing as at December 31, 2018, to PlantBiosis Ltd. and Inplanta Biotechnology Inc., in both of which one of our non-executive employees, Dr. Igor Kovalchuk, maintains influence. During the year ended December 31, 2019, we paid these companies $334,476 and owed $19,031 balance for their services.

In the fiscal year ended December 31, 2018, two of our directors, Lee Tamkee and Gregory Turnbull (through G.B.T. Holdings Ltd.), three of our executive officers, Edward Hellard, Geoff Thompson (through Boardwalk Management Consulting Ltd.) and Andrew Stordeur, as well as one of our non-executive employees, Kristine Dow, subscribed to our offering of Convertible Notes, in the aggregate amount of $7.0 million, representing approximately 24% of the proceeds of the offering, and received $137,870 in interest thereon, as well as commissions totaling $318,440, during the same period. See the section titled “Debt—Convertible Notes” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1. All of the foregoing individuals or entities (or their transferees) participated in lockup agreements and, as a result, received additional fractional warrants.

On April 1, 2019, we entered into an employment agreement with our former Vice President, Processing, in connection with which we have also agreed to purchase certain equipment for THC and CBD extraction from the employee in consideration for $900,000 payable, at the employee’s option, in monthly installments of $100,000 beginning with July 2019, or in our shares, at a price per share equivalent to 90% of the fair market value of one share following the closing of the IPO.

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In May 2019, one of our directors, Greg Mills, subscribed to our offering of Senior Convertible Notes, in the aggregate amount of $100,000 of the total $92.3 million raised in the offering. See the section titled “Debt—Senior Convertible Notes” in  “Management’s Discussion and Analysis of Financial Condition and Results of Operations attached to this Annual Report as Exhibit 15.1.

We lease the land on which Bridge Farm’s Homestead Facility and Horseshoe Facility are located from an entity owned by family members of our former Chief Operating Officer—Europe, at an annual rent of £132,000 and £468,000, respectively. See “Item 4D Property, plant and equipment—Bridge Farm Facilities”.

Except as set out above or described elsewhere in this Annual Report, there are no material interests, direct or indirect, of any of our directors or executive officers, any shareholder that beneficially owns, or controls or directs (directly or indirectly), more than 10% of any class or series of our outstanding voting securities, or any associate or affiliate of any of the foregoing persons, in any transaction within the preceding three fiscal years that has materially affected or is reasonably expected to materially affect us or any of our subsidiaries.

Indebtedness of Directors, Executive Officers and Employees

Except as set out below or described elsewhere in this Annual Report, as of the date of this Annual Report, none of our directors, executive officers, employees, former directors, former executive officers or former employees or any of our subsidiaries, and none of their respective associates, is indebted to us or any of our subsidiaries or another entity whose indebtedness is the subject of a guarantee, support agreement, letter of credit or other similar agreement or understanding provided by us or any of our subsidiaries, except, as the case may be, for routine indebtedness as defined under applicable securities legislation.

Aggregate Indebtedness

 

 

 

 

(in thousands)

 

 

Purpose

 

To us or our
Subsidiaries

 

To Another Entity

 

Share purchases

Other

$800

We have entered into separate shareholder loan agreements to advance funds to our non-executive employees, Frank Luke Fallwell and Gregg Wigeland. These loans bear interest ranging from 0.0% to 1.5% per annum and are secured by the employees’ holdings of shares or warrants, as applicable, in the Company. They are repayable in full upon the employees’ departure, a change of control of the Company, sale of the Company or conclusion of the applicable term of the loan (which ranges from on demand to three years). As at December 31, 2019, $200,000 had been advanced under these loan agreements. We have also entered into a loan agreement to advance funds to a non-executive employee, Jamie Cox. The loan of $90,000 to Jamie Cox had been repaid in the first quarter of 2019.

Overall, as at December 31, 2019, we were owed $0.2 million from related parties and owed $1.0 million to related parties, including employees, directors and corporations related to these individuals.

 

Indebtedness of Directors and Executive Officers under Securities Purchase and Other Programs

 

We had entered into shareholder loan agreements with our Former Chief Executive Officer, Torsten Kuenzlen, on February 15, 2018 and with our President and Chief Operating Officer, Andrew Stordeur, on April 6, 2018. Mr. Stordeur was entitled to a loan facility of up to $510,000 and Mr. Kuenzlen was entitled to a loan facility of up to $200,000 per year. Each of the loans bore interest at a rate of 2.5% per annum and was secured against the borrowers’ shareholdings in the Company. The loans were repayable in full upon the officers’ departure, a change of control of the Company or sale of the Company. $245,000 had been advanced to Mr. Stordeur, and $400,000 has been advanced to Mr. Kuenzlen. Prior to June 30, 2019, these loans were settled in full and were no longer outstanding.

For a description of certain other related party transactions, see note 20 to our audited consolidated financial statements for the fiscal periods ended December 31, 2019 and 2018.

Directed Share Program

As part of our IPO completed in August, 2019, the underwriters had reserved for sale, at the public offering price, up to 5% of our common shares being offered in the offering to certain individuals, including certain of our officers, directors and employees, as part of a directed share program. Certain of our officers, directors and employees participated in this program and acquired shares thereunder.

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C.

Interests of experts and counsel.

Not applicable.

Item 8. Financial Information

 

A.

Consolidated Statements and Other Financial Information.

The Company’s Annual Financial Statements are included beginning on page F-1 of this Annual Report.

Legal Proceedings

Securities Class Actions

The Company and certain of our current and former officers and directors, as well as the underwriters of our IPO, were named as defendants in several putative shareholder class action lawsuits filed between September 9, 2019 and November 1, 2019. The cases have been consolidated in two separate actions depending on the court in which they were first filed, one in the Supreme Court of New York, New York County, captioned In re Sundial Growers Inc. Securities Litigation Index No. 655178/2019, and the other in the United States District Court for the Southern District of New York, captioned In re Sundial Growers Inc. Securities Litigation, Master Case No. 1:19-cv-08913-ALC.

The complaints in each of the two consolidated actions asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. They generally allege that the Company made material misstatements and omissions in the prospectus and registration statement in connection with the Company’s IPO. In this regard, the complaints allege that the offering documents did not disclose systemic quality control issues at the Company and the return or rejection of cannabis and termination of the supply agreement by one of the Company’s customers.

We can provide no assurance as to the outcome of these proceedings or any other litigation matter in which we are a party. In particular, securities class action lawsuits are typically costly to defend, and divert the attention of management and other resources from operations and, accordingly, even if resolved in our favor, could have a material adverse effect on our business, financial condition, results of operations and liquidity and may force us to reduce or cease operations or seek relief under the applicable bankruptcy or insolvency laws.

LP Supply Agreements

We have several supply agreements or arrangements with other licensed cannabis producers (“LP Supply Agreements”), a certain number of which provide obligations for us to deliver bulk cannabis for resale by such other producer under its own brand.

We have entered into a settlement agreement with another licensed cannabis producer in connection with our non-delivery of cannabis under an LP Supply Agreement. Under this settlement agreement, we have agreed to pay penalties in the amount of $1.7 million on or prior to December 31, 2019, for which we have recorded a reserve, and, upon the payment of such penalties, our obligations under such LP Supply Agreement will be terminated.

Although we do not have a supply agreement with the province of Quebec, we do have a licence to sell cannabis to licensed producers, including those based in Quebec. We have received notice of a legal proceeding commenced against us in the province of Quebec by another licensed cannabis producer, which is based in Quebec, alleging breach of an LP Supply Agreement and have filed a statement of defence. We have recorded a reserve in the amount of $1.5 million in respect of this matter.

Other Proceedings

Our former Vice President, Processing, has sued us for $630,000 in respect of unpaid consideration for certain equipment we have purchased from him, unpaid wages and wrongful termination. We believe we have meritorious defenses to this claim and intend to vigorously defend it, but we can provide no assurance as to the outcome of this proceeding. We have recorded a reserve in the amount of $300,000 in respect of this matter.

Potential Litigation Proceedings

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Such proceedings, certain of which have been threatened against us, could include commercial litigation related to breach of contract claims brought by our customers, suppliers and contractors, as well as litigation related to termination of certain of our employees. Furthermore, in addition to the securities class actions described above, we have also received threats of litigation from certain holders of our Senior Convertible Notes. The outcome of any litigation is inherently uncertain.

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Although we believe we have meritorious defenses against all currently threatened proceedings and intend to vigorously defend all claims if they are brought, unfavorable rulings, judgments or settlement terms could have a material adverse impact on our business and results of operations.

 

Dividend Policy

We have never paid dividends on our common shares. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. As such, we do not intend to declare or pay cash dividends on our common shares in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors subject to applicable laws and will depend upon, among other factors, our earnings, operating results, financial condition and current and anticipated cash needs. Our future ability to pay cash dividends on our common shares may be limited by the terms of any then-outstanding debt or preferred securities.

 

B.

Significant Changes.

Changes to executive team and board of directors

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

 

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

 

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

 

Edward Hellard stepped down as Executive Chairman, but remains on the board of directors, and as chair of the Mergers and Acquisitions Committee;

 

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

 

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

Operational updates

In February 2020, Health Canada issued the Company a licence to sell dried and fresh cannabis from its Olds facility. This licence enables the Company to increase production capacity for sales of branded products to provincial boards by leveraging the processing capabilities of both its Olds and Rocky View facilities. The Company also commenced oil extraction operations at its Olds facility in the first quarter of 2020.

Sales and marketing updates

In the first quarter of 2020, the Company began making sales of cannabis through its medical platform to a limited customer base.

Item 9. The Offer and Listing.

 

A.

Offer and listing details.

Not applicable.

 

B.

Plan of distribution.

Not applicable.

 

C.

Markets.

The Company’s common shares were listed on the Nasdaq in the United States for trading in U.S. dollars since August 1, 2019 under the symbol “SNDL”.

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D.

Selling shareholders

Not applicable.

 

E.

Dilution.

Not applicable.

 

F.

Expenses of the issue.

Not applicable.

Item 10. Additional Information.

 

 

A.

Share capital.

Not applicable.

 

B.

Memorandum and articles of association.

Reference is made to the section entitled “Description of Share Capital—Other Important Provisions of our Amended Articles of Incorporation, By-Laws and the ABCA” and “Description of Share Capital—Comparison of Alberta Corporate Law and Our Articles of Incorporation and Delaware Corporate Law” in the Company’s prospectus, filed with the SEC on July 31, 2019.

 

 

C.

Material contracts.

We have not entered into any material contracts outside the ordinary course of business other than as described elsewhere in this Annual Report or exhibits hereto.

 

D.

Exchange controls.

There is no limitation imposed by Canadian law or by our amended articles of incorporation on the right of a non-resident to hold or vote our common shares, other than discussed below.

Competition Act

Limitations on the ability to acquire and hold our common shares may be imposed by the Competition Act (Canada). This legislation permits the Commissioner of Competition (the “Commissioner”), to review any acquisition or establishment, directly or indirectly, including through the acquisition of shares, of control over or of a significant interest in us. This legislation grants the Commissioner jurisdiction, for up to one year after the acquisition has been substantially completed, to challenge this type of acquisition by seeking a remedial order, including an order to prohibit the acquisition or require divestitures, from the Canadian Competition Tribunal, which may be granted where the Competition Tribunal finds that the acquisition substantially prevents or lessens, or is likely to substantially prevent or lessen, competition.

This legislation would also require any person or persons who intend to acquire more than 20% of our voting shares or, if such person or persons already own more than 20% of our voting shares prior to the acquisition, more than 50% of our voting shares, to file a notification with the Canadian Competition Bureau if certain financial thresholds are exceeded. These financial thresholds would be exceeded if: (i) we have assets in Canada or revenues in or from Canada generated from those assets of $96 million or more (this threshold is adjusted annually); and (ii) we and the potential acquirer together have assets in Canada or revenues from sales in, from or into Canada of $400 million or more. Where a notification is required, unless an exemption is available, the legislation prohibits completion of the acquisition until the expiration of the applicable statutory waiting period, unless the Commissioner either waives or terminates such waiting period or issues an advance ruling certificate. The Commissioner’s review of a notifiable transaction for substantive competition law considerations may take longer than the statutory waiting period.

Investment Canada Act

The Investment Canada Act requires each “non-Canadian” (as defined in the Investment Canada Act) who acquires “control” of an existing “Canadian business”, to file a notification in prescribed form with the responsible federal government department or departments not later than 30 days after closing, provided the acquisition of control is not a reviewable transaction under the Investment Canada Act. Subject to certain exemptions, a transaction that is reviewable under the Investment Canada Act may not be implemented until an application for review has been filed and the responsible minister of the federal cabinet has determined that the investment is likely to be of “net benefit to Canada” taking into account certain factors set out in the Investment Canada Act. Under the Investment Canada Act, an investment in our common shares by a non-Canadian would be reviewable only if it were an investment to acquire control of us

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pursuant to the Investment Canada Act and our enterprise value was equal to or greater than $1.568 billion for “trade agreement investors” (which include United States or EU investors, among certain others) and $1.045 billion for other investors from World Trade Organization (“WTO”), member countries. Lower financial thresholds apply to state-owned or influenced enterprises and non-WTO investors. These thresholds are adjusted annually.

Under the national security review regime in the Investment Canada Act, review on a discretionary basis may also be undertaken by the federal government in respect to a much broader range of investments by a non-Canadian to “acquire, in whole or part, or to establish an entity carrying on all or any part of its operations in Canada.” No financial threshold applies to a national security review. The relevant test is whether such investment by a non-Canadian could be “injurious to national security.” The responsible ministers have broad discretion to determine whether an investor is a non-Canadian and therefore subject to national security review. Review on national security grounds is at the discretion of the responsible ministers, and may occur on a pre- or post-closing basis.

Other

There is no law, governmental decree or regulation in Canada that restricts the export or import of capital, or which would affect the remittance of dividends or other payments by us to non-resident holders of our common shares, other than withholding tax requirements.

 

E.

Taxation.

Certain U.S. Federal Income Tax Considerations for U.S. Persons

The following is a general discussion of the principal U.S. federal income tax consequences of the acquisition, ownership and disposition of our common shares that are generally applicable to a U.S. Holder, as defined below. This summary assumes that the common shares are held as capital assets (generally, property held for investment), within the meaning of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), in the hands of a U.S. Holder at all relevant times. This discussion is based on the Code, final, temporary and proposed Treasury regulations thereunder (the “Treasury Regulations”) pertinent judicial decisions, interpretive rulings of the U.S. Internal Revenue Service (the “IRS”), and such other authorities as we have considered relevant. Future legislative, judicial, or administrative modifications, revocations, or interpretations, which may or may not be retroactive, may result in U.S. federal income tax consequences significantly different from those discussed herein. This discussion is not binding on the IRS. No ruling has been or will be sought or obtained from the IRS with respect to any of the U.S. federal tax consequences discussed herein. There can be no assurance that the IRS will not challenge any of the conclusions described herein or that a U.S. court will not sustain such a challenge.

This discussion does not address the U.S. federal income tax consequences to U.S. Holders subject to special rules, including U.S. Holders that (i) are banks, financial institutions, or insurance companies, (ii) are regulated investment companies or real estate investment trusts, (iii) are brokers, dealers, or traders in securities or currencies, (iv) are tax-exempt organizations, (v) are governments or agencies or instrumentalities thereof, (vi) elect to mark their securities to market, (vii) hold the common shares as part of hedges, straddles, constructive sales, conversion transactions, or other integrated investments, (ix) acquire the common shares as compensation for services or through the exercise or cancellation of employee stock options or warrants, (x) have a functional currency other than the U.S. dollar, (xi) own or have owned directly, indirectly, or constructively, shares of the Company representing 10% or more of the voting power or value of the Company, or (xii) are subject to the alternative minimum tax.

In addition, this discussion does not address tax considerations relevant to U.S. Holders under any non-U.S., state or local tax laws, the Medicare tax on net investment income, U.S. federal estate, gift tax, or other non-income tax, or the alternative minimum tax. Each U.S. Holder is urged to consult its tax advisors regarding the U.S. federal, state, local, and non-U.S. income and other tax considerations of an investment in the common shares.

As used herein, “U.S. Holder” means a beneficial owner of common shares that is (i) an individual who is a citizen or resident of the United States for U.S. federal income tax purposes, (ii) a corporation (or other entity taxable as a corporation for U.S. federal tax purposes) created or organized under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source, or (iv) a trust that (a) is subject to the primary supervision of a court within the United States and for which one or more U.S. persons have authority to control all substantial decisions or (b) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

If a pass-through entity, including a partnership or other entity taxable as a partnership for U.S. federal income tax purposes, holds common shares, the U.S. federal income tax treatment of an owner or partner generally will depend on the status of such owner or partner and on the activities of the pass-through entity. A U.S. person that is an owner or partner of a pass-through entity holding the common shares is urged to consult its own tax advisor.

Distributions on the Common Shares

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Subject to the PFIC rules discussed below, the gross amount of any distribution paid by the Company will generally be subject to U.S. federal income tax as foreign source dividend income to the extent paid out of the Company’s current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such amount will be includable in gross income by a U.S. Holder as ordinary income on the date that such U.S. Holder actually or constructively receives the distribution in accordance with such holder’s regular method of accounting for U.S. federal income tax purposes. The amount of any distribution made by the Company in property other than cash will be the fair market value (determined in U.S. dollars) of such property on the date of the distribution. Because the Company does not intend to calculate its earnings and profits on the basis of U.S. federal income tax principles, any distribution paid will generally be treated as a dividend for U.S. federal income tax purposes. Dividends paid by the Company will not be eligible for the dividends received deduction allowed to corporations.

To the extent that a distribution exceeds the amount of the Company’s current and accumulated earnings and profits, as determined under U.S. federal income tax principles, such distribution will be treated first as a tax-free return of capital, causing a reduction in a U.S. Holder’s adjusted basis in the common shares held by such U.S. Holder (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by such U.S. Holder upon a subsequent disposition of the common shares), with any amount that exceeds such U.S. Holder’s adjusted basis being taxed as a capital gain recognized on a sale or exchange (as discussed below).

So long as the common shares are listed on the Nasdaq or the Company is eligible for benefits under the Income Tax Convention between the U.S. and Canada, dividends a U.S. Holder receives from the Company will be “qualified dividend income” if certain holding period and other requirements (including a requirement that the Company is not a PFIC in the year of the dividend or the immediately preceding year) are met. Qualified dividend income of an individual or other non-corporate U.S. Holder is subject to a reduced maximum U.S. federal income tax rate. However, if the Company is a PFIC in the year of the dividend or was a PFIC in the immediately preceding year, distributions on the common shares will not constitute “qualified dividend income” eligible for the preferential tax rates described above.

Subject to certain limitations, Canadian tax withheld with respect to distributions made on the common shares may be treated as foreign taxes eligible for credit against a U.S. Holder’s U.S. federal income tax liability. Alternatively, a U.S. Holder may, subject to applicable limitations, elect to deduct the otherwise creditable Canadian withholding taxes for U.S. federal income tax purposes. The rules governing the foreign tax credit are complex and involve the application of rules that depend upon a U.S. Holder’s particular circumstances. Accordingly, a U.S. Holder is urged to consult its tax advisor regarding the availability of the foreign tax credit under its particular circumstances.

Sale, Exchange or Other Taxable Disposition of the Common Shares

Subject to the PFIC rules discussed below, a U.S. Holder generally will recognize gain or loss upon the taxable sale, exchange or other disposition of the common shares in an amount equal to the difference between (i) the U.S. dollar value of the amount realized upon the sale, exchange or other taxable disposition and (ii) such U.S. Holder’s adjusted tax basis in the common shares. A U.S. Holder’s adjusted tax basis in such common shares will generally be its U.S. dollar cost. Generally, such gain or loss will be capital gain or loss and will be long-term capital gain or loss if, on the date of the sale, exchange or other taxable disposition, such U.S. Holder has held the common shares for more than one year. If such U.S. Holder is an individual or other non-corporate U.S. Holder, long-term capital gains will be subject to a reduced maximum U.S. federal income tax rate. The deductibility of capital losses is subject to limitations under the Code. Gain or loss, if any, that a U.S. Holder realizes upon a sale, exchange or other taxable disposition of the common shares generally will be treated as having a U.S. source for U.S. foreign tax credit limitation purposes.

PFIC Rules

A non-U.S. corporation, such as the Company, will be classified as a PFIC for U.S. federal income tax purposes for a taxable year, if either (a) 75% or more of the gross income of the Company consists of certain types of passive income (which we refer to as the “income test”) or (b) 50% or more of the value of the Company’s assets either produce passive income or are held for the production of passive income. The value of the Company’s assets for this purpose is expected to be based, in part, on the quarterly average of the fair market value of such assets (which we refer to as the “asset test”). “Gross income” generally includes all sales revenues less the cost of goods sold. “Passive income” generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions, but does not include active business gains arising from the sale of certain commodities.

For purposes of the PFIC income test and asset test described above, if the Company owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, the Company will be treated as if it (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the PFIC income test and asset test described above, and assuming certain other requirements are met, “passive income” does not include certain interest, dividends, rents, or royalties that

75


are received or accrued by the Company from certain “related persons” (as defined in the Code), to the extent such items are properly allocable to the income of such related person that is not passive income.

Based on the projected composition of the Company’s assets and income, the Company does not believe that it was a PFIC for the taxable year ending December 31, 2019, and the Company does not anticipate becoming a PFIC for the current taxable year. Although the Company does not anticipate becoming a PFIC, because the value of the Company’s assets for purposes of the PFIC asset test generally should be determined by reference to the market price of the shares, it is possible that fluctuations in the market price of the shares may cause the Company to become a PFIC for the current or any subsequent taxable year. The determination of whether the Company will become a PFIC will also depend, in part, on the composition of its income and assets, which will be affected by how, and how quickly, the Company uses its liquid assets and cash raised in any offerings. Whether the Company is a PFIC is a factual determination and the Company must make a separate determination each taxable year as to whether it is a PFIC (after the close of each taxable year). Accordingly, the Company cannot assure holders that it will not be a PFIC during the current or any future taxable year. If the Company is classified as a PFIC for any taxable year during which a U.S. Holder holds shares, the Company will continue to be treated as a PFIC, unless the U.S. Holder makes certain elections, for all succeeding years, even if the Company ceases to qualify as a PFIC under the rules set forth above.

If the Company is considered a PFIC at any time that a U.S. Holder holds common shares, any gain recognized by the U.S. Holder on a sale or other disposition of the common shares, as well as the amount of any “excess distribution” (defined below) received by the U.S. Holder, would be allocated ratably over the U.S. Holder’s holding period for the common shares. The amounts allocated to the taxable year of the sale or other disposition (or the taxable year of receipt, in the case of an excess distribution) and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed. For the purposes of these rules, an excess distribution is the amount by which any distribution received by a U.S. Holder on common shares exceeds 125% of the average of the annual distributions on the common shares received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment or a “qualified electing fund” election) of the common shares if the Company is considered a PFIC. However, the Company does not intend to provide information necessary for U.S. Holders to make qualified electing fund elections which, if available, would result in tax treatment different from the general tax treatment for PFICs described above.

If a U.S. Holder holds common shares during any taxable year that the Company is a PFIC, such holder must file an annual report with the IRS, subject to certain exceptions based on the value of the common shares held.

Holders are urged to consult their tax advisor concerning the U.S. federal income tax consequences of purchasing, holding, and disposing common shares if the Company is or becomes a PFIC, including the possibility of making any election that may be available under the PFIC rules (including a mark-to-market election), which may mitigate the adverse U.S. federal income tax consequences of holding common shares of a PFIC.

Receipt of Foreign Currency

The U.S. dollar value of any cash distribution made in Canadian dollars to a U.S. Holder will be calculated by reference to the exchange rate prevailing on the date of actual or constructive receipt of the distribution, regardless of whether the Canadian dollars are converted into U.S. dollars at that time. For U.S. Holders following the accrual method of accounting, the amount realized on a disposition of the common shares for an amount in Canadian dollars will be the U.S. dollar value of this amount on the date of disposition. On the settlement date, such U.S. Holder will recognize U.S. source foreign currency gain or loss (taxable as ordinary income or loss) equal to the difference (if any) between the U.S. dollar value of the amount received based on the exchange rates in effect on the date of sale or other disposition and the settlement date. However, in the case of shares traded on an established securities market that are sold by a cash method U.S. Holder (or an accrual method U.S. Holder that so elects), the amount realized will be based on the spot rate in effect on the settlement date for the disposition, and no exchange gain or loss will be recognized at that time. A U.S. Holder will generally have a basis in Canadian dollars equal to their U.S. dollar value on the date of receipt of such distribution, on the date of disposition, or, in the case of cash method U.S. Holders (and accrual method U.S. Holders that so elects), on the date of settlement. Any U.S. Holder that receives payment in Canadian dollars and converts or disposes of the Canadian dollars after the date of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss and that generally will be U.S. source income or loss for foreign tax credit purposes. U.S. Holders are urged to consult their own U.S. tax advisors regarding the U.S. federal income tax consequences of receiving, owning, and disposing of Canadian dollars.

Information with Respect to Foreign Financial Assets

Individuals and certain entities that own “specified foreign financial assets,” generally with an aggregate value in excess of $50,000 are generally required to file an information report on IRS Form 8938, Statement of Specified Foreign

76


Financial Assets, with respect to such assets with their tax returns for each year in which they hold shares. “Specified foreign financial assets” include any financial accounts maintained by certain foreign financial institutions, as well as securities issued by non-U.S. persons if they are not held in accounts maintained by financial institutions. U.S. Holders are urged to consult their tax advisors regarding the application of this reporting requirement to their ownership of the common shares.

Information Reporting and Backup Withholding

In general, information reporting will apply to dividends paid to a U.S. Holder in respect of the common shares and the proceeds received by such U.S. Holder from the sale, exchange or other disposition of the common shares within the United States unless such U.S. Holder is a corporation or other exempt recipient. Backup withholding may apply to such payments if a U.S. Holder fails to provide a taxpayer identification number or certification of exempt status or fails to report dividend and interest income in full. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against a U.S. Holder’s U.S. federal income tax liability, provided that the required information is timely furnished to the IRS.

Disclosure Requirements for Certain U.S. Holders Recognizing Significant Losses

A U.S. Holder that claims significant losses in respect of common shares for U.S. federal income tax purposes (generally (i) $10 million or more in a taxable year or $20 million or more in any combination of taxable years for corporations or partnerships all of whose partners are corporations, (ii) $2 million or more in a taxable year or $4 million or more in any combination of taxable years for all other taxpayers, or (iii) $50,000 or more in a taxable year for individuals or trusts) with respect to a foreign currency transaction, may be required to file Form 8886 for “reportable transactions.” U.S. Holders should consult their own tax advisors concerning any possible disclosure obligation with respect to the common shares.

 

Canadian Tax Implications for Non-Canadian Holders

The following summary describes, as of the date hereof, the principal Canadian federal income tax considerations generally applicable to a purchaser who acquires, as a beneficial owner, common shares pursuant to this offering and who, at all relevant times, for the purposes of the application of the Income Tax Act (Canada) and the Income Tax Regulations (collectively, the “Canadian Tax Act”), (1) is not, and is not deemed to be, resident in Canada for purposes of the Canadian Tax Act and any applicable income tax treaty or convention; (2) deals at arm’s length with us; (3) is not affiliated with us; (4) does not use or hold, and is not deemed to use or hold, common shares in a business carried on in Canada; (5) has not entered into, with respect to the common shares, a “derivative forward agreement” or a “synthetic disposition arrangement”, each as that term is defined in the Canadian Tax Act, and (6) holds the common shares as capital property, such holder, a Non-Canadian Holder. Special rules, which are not discussed in this summary, may apply to a Non-Canadian Holder that is an insurer carrying on an insurance business in Canada and elsewhere.

This summary is based on the current provisions of the Canadian Tax Act, and an understanding of the current administrative policies of the Canada Revenue Agency published in writing prior to the date hereof. This summary takes into account all specific proposals (the “Proposed Amendments”), to amend the Canadian Tax Act and the Canada-United States Tax Convention (1980), as amended, (the “Canada-U.S. Tax Treaty”), publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof and assumes that all Proposed Amendments will be enacted in the form proposed. However, no assurances can be given that the Proposed Amendments will be enacted as proposed, or at all. This summary does not otherwise take into account or anticipate any changes in law or administrative policy or assessing practice whether by legislative, regulatory, administrative or judicial action nor does it take into account tax legislation or considerations of any province, territory or foreign jurisdiction, which may differ from those discussed herein.

This summary is of a general nature only and is not, and is not intended to be, legal or tax advice to any particular shareholder. This summary is not exhaustive of all Canadian federal income tax considerations. Accordingly, you should consult your own tax advisor with respect to your particular circumstances.

Generally, for purposes of the Canadian Tax Act, all amounts relating to the acquisition, holding or disposition of the common shares must be converted into Canadian dollars based on the exchange rates as determined in accordance with the Canadian Tax Act. The amount of any dividends required to be included in the income of, and capital gains or capital losses realized by, a Non-Canadian Holder may be affected by fluctuations in the Canadian exchange rate.

Dividends

Dividends paid or credited on the common shares or deemed to be paid or credited on the common shares to a Non-Canadian Holder will be subject to Canadian withholding tax at the rate of 25%, subject to any reduction in the rate of withholding to which the Non-Canadian Holder is entitled under any applicable income tax convention between Canada

77


and the country in which the Non-Canadian Holder is resident. For example, under the Canada-U.S. Tax Treaty, where dividends on the common shares are considered to be paid to or derived by a Non-Canadian Holder that is a beneficial owner of the dividends and is a U.S. resident for the purposes of, and is entitled to benefits of, the Canada-U.S. Tax Treaty, the applicable rate of Canadian withholding tax is generally reduced to 15%.

Dispositions

A Non-Canadian Holder will not be subject to tax under the Canadian Tax Act on any capital gain realized on a disposition or deemed disposition of a Common Share, unless the common shares are “taxable Canadian property” to the Non-Canadian Holder for purposes of the Canadian Tax Act and the Non-Canadian Holder is not entitled to relief under an applicable income tax convention between Canada and the country in which the Non-Canadian Holder is resident.

 

Generally, the common shares will not constitute “taxable Canadian property” to a Non-Canadian Holder at a particular time provided that the common shares are listed at that time on a “designated stock exchange” (as defined in the Canadian Tax Act), which includes the Nasdaq, unless at any particular time during the 60-month period that ends at that time (i) one or any combination of (a) the Non-Canadian Holder, (b) persons with whom the Non-Canadian Holder does not deal at arm’s length, and (c) partnerships in which the Non-Canadian Holder or a person described in (b) holds a membership interest directly or indirectly through one or more partnerships, has owned 25% or more of the issued shares of any class or series of our capital stock, and (ii) more than 50% of the fair market value of the common shares was derived, directly or indirectly, from one or any combination of: (i) real or immoveable property situated in Canada, (ii) “Canadian resource properties” (as defined in the Canadian Tax Act), (iii) “timber resource properties” (as defined in the Canadian Tax Act), and (iv) options in respect of, or interests in, or for civil law rights in, property in any of the foregoing whether or not the property exists. Notwithstanding the foregoing, in certain circumstances set out in the Canadian Tax Act, common shares could be deemed to be “taxable Canadian property.” Non-Canadian Holders whose common shares may constitute “taxable Canadian property” should consult their own tax advisors.

 

Canadian Tax Implications for Canadian Holders

The following is a general summary, as of the date hereof, of the principal Canadian federal income tax considerations under the Canadian Tax Act generally applicable to a holder who acquires, as a beneficial owner, common shares issued pursuant to the offering and who, at all relevant times, for purposes of the Canadian Tax Act: (a) is resident or deemed to be resident in Canada; (b) holds the common shares as capital property; and (c) deals at arm’s length with the Company and is not affiliated with the Company (a “Holder”). Generally, the common shares will be capital property to a Holder unless they are held or acquired in the course of carrying on a business or as part of an adventure or concern in the nature of trade. Certain Holders whose common shares do not otherwise qualify as capital property may in certain circumstances make an irrevocable election in accordance with subsection 39(4) of the Canadian Tax Act to have their common shares, and every other “Canadian security” (as defined in the Canadian Tax Act) owned by such Holder in the taxation year of the election and in all subsequent taxation years, deemed to be capital property.

This summary is not applicable to a Holder: (a) that is a “financial institution”, as defined in the Tax Act for purposes of the mark-to-market rules; (b) an interest in which is a “tax shelter investment”, as defined in the Canadian Tax Act; (c) that is a “specified financial institution”, as defined in the Canadian Tax Act; (d) that has made an election under the Canadian Tax Act to determine its Canadian tax results in a foreign currency; (e) that has entered or will enter into a “derivative forward agreement” or a “synthetic disposition arrangement”, each as defined in the Canadian Tax Act, with respect to its common shares; (f) that receives dividends on the common shares under or as part of a “dividend rental arrangement”, as defined in the Canadian Tax Act; or (g) that is a corporation that is or becomes, or does not deal at arm’s length for purposes of the Canadian Tax Act with a corporation resident in Canada that is or becomes, as part of a transaction or event or series of transactions or events that includes the acquisition of the common shares, controlled by a non-resident corporation person for purposes of the “foreign affiliate dumping” rules section 212.3 of the Canadian Tax Act. Such Holders should consult their own tax advisors.

In addition, this summary does not address the deductibility of interest by a Holder who has borrowed money or otherwise incurred debt in connection with the acquisition of common shares.

This summary is based on the facts set out in this Annual Report, the current provisions of the Canadian Tax Act, all specific proposals to amend the Canadian Tax Act publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date of hereof, or Tax Proposals, and an understanding of the current published administrative policies and assessing practices of the Canada Revenue Agency. This summary assumes that all Canadian Tax Proposals will be enacted in the form proposed, however no assurance can be made that the Canadian Tax Proposals will be enacted in the form proposed or at all. This summary is not exhaustive of all possible Canadian federal income tax considerations and, other than the Canadian Tax Proposals, does not take into account or anticipate any changes in law or in administrative

78


policy or assessing practice, whether by legislative, regulatory, administrative or judicial decision or action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations, which may differ significantly from the Canadian federal income tax considerations discussed herein.

This summary is of a general nature only and is not exhaustive of all possible Canadian federal income tax considerations applicable to an investment in the common shares. The income and other tax consequences of acquiring, holding or disposing of common shares will vary depending on a Holder’s particular status and circumstances, including the province or territory in which the Holder resides or carries on business. This summary is not intended to be, nor should it construed to be, legal or tax advice to any particular Holder. Holders should consult their own tax advisors with respect to an investment in the common shares having regard to their particular circumstances.

 

Dividends on Common Shares

In the case of a Holder who is an individual (excluding certain trusts), dividends received or deemed to be received on the common shares will be included in computing the Holder’s income for the taxation year in which such dividends are received and will be subject to the gross-up and dividend tax credit rules of the Canadian Tax Act that apply to taxable dividends received from “taxable Canadian corporations”. Provided that appropriate designations are made by the Company, such dividend will be treated as an “eligible dividend” for the purposes of the Canadian Tax Act and will be subject to an enhanced gross-up and enhanced dividend tax credit in respect of such dividend. There may be limitations on the Company’s ability to designate dividends and deemed dividends as eligible dividends.

Dividends received or deemed to be received on the common shares by a Holder that is a corporation will be required to be included in computing the corporation’s income for the taxation year in which such dividends are received, but such dividends will generally be deductible in computing the corporation’s taxable income. In certain circumstances, subsection 55(2) of the Canadian Tax Act will treat a taxable dividend received by a Holder that is a corporation as proceeds of disposition or a capital gain. Holders that are corporations should consult their own tax advisors having regard to their own circumstances.

A Holder that is a “private corporation” or a “subject corporation” (each as defined in the Canadian Tax Act) will generally be liable under Part IV of the Canadian Tax Act to pay a refundable tax on dividends received or deemed to be received on the common shares to the extent that such dividends are deductible in computing the Holder’s taxable income for the taxation year.

Dividends received by a Holder who is an individual (excluding certain trusts) may result in such Holder being liable for minimum tax under the Canadian Tax Act. Holders who are individuals should consult their own tax advisors in this regard.

Dispositions of Common Shares

On the disposition or deemed disposition of common shares by a Holder, the Holder will generally realize a capital gain (or a capital loss) equal to the amount by which the proceeds of disposition in respect of such common shares, net of any reasonable costs of disposition, exceed (or are less than) the adjusted cost base of the common shares to the Holder immediately before the disposition or deemed disposition.

The adjusted cost base to the Holder of a common share acquired pursuant to this offering will be determined by averaging the cost of such common share with the adjusted cost base of the other common shares owned by the Holder as capital property at that time.

Taxation of Capital Gains and Capital Losses

Generally, one-half of the amount of any capital gain, or a taxable capital gain, realized by a Holder on a disposition of common shares in a taxation year must be included in computing such Holder’s income for that year, and one-half of any capital loss, or an allowable capital loss, realized by a Holder on a disposition of common shares in a taxation year must be deducted from any taxable capital gains realized by the Holder in the year, subject to and in accordance with the provisions of the Canadian Tax Act. Allowable capital losses in excess of taxable capital gains realized in a taxation year may be carried back and deducted in any of the three preceding taxation years or carried forward and deducted in any following taxation year against net taxable capital gains realized in such years, subject to and in accordance with the provisions of the Canadian Tax Act.

The amount of any capital loss realized by a Holder that is a corporation on the disposition of a common share may be reduced by the amount of any dividends received (or deemed to be received) by the Holder on such common share to the extent and under the circumstances prescribed by the Canadian Tax Act. Similar rules may apply where a common share is owned by a partnership or trust of which a corporation, trust or partnership is a member or beneficiary. Such Holders should consult their own tax advisors.

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A capital gain realized by a Holder who is an individual or trust (other than certain specified trusts) may give rise to a liability for alternative minimum tax.

 

 

F.

Dividends and paying agents.

Not applicable

 

G.

Statement by experts.

Not applicable

 

H.

Documents on display.

 

We are a "foreign private issuer" as such term is defined in Rule 405 under the Securities Act, and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we are subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. As a result, we do not file the same reports that a U.S. domestic issuer would file with the SEC, although we are required to file or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws.

 

Copies of our financial statements and other continuous disclosure documents required under Canadian securities laws are available for viewing on SEDAR at www.sedar.com.

 

We will provide without charge to each person, including any beneficial owner, on the written or oral request of such person, a copy of any or all documents referred to above which have been or may be incorporated by reference in this Annual Report (not including exhibits to such incorporated information that are not specifically incorporated by reference into such information). Requests for such copies should be directed to us at the following address: #200, 919 - 11 Avenue SW Calgary, AB, T2R 1P3 Attention: Jayson Moss, phone number: +1 844-879-8337.

 

 

I.

Subsidiary Information.

Not applicable.

 

Item 11. Quantitative and Qualitative Disclosures About Market Risk.

 

Interest Rate Risk

See the section entitled “Selected Annual Information—Liquidity risks associated with financial instruments—Interest rate risk” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

Credit Risk

See the section entitled “Selected Annual Information—Liquidity risks associated with financial instruments—Credit risk” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

 

Liquidity Risk

See the section entitled “Selected Annual Information—Liquidity risks associated with financial instruments—Liquidity risk” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

Foreign Currency Risk

See the section entitled “Selected Annual Information—Liquidity risks associated with financial instruments—Foreign currency risk” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

80


Item 12. Description of Securities Other than Equity Securities.

Not applicable.

81


PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies.

None.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.

A. – D. Material Modifications to the Rights of Security Holders

None.

 

E. Use of Proceeds

The effective date of the registration statement (File no. 333-232573) for the IPO of our common shares was July 31, 2019. The offering closed on August 6, 2019. Cowen and Company, LLC, BMO Nesbitt Burns Inc. and RBC Dominion Securities Inc. were joint bookrunning managers for the offering, and Barclays Capital Canada Inc., CIBC World Markets Inc. and Scotia Capital Inc. were co-managers for the offering. We registered 11,000,000 common shares in the offering and granted the underwriters a 30-day over-allotment option, which was not exercised, to purchase up to 1,650,000 additional common shares from us to cover over-allotments. The net offering proceeds to us from the offering, after deducting the underwriting commission and offering expenses, were approximately $183.8 million. There has been no material change in the planned use of proceeds from our IPO from that described in our prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on July 31, 2019.

None of the net proceeds of the offering was paid directly or indirectly to any director, officer, general partner of ours or to their associates, persons owning ten percent or more of any class of our equity securities, or to any of our affiliates.

Item 15. Controls and Procedures.

See the section titled “Disclosure Controls and Procedures” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

Item 16A. Audit Committee Financial Expert.

The Company’s audit committee is comprised of Greg Mills and Elizabeth Cannon, and chaired by Bryan Pinney. Our board of directors has determined that each of Greg Mills, Elizabeth Cannon and Bryan Pinney is financially literate and meets the independence requirements for directors, including the heightened independence standards for members of the audit committee under Rule 10A-3 under the Exchange Act and NI 52-110. Our board of directors has determined that Bryan Pinney is “financially sophisticated” within the meaning of the Nasdaq Rules, “financially literate” within the meaning of NI 52-110, and a “financial expert” as defined by Rule 10A-3 under the Exchange Act. For information relating to qualifications and experience of each audit committee member, see “Item 6 Compensation—Directors, Senior Management and Employees”.

 

Item 16B. Code of Ethics.

The Company’s board of directors has adopted a code of conduct applicable to all of our directors and employees, including our Chief Executive Officer and Chief Financial Officer. This code qualifies as a “code of ethics” as defined in section 406(c) of SOX and which is a “code” under NI 58-101. The Company’s code of conduct is available at www.sndlgroup.com. Information contained on, or that can be accessed through, the Company’s website is not incorporated by reference into this Annual Report.

If we make any amendment to the code of conduct or grant any waiver therefrom, whether explicit or implicit, to a director or executive officer, we will disclose the nature of such amendment or waiver on our website to the extent required by, and in accordance with, the rules and regulations of the SEC and the Canadian securities regulatory authorities.

Item 16C. Principal Accountant Fees and Services.

 

The following table summarizes the fees charged by KPMG, the Company’s independent auditor, in the fiscal years ended December 31, 2019 and December 31, 2018:

 

82


 

Fees billed for the fiscal year ended

 

Service Retained

December 31, 2019

 

December 31, 2018

 

Audit fees(1)

$2,120,500

$66,875

Audit-related fees(2)

240,750

Tax fees(3)

148,450

All other fees

 

(1)

“Audit fees” include fees necessary to perform the annual audit or reviews of the consolidated financial statements.

(2)

“Audit-related fees” include fees for assurance and related services by our independent auditor that are reasonably related to the performance of the audit or review of our financial statements other than those included in “Audit Fees”.

(3)

“Tax Fees” include fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees”. This category includes fees for tax compliance, tax advice and tax planning.

 

The audit committee is responsible for the pre-approval of all non-audit services to be provided by the Company’s auditor.

 

Item 16D. Exemptions from the Listing Standards for Audit Committees.

Not applicable.

Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

Not applicable.

 

Item 16F. Change in Registrant’s Certifying Accountant.

Not applicable.

Item 16G. Corporate Governance.

The Nasdaq Rules include certain accommodations in the corporate governance requirements that allow foreign private issuers, such as us, to follow “home country” corporate governance practices in lieu of the otherwise applicable corporate governance standards of the Nasdaq. The application of such exceptions requires that we disclose any significant ways in which our corporate governance practices differ from the Nasdaq Rules that we do not follow. When our shares are listed on the Nasdaq, we intend to continue to follow Canadian corporate governance practices in lieu of the requirement under Rule 5620(c) of the Nasdaq Rules that a company’s bylaws provide for a quorum for any meeting of the holders of the company’s common shares that is not less than 33 1/3% of the outstanding common shares of the company. Our by-laws provide that a quorum of shareholders is constituted by the holders of at least 25% of the shares entitled to vote at the meeting, present in person or represented by proxy, and at least two persons entitled to vote at the meeting, present in person or represented by proxy. In addition, we do not intend to follow Rule 5635 of the Nasdaq Rules that requires that shareholder approval be required for the Company to issue securities in connection with certain events, such as the acquisition of shares or assets of another company, the establishment of or amendments to equity-based compensation plans for employees, rights issues at or below market price, certain private placements, directed issues at or above market price and issuance of convertible notes. Neither Canadian securities laws nor Alberta corporate law require shareholder approval for such transactions, except where such transactions constitute a “related party transaction” or “business combination” under Canadian securities laws or where such transaction is structured in a way that requires shareholder approval under the ABCA, in which case, we intend to follow our home country requirements.

Item 16H. Mine Safety Disclosure

Not applicable.

 

 

 

83


PART III

Item 17. Financial Statements.

See Item 18. – “Financial Statements.”

Item 18. Financial Statements.

Our Annual Financial Statements are included at the end of this Annual Report.

 

Item 19. Exhibits.

List all exhibits filed as part of the registration statement or annual report, including exhibits incorporated by reference.

 

Exhibit

Number

 

Description

Method of Filing

 

 

 

 

1.1

 

Articles of incorporation of Sundial Growers Inc., as currently in effect

Incorporated by reference to Exhibit 4.1 to the Registrant’s registration statement on Form S-8, filed with the SEC on August 9, 2019

 

1.2

 

Bylaws of Sundial Growers Inc. as currently in effect

Incorporated by reference to Exhibit 3.2 to the Registrant’s registration statement on Form F-1/A, filed with the SEC on July 30, 2019

 

 

 

 

2.1

 

Specimen Share Certificate

Incorporated by reference to Exhibit 3.2 to the Registrant’s registration statement on Form F-1/A, filed with the SEC on July 30, 2019

 

2.3

 

Lock-Up Agreement, dated September 30, 2019, among Sundial Growers Inc. and the shareholders of the Company named in Schedule A thereto.

Incorporated by reference to Exhibit 99.1 to the Registrant’s current report on Form 6-K, filed with the SEC on October 3, 2019

 

2.4

 

Description of Securities of the Registrant Registered under Section 12 of the Exchange Act

 

Filed together with this Annual Report on Form 20-F for the year ended December 31, 2019

4.1

 

Sale and Purchase Agreement among Sundial UK Limited, Sundial Growers Inc. and the Sellers specified therein, dated February 22, 2019

 

Incorporated by reference to Exhibit 2.1 to the Registrant’s registration statement on Form F-1/A, filed with the SEC on July 30, 2019

4.2

 

Licence Agreement, dated March 13, 2019, among Pathway Rx Inc., Sundial Growers Inc., Igor Kovalchuk, Olga Kovalchuk and Darryl Hudson

 

Incorporated by reference to Exhibit 10.5 to the Registrant’s registration statement on Form F-1/A, filed with the SEC on July 30, 2019

 

4.3

 

 

Service and Sale Agreement between Sundial Growers Inc. and Sun 8 Holdings Inc., dated May 1, 2019

 

Incorporated by reference to Exhibit 10.6 to the Registrant’s registration statement on Form F-1/Aill , filed with the SEC on July 30, 2019

 

4.4

 

Credit Agreement among SGI Partnership, as borrower, the lenders party thereto and SAF Jackson II LP, as administrative agent, dated June 27, 2019.

Incorporated by reference to Exhibit 10.7 to the Registrant’s registration statement on Form F-1/A, filed with the SEC on July 30, 2019

4.5

 

Professional Services Agreement, dated July 8, 2019, between AppColony Inc. and Sundial Growers Inc.

Incorporated by reference to Exhibit 10.8 to the Registrant’s registration statement on Form F-1/A, filed with the SEC on July 30, 2019

 

4.6

 

Registration Rights Agreement, dated August 6, 2019, between Sundial Growers Inc. and Edward Hellard

Incorporated by reference to Exhibit 99.1 to the Registrant’s current report on Form 6-K, filed with the SEC on August 29, 2019

 

84


4.7

 

Credit Agreement, dated August 29, 2019, among Sundial Growers Inc., the financial institutions from time to time party thereto, as lenders, ATB Financial as administrative agent for the lenders, ATB Financial and Bank of Montreal as co-lead arrangers and joint bookrunners and Bank of Montreal as syndication agent.

 

Filed together with this Annual Report on Form 20-F for the year ended December 31, 2019

8.1

 

List of Subsidiaries

 

Filed together with this Annual Report on Form 20-F for the year ended December 31, 2019

 

12.1

 

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

Filed together with this Annual Report on Form 20-F for the year ended December 31, 2019

 

 

 

 

12.2

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

Filed together with this Annual Report on Form 20-F for the year ended December 31, 2019

13.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Filed together with this Annual Report on Form 20-F for the year ended December 31, 2019

13.2

 

 

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Filed together with this Annual Report on Form 20-F for the year ended December 31, 201

15.1

 

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

 

Filed together with this Annual Report on Form 20-F for the year ended December 31, 2019

101.INS

 

XBRL Instance Document

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

*

Filed herewith.

 

85


SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

 

 

Sundial Growers Inc.

 

 

 

 

Date: March 30, 2020

 

By:

/s/ Zachary George

 

 

 

Name: Zachary George

 

 

 

Title: Chief Executive Officer

 

 

86


Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

Sundial Growers Inc.

Opinion on the Consolidated Financial Statements

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

Going Concern

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

Basis for Opinion

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

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

/s/ KPMG LLP

Chartered Professional Accountants

Calgary, Alberta

March 30, 2020

 

 

 

 

 

 

 

 

 

 

 

F-1


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sundial Growers Inc.

Consolidated Financial Statements

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

ten months ended December 31, 2 018

and the year ended February 28, 2018

(Expressed in thousands of Canadian dollars)

 

 

 

 

 

 

F-1


 

Sundial Growers Inc.

Consolidated Statements of Financial Position

(Expressed in thousands of Canadian dollars)

As at

Note

December 31, 2019

 

December 31, 2018

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

45,337

 

 

14,121

 

Restricted cash

13(a)

 

15,827

 

 

350

 

Accounts receivable

7

 

27,638

 

 

2,738

 

Biological assets

8

 

14,309

 

 

876

 

Inventory

9

 

59,942

 

 

1,234

 

Prepaid expenses and deposits

 

 

9,564

 

 

2,390

 

 

 

 

172,617

 

 

21,709

 

Non-current assets

 

 

 

 

 

 

 

Property, plant and equipment

10

 

281,984

 

 

88,491

 

Intangible assets

5,11

 

43,995

 

 

 

Goodwill

5

 

11,440

 

 

 

Total assets

 

 

510,036

 

 

110,200

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

12

 

58,110

 

 

19,324

 

Current portion of long-term debt

13,24

 

177,913

 

 

22,477

 

Convertible notes

15

 

 

 

25,449

 

Current portion of lease obligations

16

 

722

 

 

44

 

Contingent consideration

5(a)

 

32,501

 

 

 

Current portion of financial obligations

17

 

 

 

2,364

 

 

 

 

269,246

 

 

69,658

 

Non-current liabilities

 

 

 

 

 

 

 

Long-term debt

13,24

 

 

 

32,159

 

Lease obligations

16

 

16,227

 

 

170

 

Deferred tax liability

18

 

3,365

 

 

 

Financial obligation

17

 

 

 

16,121

 

Total liabilities

 

 

288,838

 

 

118,108

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Share capital

19(b)

 

509,654

 

 

65,133

 

Warrants

19(c)

 

27,831

 

 

3,108

 

Contributed surplus

19(d)

 

30,192

 

 

9,493

 

Convertible notes – equity component

15

 

 

 

3,232

 

Contingent consideration

5(b)

 

2,279

 

 

 

Accumulated deficit

 

 

(360,338

)

 

(88,874

)

Accumulated other comprehensive income

 

 

6,866

 

 

 

Total shareholders’ equity

 

 

216,484

 

 

(7,908

)

Non-controlling interest

5

 

4,714

 

 

 

Total liabilities and shareholders’ equity

 

 

510,036

 

 

110,200

 

Going concern (note 1)

Commitments (note 29)

Subsequent events (notes 5, 28, 30)

See accompanying notes to the consolidated financial statements.

Approved by the Board:

 

 

“Signed” Bryan Pinney

 

“Signed” Zachary George

Director

 

Director

 

F-2


 

Sundial Growers Inc.

Consolidated Statements of Loss and Comprehensive Loss

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

 

 

 

 

Year ended

December 31

 

 

Ten months ended

December 31

 

 

Year ended

February 28

 

 

 

Note

 

2019

 

 

2018

 

 

2018

 

Gross revenue

 

21

 

 

79,225

 

 

 

 

 

 

 

Excise taxes

 

 

 

 

3,365

 

 

 

 

 

 

 

Net revenue

 

 

 

 

75,860

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

56,147

 

 

 

 

 

 

 

Gross margin before fair value adjustments

 

 

 

 

19,713

 

 

 

 

 

 

 

Change in fair value of biological assets

 

 

 

 

30,726

 

 

 

(1,280

)

 

 

366

 

Change in fair value of biological assets realized through inventory sold

 

 

 

 

(10,685

)

 

 

 

 

 

 

Gross margin

 

 

 

 

39,754

 

 

 

(1,280

)

 

 

366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

22

 

 

44,449

 

 

 

8,309

 

 

 

3,144

 

Sales and marketing

 

22

 

 

8,888

 

 

 

2,380

 

 

 

1,274

 

Research & development

 

 

 

 

2,410

 

 

 

275

 

 

 

413

 

Pre-production expenses

 

 

 

 

 

 

 

6,457

 

 

 

1,249

 

Depreciation and amortization

 

 

 

 

4,077

 

 

 

920

 

 

 

411

 

Foreign exchange loss

 

 

 

 

(840

)

 

 

141

 

 

 

 

Share-based compensation

 

20

 

 

39,524

 

 

 

7,410

 

 

 

4,576

 

Asset impairment

 

10

 

 

162

 

 

 

523

 

 

 

2,184

 

Goodwill impairment

 

5(b)

 

 

100,305

 

 

 

 

 

 

 

Loss from operations

 

 

 

 

(159,221

)

 

 

(27,695

)

 

 

(12,885

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction costs

 

5(a)

 

 

(10,069

)

 

 

 

 

 

 

Finance costs

 

23

 

 

(28,198

)

 

 

(1,797

)

 

 

(75

)

Loss on financial obligation

 

17

 

 

(60,308

)

 

 

(27,017

)

 

 

 

Gain (loss) on disposition of PP&E

 

 

 

 

21

 

 

 

(17

)

 

 

(35

)

Change in fair value of contingent consideration

 

5(a)

 

 

(18,645

)

 

 

 

 

 

 

Change in fair value of investment

 

 

 

 

165

 

 

 

 

 

 

 

Loss before income tax

 

 

 

 

(276,255

)

 

 

(56,526

)

 

 

(12,995

)

Income tax recovery

 

5(c),18

 

 

4,626

 

 

 

 

 

 

 

Net loss

 

 

 

 

(271,629

)

 

 

(56,526

)

 

 

(12,995

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on currency translation of foreign operations

 

5(a)

 

 

6,866

 

 

 

 

 

 

 

Comprehensive loss

 

 

 

 

(264,763

)

 

 

(56,526

)

 

 

(12,995

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sundial Growers Inc.

 

 

 

 

(271,464

)

 

 

(56,526

)

 

 

(12,995

)

Non-controlling interest

 

5(c)

 

 

(165

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sundial Growers Inc.

 

 

 

 

(264,598

)

 

 

(56,526

)

 

 

(12,995

)

Non-controlling interest

 

5(c)

 

 

(165

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

25

 

$

(3.17

)

 

$

(0.82

)

 

$

(0.23

)

Segment information (note 6)

See accompanying notes to the consolidated financial statements.

 

 

F-3


 

Sundial Growers Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Expressed in thousands of Canadian dollars)

 

Note

Share capital

 

Warrants

 

Contributed

surplus

 

Convertible

notes – equity

component

 

Contingent consideration

 

Accumulated deficit

 

Accumulated

other

comprehensive

loss

 

Non-

controlling

interest

 

Total equity

 

Balance at February 28, 2017

 

 

15,136

 

 

 

 

 

 

 

 

 

 

(3,615

)

 

 

 

 

 

11,521

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(12,995

)

 

 

 

 

 

(12,995

)

Share issuances

 

 

8,123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,123

 

Shares issued to related parties

 

 

3,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,000

 

Share issuance costs

 

 

(515

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(515

)

Share-based compensation

 

 

25

 

 

 

 

4,551

 

 

 

 

 

 

 

 

 

 

 

 

4,576

 

Balance at February 28, 2018

 

 

25,769

 

 

 

 

4,551

 

 

 

 

 

 

(16,610

)

 

 

 

 

 

13,710

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(56,526

)

 

 

 

 

 

(56,526

)

Share issuances

 

 

20,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,452

 

Shares issued to related parties

 

 

16,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,474

 

Share issuance costs

 

 

(310

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(310

)

Share repurchase

 

 

(827

)

 

 

 

 

 

 

 

 

 

(15,738

)

 

 

 

 

 

(16,565

)

Fair value allocated to warrants

 

 

(3,108

)

 

3,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants exercised

 

 

2,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,182

 

Share-based compensation

 

 

521

 

 

 

 

6,889

 

 

 

 

 

 

 

 

 

 

 

 

7,410

 

Employee warrants exercised

 

 

3,980

 

 

 

 

(1,947

)

 

 

 

 

 

 

 

 

 

 

 

2,033

 

Equity component of convertible notes

 

 

 

 

 

 

 

 

3,232

 

 

 

 

 

 

 

 

 

 

3,232

 

Balance at December 31, 2018

 

 

65,133

 

 

3,108

 

 

9,493

 

 

3,232

 

 

 

 

(88,874

)

 

 

 

 

 

(7,908

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(271,464

)

 

 

 

(165

)

 

(271,629

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,866

 

 

 

 

6,866

 

Share issuances

19(b)

 

198,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

198,378

 

Shares issued to related parties

17,19(b)

 

63,460

 

 

5,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69,293

 

Share issuance costs

19(b)

 

(12,770

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,770

)

Business acquisitions

5

 

39,849

 

 

 

 

 

 

 

 

2,279

 

 

 

 

 

 

4,879

 

 

47,007

 

Convertible debt - conversions

14,15

 

113,526

 

 

6,731

 

 

 

 

(3,232

)

 

 

 

 

 

 

 

 

 

117,025

 

Warrants reclassified from liability

19(c)

 

 

 

16,091

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,091

 

Warrants exercised

19(c)

 

21,882

 

 

(3,932

)

 

 

 

 

 

 

 

 

 

 

 

 

 

17,950

 

Share-based compensation

20

 

2,515

 

 

 

 

37,009

 

 

 

 

 

 

 

 

 

 

 

 

39,524

 

Employee warrants exercised

20

 

17,681

 

 

 

 

(16,310

)

 

 

 

 

 

 

 

 

 

 

 

1,371

 

Balance at December 31, 2019

 

 

509,654

 

 

27,831

 

 

30,192

 

 

 

 

2,279

 

 

(360,338

)

 

6,866

 

 

4,714

 

 

221,198

 

See accompanying notes to the consolidated financial statements.

 

 

F-4


 

Sundial Growers Inc.

Consolidated Statement of Cash Flows

(Expressed in thousands of Canadian dollars)

 

 

 

 

Year ended

December 31

 

 

Ten months ended

December 31

 

 

Year ended

February 28

 

 

 

Note

 

2019

 

 

2018

 

 

2018

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period

 

 

 

 

(271,629

)

 

 

(56,526

)

 

 

(12,995

)

Items not involving cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax recovery

 

 

 

 

(4,626

)

 

 

 

 

 

 

Change in fair value of biological assets

 

 

 

 

(30,726

)

 

 

1,280

 

 

 

(366

)

Share-based compensation

 

20

 

 

39,524

 

 

 

7,410

 

 

 

4,576

 

Depreciation and amortization

 

10,11

 

 

9,778

 

 

 

920

 

 

 

411

 

Loss (gain) on disposition of PP&E

 

 

 

 

(21

)

 

 

17

 

 

 

35

 

Transaction costs

 

 

 

 

1,279

 

 

 

 

 

 

 

Finance costs

 

23

 

 

12,941

 

 

 

917

 

 

 

 

Gain on investment

 

 

 

 

(165

)

 

 

 

 

 

 

Loss on financial obligation

 

 

 

 

60,308

 

 

 

18,485

 

 

 

 

Change in fair value of contingent consideration

 

5(a)

 

 

18,645

 

 

 

 

 

 

 

Unrealized foreign exchange (gain) loss

 

 

 

 

(1,108

)

 

 

 

 

 

 

Asset impairment

 

 

 

 

162

 

 

 

523

 

 

 

2,184

 

Goodwill impairment

 

 

 

 

100,305

 

 

 

 

 

 

 

Change in non-cash working capital

 

24

 

 

(47,403

)

 

 

1,217

 

 

 

910

 

Net cash used in operating activities

 

 

 

 

(112,736

)

 

 

(25,757

)

 

 

(5,245

)

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

10

 

 

(138,135

)

 

 

(76,321

)

 

 

(7,588

)

Proceeds from disposal of PP&E

 

 

 

 

83

 

 

 

 

 

 

30

 

Acquisition of Bridge Farm

 

5(a)

 

 

(77,023

)

 

 

 

 

 

 

Other acquisitions, net of cash acquired

 

 

 

 

854

 

 

 

 

 

 

 

Change in non-cash working capital

 

24

 

 

1,077

 

 

 

10,282

 

 

 

(2,121

)

Net cash used in investing activities

 

 

 

 

(213,144

)

 

 

(66,039

)

 

 

(9,679

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from Syndicated Credit Agreement, net of costs

 

13(a)

 

 

82,687

 

 

 

 

 

 

 

(Repayment) proceeds of Credit Facilities

 

13(b)

 

 

(32,871

)

 

 

32,159

 

 

 

 

Proceeds from Term Debt Facility, net of costs

 

13(c)

 

 

105,539

 

 

 

 

 

 

 

(Repayment) proceeds of other debt instruments

 

13(d)-(g)

 

 

(56,173

)

 

 

8,546

 

 

 

7,000

 

Proceeds from convertible notes, net of costs

 

14

 

 

90,373

 

 

 

27,764

 

 

 

 

Payments on lease obligations

 

 

 

 

(791

)

 

 

(34

)

 

 

(109

)

Proceeds from issuance of shares, net of costs

 

19(b)

 

 

177,202

 

 

 

36,616

 

 

 

9,569

 

Proceeds from exercise of warrants

 

19(c)

 

 

17,950

 

 

 

2,182

 

 

 

 

Proceeds from exercise of employee warrants

 

20

 

 

1,371

 

 

 

2,033

 

 

 

 

Settlement of convertible notes

 

15

 

 

(4,190

)

 

 

 

 

 

 

Settlement of financial obligation

 

17

 

 

(9,500

)

 

 

 

 

 

 

Restricted cash

 

13(a)

 

 

(15,477

)

 

 

 

 

 

 

Repurchase of shares

 

 

 

 

 

 

 

(9,634

)

 

 

 

Change in non-cash working capital

 

24

 

 

2,147

 

 

 

(1,393

)

 

 

2,426

 

Net cash provided by financing activities

 

 

 

 

358,267

 

 

 

98,239

 

 

 

18,886

 

Impact of foreign currency translation

 

 

 

 

(1,171

)

 

 

 

 

 

 

Change in cash and cash equivalents

 

 

 

 

31,216

 

 

 

6,443

 

 

 

3,962

 

Cash and cash equivalents, beginning of year

 

 

 

 

14,121

 

 

 

7,678

 

 

 

3,716

 

Cash and cash equivalents, end of period

 

 

 

 

45,337

 

 

 

14,121

 

 

 

7,678

 

See accompanying notes to the consolidated financial statements.

 

 

F-5


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

1.

Description of business

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

The Company’s head office is located at 200, 919 11th Avenue SW, Calgary, Alberta, Canada.

The principal activities of the Company are the production, distribution and sale of cannabis in Canada and the production, distribution and sale of ornamental flowers and herbs in the United Kingdom. The production, distribution and sale of cannabis was regulated by the Access to Cannabis for Medical Purposes Regulations (“ACMPR”) in Canada, up to and including October 16, 2018. On October 17, 2018, the ACMPR was superseded by the Cannabis Act which regulates the production, distribution, and possession of cannabis for both medical and adult recreational access in Canada. The Company is planning to expand its operations to jurisdictions outside of Canada where federally lawful and regulated, including subsidiaries which operate in Europe and the United Kingdom.

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

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

Going concern assumption

These consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company is an early-stage company, has accumulated significant losses and is in non-compliance with its loan covenants (note 13a) as at December 31, 2019. Furthermore, the Company and certain of its subsidiaries have a limited operating history and a history of negative cash flow from operating activities.

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

The ability of the Company to continue as a going concern depends on Health Canada maintaining such licenses, the continued support of its lenders, its ability to achieve profitable operations and its ability to raise additional financing to fund current and future operating and investing activities. There is no assurance that the Company will be able to accomplish any of the foregoing objectives.

During the year ended December 31, 2019, the Company sourced the capital and liquidity to advance its strategic growth initiatives by way of the capital transactions described in notes 13, 14 and 19. At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement. As a result, as at December 31, 2019, the full principal amount of the Syndicated Credit Agreement and the full principal amount of the Term Debt Facility were classified as current liabilities on the Company’s statement of financial position. Additionally, based on the Company’s most recent financial projections, management is forecasting that the Company will be in violation of the Syndicated Credit Agreement debt covenants as at March 31, 2020, June 30, 2020 and September 30, 2020.

The Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any corresponding breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with the each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.

In addition, the Company continues to have discussions with its  lenders to provide certain amendments to the restrictive covenants and to defer principal payments for the remainder of 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar waivers in the past; however, there is no guarantee that we will be able to do so in the future. Any failure or delay in completing these amendments would have a significant negative impact on the Company’s liquidity and further impact the Company’s ability to operate as a going concern. In such a case, the Company would look to alternative sources of financing, delay capital

F-6


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

expenditures and/or evaluate potential asset sales, and potentially could be forced to curtail or cease operations or seek relief under the applicable bankruptcy or insolvency laws.

In addition, the Company will require additional financing in the near term. The Company has engaged financial advisors and is in negotiations with potential capital providers including sources of debt and/or equity. These negotiations have been negatively impacted by the effects that the Covid-19 pandemic is having, and is expected to continue to have, on the overall business environment and financial markets generally. The Company continues to advance these initiatives, however, there is no certainty as to their ultimate completion or the timing thereof.

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

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

2.

Basis of presentation

 

a)

Statement of compliance

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

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

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

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

These consolidated financial statements were approved and authorized for issue by the Board of Directors (“Board”) on March 30, 2020.

 

b)

Basis of measurement

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

 

c)

Functional and presentation currency

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

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

F-7


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

exchange differences from the translation of foreign subsidiaries into Canadian dollars are recognized in Other Comprehensive Income.

 

d)

Basis of consolidation

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

Subsidiaries

Jurisdiction of incorporation

Percentage ownership

 

Sprout Technologies Inc.

Alberta, Canada

 

100

%

KamCan Products Inc.

British Columbia, Canada

 

100

%

2011296 Alberta Inc.

Alberta, Canada

 

100

%

Sundial Deutschland GmbH

Germany

 

100

%

Sundial Portugal, Unipessoal LDA

Portugal

 

100

%

Pathway Rx Inc.

Alberta, Canada

 

50

%

2082033 Alberta Ltd.

Alberta, Canada

 

100

%

SGI Managing Partner Inc.

Alberta, Canada

 

100

%

SGI Partnership

Alberta, Canada

 

99.99

%

Sundial UK Limited

England and Wales

 

100

%

Project Seed Topco

England and Wales

 

100

%

Project Seed Bidco

England and Wales

 

100

%

Bridge Farm Nurseries Limited

England and Wales

 

100

%

Neame Lea Nursery Limited

England and Wales

 

100

%

Neame Lea Marketing Limited

England and Wales

 

100

%

Neame Lea Fresh Limited

England and Wales

 

100

%

Zyon UK Flowers and Plants Limited

England and Wales

 

100

%

 

3.

Significant accounting policies

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

Cash and cash equivalents

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

Restricted cash and cash equivalents

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

Biological assets

The Company’s biological assets consist of cannabis plants and ornamental flowers. The Company capitalizes all direct and indirect costs related to the biological transformation of the biological assets between the point of initial recognition and the point of harvest, including labour related costs, grow consumables, materials, utilities, facilities costs, depreciation and quality and testing costs. Biological assets are then recorded at fair value and consist of cannabis plants in various stages of vegetation, including cannabis clones which have not been harvested. Net unrealized changes in fair value of biological assets less cost to sell during the period are included in the results of operations for the related period. Biological assets are valued in accordance with IAS 41 and are presented at their fair values less costs to sell up to the point of harvest. The fair values are determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusts the amount for the expected selling price less costs to sell per gram. The fair value measurements for biological assets have been categorized as Level 3 fair values based on the inputs to the valuation technique used. Our method of accounting for biological assets attributes value accretion on a straight-line basis throughout the life of the biological asset from initial cloning to the point of harvest. The estimated expected harvest yield is based on assumptions of the estimated yield per plant and the weighted average number of growing weeks completed as a percentage of total expected growing weeks as at year end. These estimates are subject to volatility in market prices

F-8


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods. Differences from the anticipated yield will be reflected in the net change in fair value of biological assets in future periods.

Inventory

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

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

Property, plant, and equipment

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

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

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

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

Land

 

n/a

Production facilities

 

20 years

Equipment

 

2 to 10 years

Right-of-use assets

 

Lease term

Construction in progress

 

n/a

Intangible assets

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

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

 

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

 

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

 

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

F-9


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

Impairment of assets

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

 

(i)

Financial assets

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

 

(ii)

Non-financial assets

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

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

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

Financial instruments

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

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

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

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

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

 

(i)

Financial assets

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

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

F-10


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

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

 

(ii)

Financial liabilities

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

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

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

Non-monetary transactions

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

Repurchase of common shares

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

Compound financial instruments

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

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

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

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

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

Revenue

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

1.Identifying the contract with a customer

F-11


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

2.Identifying the performance obligations

3.Determining the transaction price

4.Allocating the transaction price to the performance obligations

5.Recognizing revenue when/as performance obligations are satisfied

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

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

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

Research and development

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

Share-based compensation

The fair value of share-based compensation expenses is estimated using the Black-Scholes pricing model and relies on a number of estimates, such as the expected life of the warrant, the volatility of the underlying share price, the risk-free rate of return and the estimated rate of forfeiture of warrants granted. Share-based compensation expense includes the expense for the issue of simple and performance warrants to employees, directors, and others at the discretion of our board of directors. Given the absence of an active trading market for the Company’s common shares prior to its initial public offering, determining the fair value of the Company’s common shares required our board of directors to make complex and subjective judgments. Our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of the Company’s common shares as of the date of each grant. For periods prior to January 1, 2019, the fair value of share-based compensation expense was primarily estimated using the value of the equity or convertible security issued to third parties for cash within a reasonable period of time of the grant to the employee. Subsequent to January 1, 2019, the fair value of share-based compensation expenses was estimated using the value of the equity or convertible security issued to third parties for cash within a reasonable period of time of the grant to the employee, as well as, other factors, including: the Company’s stage of development; the impact of significant corporate events, operational changes or milestones; material risks related to the business; the Company’s financial condition and operating results, including its revenue, history of net losses and levels of available capital resources; equity market conditions affecting comparable public companies; general U.S. market conditions; the likelihood and potential timing of achieving a liquidity event or completing an offering of common shares, such as an initial public offering; and the instruments involved illiquid securities of a private company. Subsequent to the Company’s IPO on August 6, 2019, the fair value of the Company’s shares is based on public trading data. In determining the amount of share-based compensation expense, the Company utilized the Black-Scholes pricing model and relies on a number of estimates, such as the expected life of the warrant, the volatility of the underlying share price, the risk-free rate of return and the estimated rate of forfeiture of warrants granted.

Income taxes

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

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

F-12


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

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

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

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

Business combinations

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

Goodwill

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

Non-controlling interests

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

New accounting standards

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

 

(a)

IFRS 16, Leases

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

Under the new standard, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company recognizes a right-of-use asset and a lease obligation at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses and adjusted for certain remeasurements of the lease obligation. Depreciation is recognized on the lease asset over the shorter of the estimated useful life of the asset or the lease term. The lease obligation is initially measured at the present value of the lease payments that have not been paid at the commencement date, discounted at the rate implicit in the lease or,

F-13


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

if that rate cannot be readily determined, the Company’s incremental borrowing rate. The lease obligation is subsequently increased by the interest cost on the lease obligation and decreased by lease payments made. Lease payments are allocated between the liability and interest expense. Interest expense is recognized on the lease obligation using the effective interest rate method and payments are applied against the lease obligation.

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

Impacts on Transition

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

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

 

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

 

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

 

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

 

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

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

 

 

January 1, 2019

 

Lease assets

 

 

1,333

 

Lease obligations

 

 

1,333

 

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

Lease assets

 

January 1, 2019

 

Net book value of lease assets recognized at December 31, 2018

 

 

227

 

Discounted using the implicit rate at January 1, 2019

 

 

212

 

Add: Lease assets recognized at January 1, 2019

 

 

1,121

 

Lease assets recognized at January 1, 2019

 

 

1,333

 

 

Lease obligations

 

January 1, 2019

 

Operating lease commitment at December 31, 2018

 

 

1,144

 

Discounted using the implicit rate at January 1, 2019

 

 

1,121

 

Add: Finance lease liabilities recognized at January 1, 2019

 

 

212

 

Lease obligations recognized at January 1, 2019

 

 

1,333

 

 

(b)

Amendments to definition of a business under IFRS 3

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

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

 

Clarify the minimum requirements for a business;

 

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

 

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

 

Narrow the definition of a business and of outputs; and

 

Introduce an optional fair value concentration test.

F-14


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

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

4.

Significant accounting estimates, assumptions and judgements

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

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

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

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

Impairments

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

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

Biological assets and inventory

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

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

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

Revenue

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

Deferred tax assets

Deferred tax assets, including those arising from tax loss carry-forwards, require management to assess the likelihood that the Company will generate sufficient taxable earnings in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash

F-15


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

flows. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be affected.

Share-based compensation

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

Convertible instruments

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

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

Financial obligations

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

Acquisitions

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

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

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

5.

Business acquisitions

 

(a)

Acquisition of Bridge Farm

On February 22, 2019, the Company, through its wholly owned subsidiary, Sundial UK Limited, signed a Sale and Purchase Agreement (“SPA”) to acquire all the issued and outstanding shares of Project Seed Topco (“Bridge Farm”) a private company located in the United Kingdom of Great Britain and Northern Ireland (“UK”). Bridge Farm was acquired to expand the Company’s business to cannabidiol (“CBD”) extraction and production, subject to certain regulatory, licensing and other restrictions, to launch CBD sales in the UK. The acquisition closed on July 2, 2019.

The acquisition consideration was comprised of:

 

(i)

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

 

(ii)

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

 

(iii)

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

F-16


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

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

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

 

July 2, 2019

 

Adjustments

 

December 31, 2019

 

Cash

 

77,023

 

 

 

 

77,023

 

Issuance of common shares

 

37,248

 

 

 

 

37,248

 

Contingent consideration

 

15,630

 

 

361

 

 

15,991

 

 

 

129,901

 

 

361

 

 

130,262

 

The purchase price was allocated as follows:

 

July 2, 2019

 

Adjustments

 

December 31, 2019

 

Accounts receivable

 

7,403

 

 

 

 

7,403

 

Inventory

 

469

 

 

1

 

 

470

 

Biological assets

 

1,233

 

 

55

 

 

1,288

 

Property, plant and equipment

 

57,717

 

 

651

 

 

58,368

 

Intangible assets

 

25,636

 

 

(165

)

 

25,471

 

Accounts payable

 

(14,293

)

 

 

 

(14,293

)

Long term debt

 

(33,618

)

 

 

 

(33,618

)

Lease obligations

 

(15,567

)

 

388

 

 

(15,179

)

Deferred income tax liability

 

(3,038

)

 

(1,317

)

 

(4,355

)

Goodwill

 

103,959

 

 

748

 

 

104,707

 

 

 

129,901

 

 

361

 

 

130,262

 

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

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

 

(i)

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

 

(ii)

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

 

(iii)

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

 

(iv)

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

 

(v)

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

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

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

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

 

(b)

Bridge Farm goodwill impairment

At December 31, 2019, the Company recorded a goodwill impairment of $100.3 million based on significant delays and uncertainties in the licensing and regulatory framework in the U.K. The goodwill impairment was recognized in the Bridge Farm CBD CGU and is the full amount of goodwill that was attributable to this CGU. The Bridge Farm CBD CGU is the business line focused on developing a CBD business in the U.K. The recoverable amount of the CGU was determined to be its fair value less costs of disposal and is categorized as level 3 in the fair value hierarchy.

F-17


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

Management has determined that because the Bridge Farm acquisition was completed within the last 12 months and that the Clay Lake assets are newly constructed, the fair value less costs of disposal would not be lower than the carrying amount of the tangible assets.

 

(c)

Acquisition of Pathway Rx

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

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

The purchase price was as follows:

Issuance of common shares

 

 

2,601

 

Contingent consideration (i)

 

 

2,279

 

 

 

 

4,880

 

 

(vi)

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

The purchase price was allocated as follows:

 

March 13, 2019

 

Adjustments

 

December 31, 2019

 

Intangible assets

 

13,368

 

 

184

 

 

13,552

 

Accounts payable and accrued liabilities

 

 

 

(184

)

 

(184

)

Deferred tax liability

 

(3,609

)

 

 

 

(3,609

)

Non-controlling interest (50%)

 

(4,879

)

 

 

 

(4,879

)

 

 

4,880

 

 

 

 

4,880

 

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

 

(i)

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

 

(ii)

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

 

(iii)

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

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

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

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

F-18


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

6.

Segment information

The Company’s reportable segments are based on geographic location and nature of the underlying operations. The Cannabis segment is located in Canada and the Ornamental Flowers segment is located in the United Kingdom. Cannabis operations includes legal cultivation and distribution of cannabis products under federally regulated licenses issued by Health Canada. The ornamental flower business represents the legacy operations of Bridge Farm that were included in the acquisition and capital expansion activities. The Corporate segment includes all corporate activities and items not allocated to reportable operating segments. For the ten months ended December 31, 2018, there was only one reportable segment. The Ornamental Flower segment arose from the acquisition of Bridge Farm during the year ended December 31, 2019 (note 5a).

 

As at December 31, 2019

Cannabis

 

Ornamental

Flowers

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

375,849

 

 

134,187

 

 

 

 

510,036

 

Total liabilities

 

227,024

 

 

61,814

 

 

 

 

288,838

 

Capital expenditures

 

110,271

 

 

27,864

 

 

 

 

138,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

63,562

 

 

12,298

 

 

 

 

75,860

 

Cost of sales

 

46,721

 

 

9,426

 

 

 

 

56,147

 

Gross margin before fair value adjustments

 

16,841

 

 

2,872

 

 

 

 

19,713

 

Change in fair value of biological assets

 

30,340

 

 

386

 

 

 

 

30,726

 

Change in fair value of biological assets realized through inventory sold

 

(10,685

)

 

 

 

 

 

(10,685

)

Gross margin

 

36,496

 

 

3,258

 

 

 

 

39,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

35,639

 

 

5,515

 

 

3,295

 

 

44,449

 

Other expenses

 

11,417

 

 

(959

)

 

 

 

10,458

 

Depreciation and amortization

 

595

 

 

3,482

 

 

 

 

4,077

 

Share-based compensation

 

15,809

 

 

 

 

23,715

 

 

39,524

 

Asset impairment

 

162

 

 

 

 

 

 

162

 

Goodwill impairment

 

 

 

100,305

 

 

 

 

100,305

 

Loss from operations

 

(27,126

)

 

(105,085

)

 

(27,010

)

 

(159,221

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction costs

 

 

 

 

 

(10,069

)

 

(10,069

)

Finance costs

 

(27,781

)

 

(417

)

 

 

 

(28,198

)

Loss on financial obligation

 

(60,308

)

 

 

 

 

 

(60,308

)

Other

 

8

 

 

(18,467

)

 

 

 

(18,459

)

Loss before tax

 

(115,207

)

 

(123,969

)

 

(37,079

)

 

(276,255

)

 

7.

Accounts receivable

 

December 31, 2019

 

December 31, 2018

 

Trade receivables

 

24,684

 

 

209

 

Other receivables

 

2,954

 

 

2,529

 

 

 

27,638

 

 

2,738

 

 

F-19


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

8.

Biological assets

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

 

December 31, 2019

 

December 31, 2018

 

Balance, beginning of year

 

876

 

 

54

 

Increase in biological assets due to capitalized costs

 

62,331

 

 

2,537

 

Net change in fair value of biological assets

 

30,726

 

 

(1,280

)

Transferred to inventory upon harvest

 

(80,991

)

 

(435

)

Acquisitions (note 5a)

 

1,288

 

 

 

Foreign currency translation

 

79

 

 

 

Balance, end of year

 

14,309

 

 

876

 

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

Cannabis plants

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

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

Assumption

Input

Weighted average input

 

Effect of 10% change ($000s)

 

 

 

December 31

2019

 

December 31

2018

 

December 31

2019

 

December 31

2018

 

Yield per square foot of growing space (1)

Grams

 

47

 

 

45

 

 

1,183

 

 

87

 

Average net selling price (2)

$/gram

 

5.47

 

 

5.25

 

 

3,021

 

 

294

 

After harvest cost to complete and sell

$/gram

 

2.34

 

 

0.70

 

 

267

 

 

39

 

 

(1)

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

 

(2)

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

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

The Company estimates the harvest yields for cannabis at various stages of growth. As at December 31, 2019, it is estimated that the Company’s biological assets will yield approximately 10,455 kilograms (December 31, 2018 - 2,800 kilograms) of dry cannabis when harvested. During the year ended December 31, 2019 the Company harvested 34,012 kilograms of dry cannabis (ten months ended December 31, 2018 – 337 kilograms).

The Company’s estimates are, by their nature, subject to change and differences from the anticipated yield will be reflected in the net change in fair value of biological assets in future periods.

Flowers

Due to the large variety of plants produced by the Company it is not possible to determine the costs to sell for each product line due to mixed trolleys being delivered to customers each day and therefore an average has been applied across all plants based on a post-wastage gross margin.

The fair value measurements for biological assets have been categorized as Level 2 fair values based on inputs from the international flower market and applied to all unharvested plants at each period end.

F-20


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

9.

Inventory

 

December 31, 2019

 

December 31, 2018

 

Harvested cannabis

 

50,403

 

 

435

 

Cannabis supplies and consumables

 

8,808

 

 

799

 

Ornamental flowers, supplies and consumables

 

731

 

 

 

 

 

59,942

 

 

1,234

 

At December 31, 2019, the Company held 8,380 kilograms of harvested cannabis (December 31, 2018 – 303 kilograms) in inventory. During the year ended December 31, 2019, inventories of $45.8 million were recognized as an expense and included in cost of sales (ten months ended December 31, 2018 - $nil).

10.

Property, plant and equipment

 

Land

 

Production facilities

 

Equipment

 

Right of

use assets

 

Construction

in progress

(“CIP”)

 

Total

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 28, 2018

 

4,029

 

 

3,272

 

 

2,976

 

 

 

 

3,316

 

 

13,593

 

Additions

 

1,217

 

 

20,064

 

 

4,295

 

 

 

 

50,745

 

 

76,321

 

Dispositions

 

 

 

 

 

(17

)

 

 

 

 

 

(17

)

Balance at December 31, 2018

 

5,246

 

 

23,336

 

 

7,254

 

 

 

 

54,061

 

 

89,897

 

Adoption of IFRS 16

 

 

 

 

 

(327

)

 

1,333

 

 

 

 

1,006

 

Acquisitions (note 5a)

 

15,860

 

 

21,294

 

 

247

 

 

14,648

 

 

6,360

 

 

58,409

 

Additions

 

1,517

 

 

283

 

 

3,393

 

 

687

 

 

134,183

 

 

140,063

 

Transfers from CIP

 

3,406

 

 

120,724

 

 

13,603

 

 

 

 

(137,733

)

 

 

Dispositions

 

(31

)

 

 

 

(159

)

 

(700

)

 

 

 

(890

)

Foreign currency translation

 

608

 

 

805

 

 

10

 

 

541

 

 

1,160

 

 

3,124

 

Balance at December 31, 2019

 

26,606

 

 

166,442

 

 

24,021

 

 

16,509

 

 

58,031

 

 

291,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 28, 2018

 

 

 

84

 

 

402

 

 

 

 

 

 

486

 

Depreciation

 

 

 

228

 

 

692

 

 

 

 

 

 

920

 

Balance at December 31, 2018

 

 

 

312

 

 

1,094

 

 

 

 

 

 

1,406

 

Adoption of IFRS 16

 

 

 

 

 

(100

)

 

 

 

 

 

(100

)

Depreciation

 

3

 

 

5,026

 

 

2,833

 

 

610

 

 

 

 

8,472

 

Impairment

 

 

 

 

 

 

 

 

 

162

 

 

162

 

Dispositions

 

 

 

 

 

(130

)

 

(248

)

 

 

 

(378

)

Foreign currency translation

 

 

 

62

 

 

 

 

1

 

 

 

 

63

 

Balance at December 31, 2019

 

3

 

 

5,400

 

 

3,697

 

 

363

 

 

162

 

 

9,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

5,246

 

 

23,024

 

 

6,160

 

 

 

 

54,061

 

 

88,491

 

Balance at December 31, 2019

 

26,603

 

 

161,042

 

 

20,324

 

 

16,146

 

 

57,869

 

 

281,984

 

During the year ended December 31, 2019, $0.6 million (ten months ended December 31, 2018 - $0.8 million) in salaries and benefits was capitalized, including $0.6 million (ten months ended December 31, 2018 - $0.3 million) associated with construction in progress. In addition, a total of $1.3 million in interest associated with construction in progress was capitalized during the year ended December 31, 2019 (ten months ended December 31, 2018 - $2.0 million). Construction in progress relates to the construction of production facilities.

Subsequent to December 31, 2019, the Company signed a purchase and sale agreement to sell certain non-core assets within the Cannabis segment, consisting of land, building and equipment, located in Kamloops, British Columbia, for gross proceeds of $2.1 million. The sale closed on March 27, 2020.

F-21


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

11.

Intangible assets

 

Brands and trademarks

 

Patents

 

Customer relationships

 

Other

 

Total

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 28, 2018

 

 

 

 

 

 

 

523

 

 

523

 

Balance at December 31, 2018

 

 

 

 

 

 

 

523

 

 

523

 

Additions

 

5,295

 

 

 

 

 

 

 

 

5,295

 

Acquisitions (note 5)

 

2,977

 

 

13,551

 

 

18,855

 

 

3,639

 

 

39,022

 

Foreign currency translation

 

114

 

 

 

 

723

 

 

139

 

 

976

 

Balance at December 31, 2019

 

8,386

 

 

13,551

 

 

19,578

 

 

4,301

 

 

45,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 28, 2018

 

 

 

 

 

 

 

 

 

 

Impairment

 

 

 

 

 

 

 

523

 

 

523

 

Balance at December 31, 2018

 

 

 

 

 

 

 

523

 

 

523

 

Depreciation

 

132

 

 

 

 

982

 

 

192

 

 

1,306

 

Foreign currency translation

 

(1

)

 

 

 

(6

)

 

(1

)

 

(8

)

Balance at December 31, 2019

 

131

 

 

 

 

976

 

 

714

 

 

1,821

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

8,255

 

 

13,551

 

 

18,602

 

 

3,587

 

 

43,995

 

In addition to the intangible assets acquired through acquisitions (note 5), On May 1, 2019, the Company purchased intellectual property from Sun 8 Holdings Inc. The intellectual property acquired under this agreement consists of world-wide proprietary rights to certain cannabis product brands, including trademarks. Consideration of $5.3 million under the arrangement consisted of 480,000 common shares of the Company at a price of $11.03. The agreement includes future consideration in the form of warrants to acquire up to 1.8 million common shares at an exercise price of $0.94 per share, subject to vesting conditions contingent upon achieving minimum thresholds of revenue derived from the acquired brands or acquired cultivars over five years. The agreement also includes the following royalty payments, (i) a royalty ranging from $0.25 to $0.35 per gram of dried flower harvested from the acquired cultivars, based on harvest yields achieved, (ii) a royalty ranging from $0.05 to $0.20 per gram of cannabis (other than dried flower) from the acquired cultivars, based on the THC and CBD potency achieved, (iii) a royalty of $0.15 per gram of cannabis produced by certain third-party cultivators, and (iv) a royalty of $0.15 per gram of any cannabis product or item of merchandise sold under any of the acquired brands.

Brands and trademarks relating to the intellectual property purchased from Sun 8 have a remaining useful life of 15 years. The depreciation of brands and trademarks is included in depreciation and amortization expense.

12.

Accounts payable and accrued liabilities

 

December 31, 2019

 

December 31, 2018

 

Trade payables

 

20,228

 

 

11,070

 

Accrued and other liabilities

 

37,882

 

 

8,254

 

 

 

58,110

 

 

19,324

 

 

F-22


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

13.

Debt

 

Interest rate

Maturity

Principal

 

December 31, 2019

 

December 31, 2018

 

Syndicated Credit Agreement (a)

 

 

 

 

 

 

 

 

 

 

 

Syndicated facility

Prime + 2.5%

Aug 27, 2021

 

84,000

 

 

82,910

 

 

 

Operating facility

Prime + 2.5%

Aug 27, 2021

 

6,000

 

 

 

 

 

Credit Facilities (b)

 

 

 

 

 

 

 

 

 

 

 

Facility 1, 3 & 4

Prime + 2.75%

Aug 16, 2020

 

5,000

 

 

 

 

32,159

 

Facility 5 & 7

Prime + 2.25%

Aug 16, 2020

 

43,500

 

 

 

 

 

Term Debt Facility (c)

 

 

 

 

 

 

 

 

 

 

 

First tranche

9.75%

Jul 27, 2023

 

115,000

 

 

95,003

 

 

 

Credit Agreement (d)

9.00%

May 15, 2019

 

30,000

 

 

 

 

 

Loan Agreement (e)

9.50%

Sep 30, 2019

 

10,000

 

 

 

 

7,000

 

Note Agreement (f)

 

Feb 22, 2019

 

7,000

 

 

 

 

8,546

 

Promissory Note (g)

1.0% per month

Mar 25, 2019

 

6,931

 

 

 

 

6,931

 

 

 

 

 

 

 

 

177,913

 

 

54,636

 

 

 

 

 

 

 

 

 

 

 

 

 

Current portion

 

 

 

 

 

 

177,913

 

 

22,477

 

Long term

 

 

 

 

 

 

 

 

32,159

 

 

(a)

Syndicated Credit Agreement

 

 

December 31, 2019

 

Principal value of debt

 

 

84,000

 

Transaction costs

 

 

(1,313

)

Accretion

 

 

223

 

 

 

 

82,910

 

On August 29, 2019, the Company entered into a Syndicated Credit Agreement with an initial $90.0 million of secured debt facilities comprised of a $84.0 million senior secured term credit facility and a $6.0 million senior secured revolving operating facility (“Syndicated Credit Agreement”). Under the terms of the agreement, the Company has the right to obtain an additional facility, on a project by project basis, from existing or additional lenders, up to a maximum of $50.0 million subject to the consent of the lenders and satisfaction of certain other conditions.

Principal will be repaid in quarterly payments, beginning at the end of the Company’s first fiscal quarter following the covenant conversion date of March 31, 2020, amortized over a 10-year period, with the balance of all borrowings outstanding being due and payable in full on August 27, 2021. Interest will be incurred at either (i) prime plus a margin between 1.25% to 2.5% or (ii) the one-month bankers acceptance rate plus 1%, plus a margin between 2.75% to 4.00%. The margin level is determined based on the Company’s senior funded debt to EBITDA ratio. Interest on prime loans accrues daily and is payable monthly on the last business day of each month. The Syndicated Credit Agreement is secured by a general security agreement over all present and after acquired personal property and a first floating charge over all other present and after acquired property in Alberta, British Columbia and other Canadian jurisdictions, subject to permitted encumbrances.

As at December 31, 2019, the Company was required to maintain a cash balance of $10.0 million in accordance with the financial covenants contained in the Syndicated Credit Agreement, which has been classified as restricted cash on the statement of financial position. The Company has also classified funds held in trust in support of letters of credit of $5.3 million as restricted cash.

F-23


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

The Syndicated Credit Agreement contained an interest coverage ratio to be maintained as at the end of the quarter ended September 30, 2019, which was subsequently removed from the agreement.

 

At December 31, 2019, the Syndicated Credit Agreement, as written, contained certain financial covenants to maintain:

 

 

(i)

An available cash balance to March 31, 2020;

 

(ii)

A certain interest coverage ratio as at December 31, 2019;

 

(iii)

A certain senior funded debt to EBITDA ratio as at March 31, 2020 and as at the end of every fiscal quarter thereafter; and

 

(iv)

A fixed charge coverage ratio at March 31, 2020 and as at the end of every fiscal quarter thereafter.

 

At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement, which caused a cross-acceleration under its Term Debt Facility. As a result, as at December 31, 2019, the full principal amount of the Syndicated Credit Agreement and the Term Debt Facility was classified as a current liability on the Company’s statement of financial position.

 

Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.

In addition, we anticipate that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar waivers in the past; however, there is no guarantee that we will be able to do so in the future.

 

(b)

Credit Facilities

As at December 31, 2018, the Credit Facilities were comprised of the following:

 

Facility 1 – $29.5 million non-revolving development term out facility

 

Facility 3 – $5.0 million term out facility

 

Facility 4 – $14.0 million term out facility

As per the December 19, 2018 amended and restated commitment letter (the “Commitment Letter”), on June 1, 2019, Facilities 1 and 4 were refinanced through Facilities 5 and 7, while Facility 3 remained in place. The new Facilities can be summarized as follows:

 

Facility 3 – $5.0 million term out facility

 

Facility 5 – $29.5 million non-revolving development term out facility

 

o

To be used solely for the purpose of refinancing Facility 1

 

Facility 7 – $14.0 million term out facility

 

o

To be used solely for the purpose of refinancing Facility 4

 

o

Available subject to revenue being generated from two of the three pods in cluster 1

Following the advances of Facilities 5 and 7, interest was to be incurred at prime plus 2.25%. Interest (on Facilities 3, 5 and 7) and principal (on Facilities 5 and 7 only) were to be paid in quarterly payments at the end of the Company’s first fiscal quarter following such advance, amortized over a 5-year period, with the balance of all borrowings outstanding being due and payable in full on August 16, 2020. The facilities under the Commitment Letter were secured by a general security agreement over all present and after acquired personal property and a floating charge on all lands, subject to permitted encumbrances.

F-24


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

The Company was subject to two financial covenants under these facilities as follows:

 

(i)

The Company had to maintain a Working Capital Ratio (current assets divided by current liabilities, net of Authorized Subordinated Debt) of at least 1.15 to 1.00 until April 1, 2019 and 1.25 to1.00 on or after April 1, 2019; and

 

(ii)

Beginning with the first full quarter following June 1, 2019, the Company had to maintain a fixed charge coverage ratio of at least 1.50 to 1.00.

On August 29, 2019, the Credit Facilities of $49.0 million plus accrued interest were repaid in full using a portion of the proceeds from the Syndicated Credit Agreement described in section (a) above and are no longer available to the Company.

 

(c)

Term Debt Facility

 

 

December 31, 2019

 

Principal value of debt

 

 

115,000

 

Transaction costs

 

 

(9,461

)

Accretion

 

 

3,397

 

Fair value assigned to warrants, at issuance

 

 

(13,933

)

 

 

 

95,003

 

On June 27, 2019, the Company entered into a secured credit agreement (the “Term Debt Facility”) through SGI Partnership, a newly formed wholly owned subsidiary of the Company. The Term Debt Facility is secured on a second-priority basis over all assets of the Company except for the acquired Bridge Farm assets (note 5a), which are secured on a first priority basis. The Term Debt Facility consists of two tranches totalling $159.6 million, less (i) a 6% original issue discount and (ii) upfront fees totalling up to approximately $2.4 million. The first tranche of $115.0 million, less the original issue discount and upfront fees, was advanced on June 27, 2019 to fund the acquisition of Bridge Farm described in note 5(a). The second tranche was not advanced, and the deadline to advance it has passed. Amounts advanced under the Term Debt Facility bear interest at a rate of 9.75% per annum. Principal will be repaid in quarterly payments beginning June 30, 2020 with the first instalment based on 5% of the principal outstanding and subsequent quarters based on 1.25% of principal outstanding, with the balance of all borrowings outstanding being due and payable in full on July 27, 2023.

In connection with each tranche advanced, the lender is entitled to receive warrants exercisable upon the earlier of (i) the completion of an initial public offering, (ii) December 31, 2020, or (iii) a default or event of default under the Term Debt Facility or certain other specified events. The number of warrants issuable and the exercise price of such warrants issued was indexed to the Company’s share price determined at the date of the completion of an initial public offering. Prior to the completion of the initial public offering, the warrants were classified as a derivative liability measured at FVTPL. The fair value of the warrants was estimated based on the Black-Scholes option pricing model. The measurements for the warrants were categorized as Level 3 fair values based on the inputs to the valuation technique used.

In August 2019, upon completion of the initial public offering, 957,225 warrants with an exercise price of $21.63 and 1,495,665 warrants with an exercise price of $20.76 were issued. The Company recorded a fair value adjustment of $2.2 million to finance expense upon reclassification from a derivative liability to equity (note 19c).

The Company is subject to three financial covenants under this facility, so long as the principal amount owing under the Term Debt Facility is greater than $75 million, as follows:

 

(i)

The Company must maintain, at all times, 60% of the square footage of the existing facilities in the United Kingdom dedicated to plant production and inventory and shall achieve a minimum 20% gross margin for both the quarter ending December 31, 2019 and the March 31, 2020 on said plant business;

 

(ii)

The Company’s UK leverage ratio is defined as the ratio of outstanding amounts under the Term Debt Facility to annualized bank EBITDA related to its United Kingdom operations. The UK leverage ratio shall not exceed:

 

11.0 to 1.0, calculated at the end of each financial quarter for the four financial quarters then ended, commencing for the financial quarter ending June 30, 2020 and each financial quarter thereafter until and including March 31, 2021; and

 

9.0 to 1.0, calculated at the end of each financial quarter for the four financial quarters then ended, commencing for the financial quarter ending June 30, 2021 and each financial quarter thereafter.

F-25


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

 

(iii)

The Company’s consolidated leverage ratio is defined as the ratio of outstanding amounts under the Term Debt Facility to annualized bank EBITDA related to its consolidated operations. The consolidated leverage ratio shall not exceed:

 

6.0 to 1.00, calculated at the end of each financial quarter for the four financial quarters then ended, commencing for the financial quarter ending June 30, 2020 and each financial quarter thereafter until and including March 31, 2021; and

 

4.5 to 1:0, calculated at the end of each financial quarter for the four financial quarters then ended, commencing for the financial quarter ending June 30, 2021 and each financial quarter thereafter.

As at December 31, 2019, the Company was in compliance with all financial covenants under the Term Debt Facility. However, because, at December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement, the full principal amount of the Syndicated Credit Agreement and the Term Debt Facility, which was cross-accelerated, was classified as a current liability on the Company’s statement of financial position.

Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.

 

 

(d)

Credit Agreement

On February 22, 2019, the Company entered into a credit agreement with a Canadian financial institution to provide a $30 million non-revolving term-loan facility (the “Credit Agreement”). The Credit Agreement was secured by a second priority general security agreement over all present and after acquired personal property and a floating charge on all lands, subject to permitted encumbrances, as well as a first priority assignment of all net proceeds from certain future equity or debt offerings. Interest was accrued at 9.00% with principal and interest repayable on or before May 15, 2019 and later extended to May 22, 2019 where principal of $30 million plus accrued interest was repaid in full. The Credit Agreement is no longer available to the Company. The Credit Agreement was subject to various non-financial covenants, with which the Company was in compliance throughout the term of the Credit Agreement.

 

(e)

Loan Agreement

On April 10, 2019, the Company signed an agreement to amend the Loan Agreement by extending the maturity from May 31, 2019 to September 30, 2019. In addition, the Company secured an additional loan in the principal amount of $3.0 million for a total of $10.0 million. The new loan was subject to interest at a rate of 9.5% payable monthly with the principal amount due on September 30, 2019. The agreement required monthly confirmation that all financial covenants under the Commitment Letter described in note 13(b) have been met. On June 27, 2019 the $10 million plus accrued interest was repaid in full. The Loan Agreement is no longer available to the Company.

 

(f)

Note Agreement

On February 22, 2019, the Note Agreement was repaid in full using proceeds from the Credit Facilities described in note 13(b). The repayment consisted of $7.0 million in principal plus accumulated interest and an extension fee of $1.9 million. The Note Agreement is no longer available to the Company.

 

(g)

Promissory Note

The Promissory Note matured on March 25, 2019 but was extended in accordance with the terms of the agreement. The balance of $6.9 million outstanding included principal and interest which accrued from the date of extension at a rate of 1% per month and was repaid in full on June 5, 2019. The Promissory Note is no longer available to the Company.

F-26


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

14.

Senior Convertible Notes

 

 

December 31, 2019

 

Senior Convertible Notes issued

 

 

93,192

 

Transaction costs

 

 

(2,819

)

Fair value attributable to conversion feature

 

 

(40,494

)

Balance attributable to debt portion upon issuance

 

 

49,879

 

Accretion of note obligation

 

 

1,223

 

Amortization of note issue costs

 

 

93

 

Accrued interest

 

 

1,903

 

Conversion to common shares

 

 

(53,098

)

Balance, end of year

 

 

 

In May 2019, the Company closed a private placement of 8% senior unsecured convertible notes (“Senior Convertible Notes”) for gross proceeds of $92.6 million. In July 2019, an additional $0.6 million were issued. The Senior Convertible Notes bore interest at a rate of 8% per annum, compounded monthly. The Senior Convertible Notes and any accrued interest were repayable on the earlier of five years from date of issuance, the day the Company redeems the Senior Convertible Notes on certain conditions defined in the note agreement, or the day upon which the noteholder exercise their conversion rights as defined in the agreement. $0.1 million of the senior convertible notes were issued to a director of the Company.

The Senior Convertible Notes were hybrid instruments consisting of a financial liability and an embedded conversion feature. The embedded conversion feature met the definition of an embedded derivative which was separated from the host contract and accounted for separately as the economic characteristics and risks of the host contract and the embedded derivative were not closely related. The conversion feature did not contain a fixed conversion price and was only exercisable in the event of an initial public offering and at the second anniversary following the closing date. Prior to the initial public offering and the subsequent conversion, the embedded conversion feature was carried at FVTPL.

On August 14, 2019, Sundial received conversion notices from all holders of the 8% convertible notes. As a result, all principal and accrued interest was converted into 6.9 million common shares at a conversion price of $13.84 representing 80% of the initial public offering price converted to Canadian dollars.

15.

Convertible notes

 

December 31, 2019

 

December 31, 2018

 

Balance, beginning of year

 

25,449

 

 

 

Convertible Notes issued - liability portion

 

 

 

24,531

 

Unrealized foreign exchange gain

 

(209

)

 

 

Accrued interest

 

(152

)

 

152

 

Accretion

 

2,443

 

 

594

 

Amortization of note issue costs

 

745

 

 

172

 

Conversion to common shares

 

(18,139

)

 

 

Conversion to warrants

 

(5,947

)

 

 

Repayments

 

(4,190

)

 

 

 

Balance, end of year

 

 

 

25,449

 

In 2018, the Company closed three separate tranches of a private placement of 12% notes for gross proceeds of $28.9 million ($22.2 million from the CAD offering and $USD 5.0 from the USD offering), convertible into units consisting of 1.6 common shares and 0.8 of one common share purchase warrant at the option of the holder for up to twelve months. The Canadian dollar denominated offering was convertible into units at a price of $3.91 per unit. The U.S. dollar denominated offering was convertible into units at a price of $3.13 USD per unit. Interest was payable at 12% per annum, payable monthly, and maturing twelve months from the date of issuance. The convertible notes were segregated into their debt and equity components using the residual value approach, with $3.2 million being allocated to equity. $7 million of the convertible notes were issued to directors and officers.

During the year ended December 31, 2019, principal of $21.2 million convertible notes and USD$2.5 million convertible notes were converted into equity units, at the option of the holders. Equity units issued consisted of 6.2 million common shares and 3.6 million warrants. During the year ended December 31, 2019, principal of $1.0 million convertible notes and USD$2.4 million convertible notes were repaid to unit holders.

F-27


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

16.

Lease obligations

 

December 31, 2019

 

December 31, 2018

 

Balance, beginning of year

 

214

 

 

141

 

Adoption of IFRS 16

 

1,119

 

 

 

Acquisitions (note 5a)

 

15,179

 

 

 

Liabilities incurred

 

674

 

 

107

 

Lease payments

 

(778

)

 

(34

)

Liabilities disposed of

 

(468

)

 

 

Interest expense

 

444

 

 

 

Foreign currency translation

 

565

 

 

 

Balance, end of year

 

16,949

 

 

214

 

 

 

 

 

 

 

 

Current portion

 

722

 

 

44

 

Long-term

 

16,227

 

 

170

 

On adoption of IFRS 16, the Company recognized lease liabilities of $1.1 million in relation to corporate office space and equipment at the present value of the remaining lease payments as at January 1, 2019, and discounted using the Company’s incremental borrowing rate of 5.95% for assets over a similar term with similar security, determined in accordance with IFRS 16. The associated right-of-use assets were measured at the amount equal to the lease liabilities on January 1, 2019.

The Company’s minimum lease payments are as follows:

 

 

December 31, 2019

 

Less than one year

 

 

1,563

 

One to three years

 

 

3,465

 

Three to five years

 

 

2,071

 

Thereafter

 

 

22,868

 

Minimum lease payments

 

 

29,967

 

Amounts representing finance charges

 

 

(13,018

)

Net minimum lease payments

 

 

16,949

 

The Company has short-term leases with lease terms of 12 months or less as well as low-value leases. As these costs are incurred, they are recognized as general and administrative expense. These costs were immaterial in 2019.

17.

Financial obligations

On January 15, 2018, the Company entered into the Investment and Royalty Agreement with a company controlled by the former Executive Chairman of the Company (the “Purchaser”). The Investment and Royalty Agreement was amended on August 16, 2018. Under the amended agreement, the Purchaser agreed to provide up to $11.0 million of equity financing for the construction of a portion of the Company’s facility in Olds, Alberta. As at December 31, 2018, a total of $10.9 million had been advanced under the amended agreement and was converted into 7,149,035 common shares. The difference between the estimated fair value of the shares at the time of issue and the amount based on the price per share as outlined in the credit agreement of $8.5 million was charged to finance expense in 2018. The Investment and Royalty Agreement was subject to various non-financial covenants, with which the Company was in compliance as a December 31, 2018, except for the growing capacity covenant. This covenant required that at least 25,000 square feet of defined space at the Olds facility be dedicated exclusively to and capable of producing flower. This covenant was waived by the Purchaser for the period from August 16, 2018 to October 1, 2019, as the use of that facility space for clones and vegetation plants was determined to be a superior allocation of productive capacity.

In addition, pursuant to the terms of the Investment and Royalty Agreement, the Purchaser was entitled to quarterly royalty payments calculated based on the Company’s revenue from the facilities subject to the amended agreement for each fiscal quarter multiplied by 6.5% (the “Royalty Payment”). The Royalty Payments accrued beginning October 1, 2019 and were to be paid on the first business day of every subsequent fiscal quarter until September 30, 2028. The Company had estimated the present value of these payments at December 31, 2018 to be $18.5 million assuming a discount rate of 18%.

F-28


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

The Company used a discounted cash flow methodology to estimate the value the royalty component of the financial obligation. The material assumptions used by the Company to estimate the valuation for the royalty and held constant for the 10-year term of the royalty payments, and assuming a discount rate of 18%, were as follows:

 

 

December 31, 2018

 

Growing space related to royalty

square feet

 

44,403

 

Average yield

grams/square feet

 

45

 

Total cannabis production

million grams/year

 

12.0

 

Average price

$/gram

 

5.50

 

On July 17, 2019, the Company issued 50,963 shares to the Company’s former Executive Chairman in consideration for advancing the remaining funds available to be advanced under the financial obligation. In addition, the Company agreed to indirectly acquire the Investment and Royalty Agreement pursuant to a purchase agreement whereby the Company would purchase all of the outstanding shares of the Purchaser from the Company’s former Executive Chairman for aggregate consideration of 3,680,000 common shares, 480,000 share purchase warrants (each exercisable for one common share at an exercise price of $15.94 for a period of three years from the date of issue) and a cash payment of $9.5 million. Upon completion of the Company’s initial public offering, the Purchaser was acquired on August 6, 2019 resulting in a loss on financial obligation of $59.6 million based on the initial public offering price of $US13.00. The cash payment of $9.5 million under the purchase agreement was paid prior to September 30, 2019.

18.

Income taxes

The following table reconciles the expected income tax expense (recovery) at the Canadian federal and provincial statutory income tax rates to the amounts recognized in the consolidated statements of loss and comprehensive loss for the year ended December 31, 2019 and ten months ended December 31, 2018:

 

December 31, 2019

 

December 31, 2018

 

February 28,

2018

 

Loss before taxes

 

(276,255

)

 

(56,526

)

 

(12,995

)

Statutory income tax rates

 

26.5

%

 

27

%

 

27

%

Expected income tax recovery

 

(73,208

)

 

(15,262

)

 

(3,509

)

Non-deductible goodwill impairment

 

26,581

 

 

 

 

 

Non-deductible share-based compensation

 

10,474

 

 

1,860

 

 

1,236

 

Non-deductible finance expense

 

15,981

 

 

2,304

 

 

 

Other non-deductible expenses

 

4,101

 

 

 

 

 

Change in tax rates

 

3,988

 

 

 

 

 

Deferred tax benefits not recognized

 

7,457

 

 

11,098

 

 

2,273

 

Income tax (recovery) expense

 

(4,626

)

 

 

 

 

Details of the deferred tax assets (liabilities) are as follows:

 

December 31, 2019

 

December 31, 2018

 

Deferred tax assets (liabilities):

 

 

 

 

 

 

Property, plant and equipment

 

(3,490

)

 

 

Inventory

 

1,881

 

 

(333

)

Biological assets

 

(7,170

)

 

(236

)

Intangible assets

 

(7,355

)

 

 

Non-capital losses

 

12,769

 

 

569

 

Net deferred tax asset (liability)

 

(3,365

)

 

 

F-29


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

Deferred tax assets have not been recognized for the following deductible temporary differences:

 

December 31, 2019

 

December 31, 2018

 

Unrecognized deductible temporary differences:

 

 

 

 

 

 

Property, plant and equipment

 

 

 

896

 

Intangible assets

 

 

 

4,520

 

Share issue costs

 

16,779

 

 

1,880

 

Financial obligations and other

 

1,726

 

 

18,699

 

Convertible notes

 

 

 

594

 

Non-capital losses

 

54,472

 

 

30,074

 

Unrecognized deductible temporary differences

 

72,977

 

 

56,663

 

The movement in deferred income tax liability during the year is as follows:

 

 

December 31, 2019

 

Balance, beginning of year

 

 

 

Acquisition of Pathway Rx

 

 

3,609

 

Acquisition of Bridge Farm

 

 

4,355

 

Recognized in profit and loss

 

 

(4,626

)

Recognized in other comprehensive income

 

 

27

 

Balance, end of year

 

 

3,365

 

 

The Company has $99.1 million (December 31, 2018 - $32.2 million) of non-capital losses available for future periods that will expire prior to 2038-2039. The Company has £8.1 million of non-capital losses available for future periods that do not expire.

19.

Share capital and warrants

 

(a)

Authorized

The authorized capital of the Company consists of an unlimited number of voting common shares and preferred shares with no par value.

On July 12, 2019, the Company approved a 1.6 to 1 share split of the Company’s issued and outstanding common shares (the “Share Split”). Each shareholder of record of the Company as of the close of business on the record date on July 22, 2019 received 1.6 common shares for each share held on such date. All references to common shares, warrants, simple warrants and performance warrants have been retrospectively adjusted to reflect the Share Split.

 

(b)

Issued and outstanding

 

 

December 31, 2019

 

December 31, 2018

 

 

Note

Number of

Shares

 

Carrying

Amount

 

Number of

Shares

 

Carrying

Amount

 

Balance, beginning of year

 

 

68,648,984

 

 

65,133

 

 

62,204,846

 

 

25,769

 

Initial public offering

 

 

11,000,000

 

 

189,518

 

 

 

 

 

Shares issued for assets

5,28

 

797,952

 

 

6,537

 

 

 

 

 

Other shares issuances

 

 

394,926

 

 

2,323

 

 

7,040,714

 

 

17,344

 

Shares issued to related parties

27

 

3,730,963

 

 

63,460

 

 

5,549,037

 

 

16,474

 

Share issuance costs

 

 

 

 

(12,770

)

 

 

 

(310

)

Business acquisitions

5

 

2,696,800

 

 

39,849

 

 

 

 

 

Convertible debt - conversions

14,15

 

13,108,676

 

 

113,526

 

 

 

 

 

Warrants exercised

19(c)

 

4,551,082

 

 

21,882

 

 

558,501

 

 

2,182

 

Shares issued for services

20

 

164,080

 

 

2,320

 

 

236,277

 

 

521

 

RSUs exercised

20(c)

 

57,960

 

 

195

 

 

 

 

 

Employee warrants exercised

20

 

2,029,000

 

 

17,681

 

 

2,875,310

 

 

3,980

 

Shares repurchased

27

 

 

 

 

 

(9,815,701

)

 

(827

)

Balance, end of year

 

 

107,180,423

 

 

509,654

 

 

68,648,984

 

 

65,133

 

F-30


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

On August 6, 2019, the Company closed its initial public offering of 11 million common shares at a price of US$13.00 per common share (Canadian equivalent of $17.23). Gross proceeds amounted to $189.5 million.

 

(c)

Common share purchase warrants

 

Number of Warrants

 

Carrying Amount

 

Balance at February 28, 2018

 

 

 

 

Fair value assigned to common share purchase warrants

 

4,211,904

 

 

3,108

 

Balance at December 31, 2018

 

4,211,904

 

 

3,108

 

40% Warrants reclassified from derivative liability (i) (note 13c)

 

957,225

 

 

4,122

 

60% Warrants reclassified from derivative liability (i) (note 13c)

 

1,495,665

 

 

11,969

 

Warrants issued to related parties (ii)

 

480,000

 

 

5,833

 

Warrants issued on conversion of convertible notes (iii)

 

3,572,274

 

 

6,731

 

Warrants exercised

 

(4,551,082

)

 

(3,931

)

Warrants expired

 

(662

)

 

(1

)

Balance at December 31, 2019

 

6,165,324

 

 

27,831

 

 

(i)

On August 1, 2019, the 40% and 60% warrants issued as part of the term debt financing (note 13c) and initially classified as derivative liabilities as at June 30, 2019, were reclassified to equity as the number of warrants issuable and the exercise price for each tranche of warrants became fixed in conjunction with the initial public offering date. The exercise price for the 40% and 60% warrants are $21.63 and $20.76 respectively.

 

(ii)

480,000 warrants with an exercise price of $15.94 were issued to a director of the Company in relation to the acquisition of the financial obligation (notes 17 and 27).

 

(iii)

Equity units issued upon conversion of CAD denominated convertible notes included 3,095,386 warrants with an exercise price of $4.38 and vested immediately. Equity units issued upon conversion of USD denominated notes included 476,888 warrants with an exercise price of USD$3.75 and vested immediately.

During the year ended December 31, 2019, a total of 4,551,082 warrants were exercised consisting of 4,211,242 warrants exercised at a price of $3.91 for gross proceeds of $16.5 million, 307,840 exercised for gross proceeds of $1.3 million of the warrants issued upon conversion of the CAD denominated convertible notes and 32,000 warrants exercised for gross proceeds of USD$120 thousand of the warrants issued upon conversion of the USD denominated convertible notes. 662 warrants expired unexercised in April 2019. The carrying value of the exercised warrants of $3.9 million was adjusted from warrants to share capital.

The following table summarizes outstanding warrants as at December 31, 2019:

 

Warrants outstanding and exercisable

 

Issued in relation to

Weighted average exercise price

 

Number of warrants

 

Weighted average

contractual life (years)

 

Convertible notes (USD)

USD 3.75

 

 

444,888

 

 

0.8

 

Convertible notes (CAD)

 

4.38

 

 

2,787,546

 

 

0.7

 

Acquisition of financial obligation

 

15.94

 

 

480,000

 

 

2.5

 

Term debt financing (60%)

 

20.76

 

 

1,495,665

 

 

2.6

 

Term debt financing (40%)

 

21.63

 

 

957,225

 

 

2.6

 

 

 

11.97

 

 

6,165,324

 

 

1.6

 

 

(d)

Contributed surplus

 

Year ended

December 31

 

Ten months ended

December 31

 

 

2019

 

2018

 

Balance, beginning of year

 

9,493

 

 

4,551

 

Share-based compensation

 

37,009

 

 

6,889

 

Warrants forfeited

 

 

 

(82

)

Warrants exercised

 

(16,310

)

 

(1,865

)

Balance, end of year

 

30,192

 

 

9,493

 

 

20.

Share-based compensation

The Company has a number of equity-settled share-based compensation plans which include simple and performance warrants, stock options, restricted share units (“RSUs”) and deferred share units (“DSUs”). Further detail on each of these plans is outlined below. Subsequent to the Company’s initial public offering, the Company established the stock option, RSU and DSU plans to replace the granting of simple warrants and performance warrants.

F-31


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

The components of share-based compensation expense are as follows:

 

Year ended

December 31

 

Ten months ended

December 31

 

Year ended

February 28

 

 

2019

 

2018

 

2018

 

Simple warrants (a)

 

24,741

 

 

5,029

 

 

1,086

 

Performance warrants (a)

 

11,023

 

 

1,860

 

 

3,465

 

Stock options (b)

 

101

 

 

 

 

 

Restricted share units (c)

 

220

 

 

 

 

 

Deferred share units (c)

 

1,119

 

 

 

 

 

Shares issued for services

 

2,320

 

 

521

 

 

25

 

 

 

39,524

 

 

7,410

 

 

4,576

 

In determining the amount of share-based compensation, the Company used the Black-Scholes option pricing model to estimate the fair value of units granted during the year ended December 31, 2019 and ten months ended December 31, 2018 through application of the following assumptions:

 

December 31, 2019

December 31,

2018

February 28,

2018

Risk-free interest rate

1.41% - 1.88%

1.65% - 2.05%

1.13%

Expected life of units (years)

2 - 10

0.5 – 14

2 – 8

Expected annualized volatility

97% - 116%

80% - 106%

80%

Expected dividend yield

Nil

Nil

Nil

Weighted average Black-Scholes value of each unit

$0.67 - $23.55

$1.76 - $3.81

$0.52 - $2.09

Volatility was estimated by using the historical volatility of peer companies that the Company considers comparable, which have trading and volatility history. The expected life in years represents the period of time that the units granted are expected to be outstanding. The risk-free rate was based on Government of Canada bond rates of comparable duration.

 

a)

Simple and performance warrants

The Company issued simple warrants and performance warrants to employees, directors and others at the discretion of the Board. Simple and performance warrants granted generally vest annually in thirds over a three-year period and expire five years after the grant date.

The following table summarizes changes in the simple and performance warrants during the year ended December 31, 2019:

 

 

Simple

warrants

outstanding

 

 

Weighted

average

exercise price

 

 

Performance

warrants

outstanding

 

 

Weighted

average

exercise price

 

Balance at December 31, 2018

 

 

6,129,866

 

 

$

1.80

 

 

 

7,094,822

 

 

$

2.04

 

Granted

 

 

4,795,200

 

 

 

6.32

 

 

 

723,200

 

 

 

12.23

 

Cancelled

 

 

(733,866

)

 

 

2.32

 

 

 

(366,400

)

 

 

1.21

 

Exercised

 

 

(376,200

)

 

 

0.85

 

 

 

(1,652,800

)

 

 

0.63

 

Balance at December 31, 2019

 

 

9,815,000

 

 

$

4.01

 

 

 

5,798,822

 

 

$

2.66

 

The following table summarizes changes in the simple and performance warrants during the ten months ended December 31, 2018:

F-32


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

 

 

Simple

warrants

outstanding

 

 

Weighted

average

exercise price

 

 

Performance

warrants

outstanding

 

 

Weighted

average

exercise price

 

Balance at February 28, 2018

 

 

2,904,000

 

 

$

0.82

 

 

 

8,125,334

 

 

$

1.39

 

Granted

 

 

3,535,200

 

 

 

2.61

 

 

 

2,188,800

 

 

 

2.48

 

Cancelled

 

 

(293,334

)

 

 

0.94

 

 

 

(360,002

)

 

 

 

Exercised

 

 

(16,000

)

 

 

0.63

 

 

 

(2,859,310

)

 

 

0.71

 

Balance at December 31, 2018

 

 

6,129,866

 

 

$

1.80

 

 

 

7,094,822

 

 

$

2.04

 

The following table summarizes changes in the simple and performance warrants during the year ended February 28, 2018:

 

 

Simple

warrants

outstanding

 

 

Weighted

average

exercise price

 

 

Performance

warrants

outstanding

 

 

Weighted

average

exercise price

 

Balance at February 28, 2017

 

 

 

 

$

 

 

 

 

 

$

 

Granted

 

 

2,904,000

 

 

 

0.82

 

 

 

8,125,334

 

 

 

1.39

 

Balance at February 28, 2018

 

 

2,904,000

 

 

$

0.82

 

 

 

8,125,334

 

 

$

1.39

 

The following table summarizes outstanding simple and performance warrants as at December 31, 2019:

 

 

Warrants outstanding

 

 

Warrants exercisable

 

Range of exercise prices

 

Number of

warrants

 

 

Weighted

average

exercise

price

 

 

Weighted

average

contractual

life (years)

 

 

Number of

warrants

 

 

Weighted

average

exercise

price

 

 

Weighted

average

contractual

life (years)

 

Simple warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.63 - $0.94

 

 

4,019,000

 

 

 

0.68

 

 

 

5.62

 

 

 

3,635,000

 

 

 

0.68

 

 

 

5.62

 

$1.25 - $1.88

 

 

560,000

 

 

 

1.50

 

 

 

10.18

 

 

 

560,000

 

 

 

1.50

 

 

 

10.18

 

$2.97 - $4.53

 

 

1,232,000

 

 

 

3.18

 

 

 

5.62

 

 

 

848,000

 

 

 

3.10

 

 

 

5.11

 

$6.25 - $9.38

 

 

3,462,400

 

 

 

6.37

 

 

 

4.50

 

 

 

80,000

 

 

 

6.25

 

 

 

4.44

 

$12.50 - $37.50

 

 

541,600

 

 

 

18.08

 

 

 

7.87

 

 

 

9,600

 

 

 

21.88

 

 

 

9.05

 

 

 

 

9,815,000

 

 

$

4.01

 

 

 

5.61

 

 

 

5,132,600

 

 

$

1.29

 

 

 

6.02

 

Performance warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.63 - $0.94

 

 

3,700,690

 

 

 

0.64

 

 

n/a

 

 

 

3,546,022

 

 

 

0.64

 

 

n/a

 

$1.25 - $1.88

 

 

646,933

 

 

 

1.52

 

 

n/a

 

 

 

381,334

 

 

 

1.48

 

 

n/a

 

$2.97 - $4.53

 

 

788,000

 

 

 

3.09

 

 

n/a

 

 

 

490,666

 

 

 

3.08

 

 

n/a

 

$6.25 - $9.38

 

 

362,933

 

 

 

6.97

 

 

n/a

 

 

 

38,400

 

 

 

6.25

 

 

n/a

 

$12.50 - $37.50

 

 

300,266

 

 

 

23.72

 

 

n/a

 

 

 

 

 

 

 

 

n/a

 

 

 

 

5,798,822

 

 

$

2.66

 

 

n/a

 

 

 

4,456,422

 

 

$

1.02

 

 

n/a

 

F-33


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

The following table summarizes outstanding simple and performance warrants as at December 31, 2018:

 

 

Warrants outstanding

 

 

Warrants exercisable

 

Range of exercise prices

 

Number of

warrants

 

 

Weighted

average

exercise

price

 

 

Weighted

average

contractual

life (years)

 

 

Number of

warrants

 

 

Weighted

average

exercise

price

 

 

Weighted

average

contractual

life (years)

 

Simple warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.63 - $0.94

 

 

3,629,866

 

 

 

0.73

 

 

 

5.46

 

 

 

1,765,331

 

 

 

0.73

 

 

 

5.46

 

$1.25 - $1.88

 

 

880,000

 

 

 

1.52

 

 

 

11.25

 

 

 

 

 

 

 

 

 

 

$2.97 - $4.53

 

 

1,331,200

 

 

 

3.24

 

 

 

6.78

 

 

 

328,000

 

 

 

2.97

 

 

 

6.59

 

$6.25 - $9.38

 

 

190,400

 

 

 

7.16

 

 

 

5.20

 

 

 

80,000

 

 

 

6.25

 

 

 

4.00

 

$12.50 - $15.63

 

 

98,400

 

 

 

13.87

 

 

 

9.46

 

 

 

 

 

 

 

 

 

 

 

 

 

6,129,866

 

 

$

1.80

 

 

 

6.63

 

 

 

2,173,331

 

 

$

1.28

 

 

 

5.58

 

Performance warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.63 - $1.25

 

 

4,053,222

 

 

 

0.68

 

 

n/a

 

 

 

1,924,690

 

 

 

0.64

 

 

n/a

 

$1.56 - $3.13

 

 

1,221,600

 

 

 

2.50

 

 

n/a

 

 

 

120,000

 

 

 

2.97

 

 

n/a

 

$3.75 - $5.00

 

 

1,640,000

 

 

 

4.36

 

 

n/a

 

 

 

 

 

 

 

 

n/a

 

$6.25 - $21.88

 

 

180,000

 

 

 

8.33

 

 

n/a

 

 

 

 

 

 

 

 

n/a

 

 

 

 

7,094,822

 

 

$

2.04

 

 

n/a

 

 

 

2,044,690

 

 

$

0.78

 

 

n/a

 

The following table summarizes outstanding simple and performance warrants as at February 28, 2018:

 

 

Warrants outstanding

 

 

Warrants exercisable

 

Range of exercise prices

 

Number of

warrants

 

 

Weighted

average

exercise

price

 

 

Weighted

average

contractual

life (years)

 

 

Number of

warrants

 

 

Weighted

average

exercise

price

 

 

Weighted

average

contractual

life (years)

 

Simple warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.63

 

 

2,096,000

 

 

 

 

 

 

 

5.26

 

 

 

350,400

 

 

 

 

 

 

 

5.26

 

$0.94

 

 

696,000

 

 

 

 

 

 

 

6.79

 

 

 

 

 

 

 

 

 

 

 

$1.25

 

 

112,000

 

 

 

 

 

 

 

7.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,904,000

 

 

$

0.82

 

 

 

6.20

 

 

 

350,400

 

 

$

0.63

 

 

 

5.26

 

Performance warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.63

 

 

5,853,333

 

 

 

 

 

 

n/a

 

 

 

3,432,000

 

 

 

 

 

 

n/a

 

$0.94

 

 

210,667

 

 

 

 

 

 

n/a

 

 

 

 

 

 

 

 

 

n/a

 

$1.25

 

 

210,667

 

 

 

 

 

 

n/a

 

 

 

 

 

 

 

 

 

n/a

 

$1.56 - $1.88

 

 

250,667

 

 

 

 

 

 

n/a

 

 

 

 

 

 

 

 

 

n/a

 

$3.75 - $5.00

 

 

1,600,000

 

 

 

 

 

 

n/a

 

 

 

 

 

 

 

 

 

n/a

 

 

 

 

8,125,334

 

 

$

1.39

 

 

n/a

 

 

 

3,432,000

 

 

$

0.63

 

 

n/a

 

During the year ended December 31, 2019, the Company granted 4,795,200 simple warrants with an average exercise price of $6.32 (ten months ended December 31, 2018 – 3,535,200 simple warrants with an average exercise price of $2.61, year ended February 28, 2018 – 2,904,000 simple warrants with an average exercise price of $0.82) and 723,200 performance warrants with an average exercise price of $12.23 (ten months ended December 31, 2018 – 2,188,800 performance warrants with an average exercise price of $2.48, year ended February 28, 2018 – 8,125,334 performance warrants with an average exercise price of $1.39).

During year ended December 31, 2019, 376,200 simple warrants were exercised at a weighted average price of $0.85 (ten months ended December 31, 2018 – 16,000 simple warrants were exercised at a weighted average price of $0.63, year ended February 28, 2018 - nil) and 1,652,800 performance warrants were exercised at a weighted average price of $0.63 (ten months ended December 31, 2018 – 2,859,310 performance warrants were exercised at a weighted average price of $0.71, year ended February 28, 2018 - nil). As a result of the warrant exercises, a total of $16.3 million was transferred from contributed surplus to share capital.

F-34


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

 

b)

Stock options

The Company issues stock options to employees, directors and others at the discretion of the Board. Stock options granted generally vest annually in thirds over a three-year period and expire ten years after the grant date.

 

The following table summarizes changes in the stock options during the year ended December 31, 2019:

 

 

Stock options outstanding

 

 

Weighted

average

exercise price

 

Balance at December 31, 2018

 

 

 

 

$

 

Granted

 

 

623,850

 

 

 

4.33

 

Balance at December 31, 2019

 

 

623,850

 

 

$

4.33

 

The following table summarizes outstanding stock options as at December 31, 2019:

 

 

Stock options outstanding

 

 

Stock options exercisable

 

Range of exercise prices

 

Number of

options

 

 

Weighted

average

exercise

price

 

 

Weighted

average

contractual

life (years)

 

 

Number of

options

 

 

Weighted

average

exercise

price

 

 

Weighted

average

contractual

life (years)

 

$3.12 - $5.80

 

 

373,850

 

 

 

3.12

 

 

 

9.21

 

 

 

22,500

 

 

 

3.12

 

 

 

4.97

 

$5.81 - $5.86

 

 

250,000

 

 

 

5.86

 

 

 

6.37

 

 

 

 

 

 

 

 

 

 

 

 

 

623,850

 

 

$

4.33

 

 

 

7.97

 

 

 

22,500

 

 

$

3.12

 

 

 

4.97

 

During the year ended December 31, 2019, the Company granted 623,850 stock options with an average exercise price of $4.33.

 

c)

Restricted and deferred share units

RSUs are granted to employees and the vesting requirements and maximum term are at the discretion of the Board. DSUs are granted to directors and generally vest in equal quarterly instalments over a one year. RSUs and DSUs are exchangeable for an equal number of common shares.

The following table summarizes changes in the RSUs and DSUs as at December 31, 2019:

 

 

RSUs

outstanding

 

 

DSUs

outstanding

 

Balance at December 31, 2018

 

 

 

 

 

 

Granted

 

 

107,543

 

 

 

378,080

 

Cancelled

 

 

(700

)

 

 

(7,617

)

Settled

 

 

 

 

 

(2,539

)

Exercised

 

 

(57,960

)

 

 

 

Balance at December 31, 2019

 

 

48,883

 

 

 

367,924

 

 

21.

Revenue

The Company’s revenue is solely from contracts with customers and is comprised of revenue from the sale of cannabis and ornamental flowers. Cannabis revenue is comprised of sales to Provincial boards that sell cannabis through their respective distribution models, sales to licensed producers for further processing, and sales to medical customers. Ornamental flower revenue is comprised of sales of ornamental flowers and herbs to customers.

F-35


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

 

Year ended

December 31

 

Ten months ended

December 31

 

Year ended

February 28

 

 

2019

 

2018

 

2018

 

Cannabis revenue

 

 

 

 

 

 

 

 

 

Provincial boards

 

13,386

 

 

 

 

 

Medical

 

24

 

 

 

 

 

Licensed producers

 

53,517

 

 

 

 

 

Cannabis revenue

 

66,927

 

 

 

 

 

Ornamental flower revenue

 

12,298

 

 

 

 

 

Gross revenue

 

79,225

 

 

 

 

 

 

(1)

The Company had four major customers each with revenue in excess of 10% of total cannabis revenue. Sales to major customers totaled $40.7 million for the year ended December 31, 2019 (2018 - $nil).

 

(2)

Cannabis revenue recognized during the year ended December 31, 2019 is attributed to Canada and Ornamental flower revenue for the year ended December 31, 2019 is attributed to the United Kingdom.

The Company has recognized the following receivables from contracts with customers:

 

December 31, 2019

 

December 31, 2018

 

February 28,

2018

 

Receivables, included in 'trade receivables' (note 7)

 

24,684

 

 

209

 

 

 

Receivables from contracts with customers are typically settled within 30 days. As at December 31, 2019, an impairment loss of $0.6 million has been recognized on receivables from contracts with customers (note 26).

22.

Other operating expenses

 

a)

General and administrative expense

 

Year ended

December 31

 

Ten months ended

December 31

 

Year ended

February 28

 

 

2019

 

2018

 

2018

 

Salaries and wages

 

17,527

 

 

3,847

 

 

859

 

Consulting fees

 

6,896

 

 

1,647

 

 

828

 

Office and general

 

10,599

 

 

1,738

 

 

495

 

Professional fees

 

5,419

 

 

877

 

 

673

 

Director fees

 

188

 

 

30

 

 

60

 

Other

 

3,820

 

 

170

 

 

229

 

 

 

44,449

 

 

8,309

 

 

3,144

 

 

b)

Sales and marketing expense

 

Year ended

December 31

 

Ten months ended

December 31

 

Year ended

February 28

 

 

2019

 

2018

 

2018

 

Marketing

 

3,913

 

 

1,733

 

 

1,176

 

Events

 

2,961

 

 

 

 

 

Research

 

199

 

 

24

 

 

 

Media

 

1,815

 

 

623

 

 

98

 

 

 

8,888

 

 

2,380

 

 

1,274

 

 

F-36


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

23.

Finance expense

 

Year ended

December 31

 

Ten months ended

December 31

 

Year ended

February 28

 

 

2019

 

2018

 

2018

 

Cash finance expense

 

 

 

 

 

 

 

 

 

Interest on Syndicated Credit Agreement

 

1,746

 

 

 

 

 

Interest on Credit Facilities

 

1,818

 

 

437

 

 

 

Interest on Term Debt Facility

 

5,714

 

 

 

 

 

Interest on Senior Convertible Notes

 

375

 

 

 

 

 

Interest on Convertible Notes

 

2,574

 

 

421

 

 

 

Interest on other debt

 

1,651

 

 

1,659

 

 

 

Other finance costs

 

2,659

 

 

399

 

 

75

 

 

 

16,537

 

 

2,916

 

 

75

 

Non-cash finance expense

 

 

 

 

 

 

 

 

 

Accretion

 

6,696

 

 

594

 

 

 

Amortization of debt issue costs

 

1,730

 

 

172

 

 

 

Interest on Senior Convertible Notes

 

1,903

 

 

 

 

 

Loss on derivative liabilities

 

1,649

 

 

 

 

 

Loss on extinguishment of debt issue costs

 

488

 

 

 

 

 

Other

 

475

 

 

151

 

 

 

 

 

12,941

 

 

917

 

 

 

Less: interest capitalized relating to CIP (note 10)

 

(1,280

)

 

(2,036

)

 

 

 

 

28,198

 

 

1,797

 

 

75

 

 

24.

Supplemental cash flow disclosures

 

 

Year ended

December 31

 

Ten months ended

December 31

 

Year ended

February 28

 

 

2019

 

2018

 

2018

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(15,267

)

 

(2,469

)

 

118

 

Biological assets

 

18,659

 

 

(2,102

)

 

 

Inventory

 

(57,985

)

 

(923

)

 

 

Prepaid expenses and deposits

 

(7,213

)

 

1,072

 

 

(3,726

)

Accounts payable and accrued liabilities

 

18,476

 

 

14,421

 

 

4,823

 

Convertible notes

 

(152

)

 

 

 

 

Deferred tax

 

(115

)

 

 

 

 

Contingent consideration

 

(582

)

 

 

 

 

Finance leases

 

 

 

107

 

 

 

 

 

(44,179

)

 

10,106

 

 

1,215

 

 

 

 

 

 

 

 

 

 

 

Changes in non-cash working capital relating to:

 

 

 

 

 

 

 

 

 

Operating

 

(47,403

)

 

1,217

 

 

910

 

Investing

 

1,077

 

 

10,282

 

 

(2,121

)

Financing

 

2,147

 

 

(1,393

)

 

2,426

 

 

 

(44,179

)

 

10,106

 

 

1,215

 

 

 

 

 

 

 

 

 

 

 

Cash interest paid

 

13,753

 

 

919

 

 

 

 

F-37


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

The following table reconciles long-term debt to cash flows arising from financing activities:

 

 

 

Long-term debt(1)

 

Balance at February 28, 2017

 

 

 

Cash changes:

 

 

 

 

Proceeds from Note Agreement

 

 

7,000

 

Balance at February 28, 2018

 

 

7,000

 

Cash changes:

 

 

 

 

Proceeds from Credit Facilities

 

 

32,159

 

Proceeds from other debt instruments

 

 

8,546

 

Non-cash changes:

 

 

 

 

Promissory Note issued to repurchase shares

 

 

6,931

 

Balance at December 31, 2018 (note 13)

 

 

54,636

 

Cash changes:

 

 

 

 

Proceeds from Syndicated Credit Agreement, net of costs

 

 

82,687

 

Repayment of Credit Facilities

 

 

(32,871

)

Proceeds from Term Debt Facility, net of costs

 

 

105,539

 

Repayment of other debt instruments

 

 

(56,173

)

Debt acquired through acquisitions

 

 

33,618

 

Non-cash changes:

 

 

 

 

Accretion

 

 

3,030

 

Amortization of debt issue costs

 

 

892

 

Extinguishment of debt issue costs

 

 

488

 

Reclassification to derivative liability

 

 

(13,933

)

Balance at December 31, 2019 (note 13)

 

 

177,913

 

(1)Long-term debt, including the current portion of long-term debt

 

25.

Loss per share

 

 

Year ended

December 31

 

 

Ten months ended

December 31

 

 

Year ended

February 28

 

 

 

2019

 

 

2018

 

 

2018

 

Net loss

 

 

(271,629

)

 

 

(56,526

)

 

 

(12,995

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding (000s)

 

 

 

 

 

 

 

 

 

 

 

 

Basic and dilutive (1)

 

 

85,750

 

 

 

69,203

 

 

 

56,922

 

Loss per share – basic and dilutive

 

$

(3.17

)

 

$

(0.82

)

 

$

(0.23

)

 

(1)

For the year ended December 31, 2019, there were 6.2 million warrants exercisable, 5.1 million simple warrants exercisable and 4.5 million performance warrants exercisable that were excluded from the calculation as the impact was anti-dilutive (ten months ended December 31, 2018 – 2.2 million simple warrants and 2.0 million performance warrants, year ended February 28, 2018 – 0.4 million simple warrants and 3.4 million performance warrants).

26.

Financial instruments

The financial instruments recognized on the consolidated statement of financial position are comprised of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, long-term debt, convertible notes and contingent consideration.

 

(a)

Fair value

The carrying value of cash and cash equivalents, restricted cash, accounts receivable and accounts payable and accrued liabilities approximate the fair value of the respective assets and liabilities due to the short-term nature of those instruments.

F-38


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

Fair value measurements of long-term debt, convertible notes and contingent consideration are as follows:

 

 

 

 

Fair value measurements using

 

December 31, 2019

Carrying

amount

 

Level 1

 

Level 2

 

Level 3

 

Recurring measurements:

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

177,913

 

 

 

 

177,913

 

 

 

Contingent consideration

 

32,501

 

 

 

 

 

 

32,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements using

 

December 31, 2018

Carrying

amount

 

Level 1

 

Level 2

 

Level 3

 

Recurring measurements:

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

54,636

 

 

 

 

54,636

 

 

 

Convertible Notes

 

25,449

 

 

 

 

25,449

 

 

 

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

As at December 31, 2019, the Company did not have any financial instruments measured at Level 1 fair value.

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

The fair value of long-term debt approximates it carrying value as it bears a floating rate of interest (Syndicated Credit Agreement) and interest at a fixed rate of 9.75% which approximates a market rate for comparable transactions (Term Debt Facility).

The convertible notes bear interest at a fixed rate of 12%, however the carrying value has been determined using an interest rate of 18% which approximates a market rate for comparable financing transactions.

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

Contingent consideration classified as liabilities as part of the consideration paid for Bridge Farm (note 5a) is a Level 3 financial liability that is re-measured each reporting period. Contingent consideration was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in these calculations include expected future share price, discount rate and various probability factors. The settlement of contingent consideration could differ from current estimated based on the actual results of these financial measures.

 

At December 31, 2019, a US$0.50 change in the expected future share price would change the earn out share portion of the contingent consideration by approximately $1.5 million and would change the additional share portion of the contingent consideration by approximately $1.9 million.

 

There were no transfers between levels 1, 2 and 3 inputs during the period.

F-39


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

 

(b)

Interest rate risk management

The Company is exposed to interest rate risk in that changes in market interest rates will cause fluctuations in the fair value of future cash flows. The Company is exposed to interest rate risk through its Syndicated Credit Agreement which has a variable interest rate. The Company was exposed to interest rate risk through its Credit Facilities which had a variable interest rate and were repaid in full during 2019. For the year ended December 31, 2019, a 1% increase in the prime interest rate would result in additional interest expense of $0.6 million (2018 - $47 thousand).

 

(c)

Credit risk management

Credit risk is the risk of financial loss if the counterparty to a financial transaction fails to meet its obligations. The Company manages risk over its accounts receivable by issuing credit only to credit worthy counterparties. The Company considers financial instruments to have low credit risk when its credit risk rating is equivalent to investment grade. The Company assumes that the credit risk on a financial asset has increased significantly if it is outstanding past the contractual payment terms. The Company considers a financial asset to be in default when the debtor is unlikely to pay its credit obligations to the Company.

The Company applies the simplified approach under IFRS 9 and has calculated ECLs based on lifetime expected credit losses, taking into consideration historical credit loss experience and financial factors specific to the debtors and general economic conditions.

Impairment losses on accounts receivable recognized in profit or loss were as follows:

 

 

December 31, 2019

 

Impairment loss on trade receivables

 

 

582

 

Impairment loss on other receivables

 

 

170

 

 

 

 

752

 

The movement in the allowance for impairment in respect of accounts receivable during the year was as follows:

 

 

December 31, 2019

 

Balance, beginning of year

 

 

 

Loss allowance for accounts receivable

 

 

752

 

Balance, end of year

 

 

752

 

The maximum amount of the Company’s credit risk exposure is the carrying amounts of cash and cash equivalents and accounts receivable. The Company attempts to mitigate such exposure to its cash by investing only in financial institutions with investment grade credit ratings.

During 2019, four customers of the Company accounted for more than 10% each of total revenue.

 

(d)

Foreign currency risk management

The Company is exposed to risks arising from fluctuations in currency exchange rates between the Canadian dollar, Pound Sterling and United States dollar. At December 31, 2019, the Company’s primary currency exposure related to the Pound Sterling (“GBP”) and United States dollar (“USD”) balances. The following table summarizes the Company’s foreign currency exchange risk for each of the currencies indicated:

As at December 31, 2019

GBP

 

USD

 

Cash and cash equivalents

 

1,418

 

 

22,088

 

Accounts receivable

 

3,071

 

 

 

Accounts payable and accrued liabilities

 

(6,254

)

 

(2,150

)

Net foreign exchange exposure

 

(1,765

)

 

19,938

 

Translation to CAD

 

1.7174

 

 

1.2988

 

CAD equivalent at period end exchange rate

 

(3,031

)

 

25,895

 

 

 

 

 

 

 

 

As at December 31, 2018

GBP

 

USD

 

Cash and cash equivalents

 

 

 

3,148

 

Accounts receivable

 

 

 

 

Accounts payable and accrued liabilities

 

 

 

 

Net foreign exchange exposure

 

 

 

3,148

 

Translation to CAD

 

1.7439

 

 

1.3642

 

CAD equivalent at period end exchange rate

 

 

 

4,295

 

F-40


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

Based on the net foreign exchange exposure at the end of the year, if these currencies had strengthened or weakened by 10% compared to the Canadian dollar and all other variables were held constant, the after-tax earnings would have decreased or increased by approximately the following amounts:

 

Year ended

December 31

 

Ten months ended

December 31

 

Pound sterling (GBP)

 

(303

)

 

 

United States dollar (USD)

 

2,590

 

 

429

 

Impact on profit (loss)

 

2,287

 

 

429

 

 

(e)

Liquidity risk management

Liquidity risk is the risk that the Company cannot meet its financial obligations when due. The Company manages liquidity risk by monitoring operating and growth requirements. Management believes its current capital resources and its ability to manage cash flow and working capital levels will require the Company to seek future additional financing to allow it to meet its obligations, to make debt service requirements, and to fund the other needs of its business. However, no assurance can be given that future sources of capital will be available. The ability of the Company to continue as a going concern is dependent on raising capital to fund its business plan and ultimately to attain profitable operations. Any delay or failure to complete any additional financing would have a significant negative impact on the Company’s business, results of operations and financial condition, and the Company may be forced to reduce or cease its operations or seek relief under applicable bankruptcy laws.

The timing of expected cash outflows relating to financial liabilities at December 31, 2019 is as follows:

 

Less than

one year

 

One to three

years

 

Three to five

years

 

Thereafter

 

Total

 

Accounts payable and accrued liabilities

 

58,110

 

 

 

 

 

 

 

 

58,110

 

Syndicated Credit Agreement (1)

 

84,000

 

 

 

 

 

 

 

 

84,000

 

Term Debt Facility (1)

 

115,000

 

 

 

 

 

 

 

 

115,000

 

Deferred consideration

 

32,501

 

 

 

 

 

 

 

 

32,501

 

Lease obligations

 

722

 

 

1,902

 

 

683

 

 

13,642

 

 

16,949

 

Balance, end of period

 

290,333

 

 

1,902

 

 

683

 

 

13,642

 

 

306,560

 

 

(1)

At face value, excludes interest

 

(2)

The Syndicated Credit Agreement and Term Debt Facility have been classified as current in the statement of financial position, see note 13

27.

Related Party Transactions

 

a)

Related party transactions and balances

The Company has outstanding amounts receivable from and payable to related parties, including employees, directors and corporations related to those individuals. As at December 31, 2019, the Company was owed $0.2 million (December 31, 2018 - $0.5 million) from related parties and owed $1.0 million (December 31, 2018 - $0.8 million) to related parties.

The amounts owing from related parties are both interest bearing and non-interest bearing and have various repayment terms.

Loan Receivable Agreements

On April 6, 2018, the Company issued 40,000 common shares to an officer of the Company at a fair value of $2.97, in accordance with an employment agreement. On April 6, 2018, the Company and this officer also entered into a shareholder loan agreement that provides a loan facility of up to $510 thousand to the officer. The loan bore interest at a rate of 2.5% per annum, had a term of three years, and was secured against the officer’s shareholdings in the Company. The loan was repayable in full upon the officer’s departure, a change of control of the Company or sale of the Company. As at December 31, 2018, $245 thousand had been advanced under this shareholder loan agreement. In July 2019, the loan was extinguished against performance bonuses declared in the form of salary compensation such that no amount remains outstanding under the shareholder loan agreement.

The Company has entered into separate shareholder loan agreements with two (December 31, 2018 – three) employees of the Company. The loans bear interest at rates ranging from 0-1.5% per annum and are secured by the employees’ shareholdings in the Company. The loans are each repayable in full upon an employees’ departure from

F-41


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

employment, a change of control of the Company or sale of the Company. As at December 31, 2019, $200 thousand (December 31, 2018 - $190 thousand), had been advanced under these loan agreements.

On February 15, 2018, the Company and an officer entered into a shareholder loan agreement that provides for a loan of up to $200 thousand per year. The loan bore interest at a rate of 2.5% per annum and was secured by the officer’s shareholdings in the Company. The loan was repayable in full upon the officer’s departure, a change of control of the Company or sale of the Company. During 2019, $400 thousand was advanced under this loan agreement. In July 2019, the loan was extinguished against performance bonuses declared in the form of salary compensation such that no amount remains outstanding under the shareholder loan agreement.

Promissory note

During the ten months ended December 31, 2018, the Company entered into an agreement with a former officer of the Company to repurchase a total of 9,815,701 common shares at a weighted average price of $1.69 per common share for total consideration of $16.6 million. A balance of $6.9 million remained unpaid under the agreement and was converted to an Unsecured Subordinated Promissory Note (the “Promissory Note”) as described under note 13(g). The Promissory Note matured on March 25, 2019 but was extended in accordance with the terms of the Note. The balance of $6.9 million outstanding included principal and interest which accrued from the date of extension at a rate of 1% per month and was repaid in full on June 5, 2019.

Transactions

Marketing, brand research and development and promotional costs totalling $3.1 million for the year ended December 31, 2019, (ten months ended December 31, 2018 - $2.3 million, year ended February 28, 2018 - $1.0 million) were paid to a company controlled by a shareholder, officer and director of the Company. At December 31, 2019, the Company owed a balance of $0.3 million (December 31, 2018 - $0.3 million) relating to services under this contract.

Land lease costs related to our Bridge Farm operations, at an annual amount of £600,000, were paid to a family member of a former executive officer.

Consulting services were provided to the Company by an officer, including services related to private placements completed. For the year ended December 31, 2019, consulting and commission expenses totalled nil (ten months ended December 31, 2018 - $1.5 thousand, year ended February 28, 2018 - $399.3 thousand).

The Company has two contracts with companies in which an officer (who is not considered a member of key management) of the Company maintains influence. The contracts relate to research and development services being provided to the Company and its ability to access and license certain strains of cannabis for research purposes. For the year ended December 31, 2019, the fees paid totaled $334.5 thousand (ten months ended December 31, 2018 - $229.4 thousand, year ended February 28, 2018 - $97.6 thousand). At December 31, 2019, the Company owed a balance of $60 thousand (December 31, 2018 - $19 thousand) relating to services under these contracts.

A member of the Board of Directors is a partner at a law firm which provides legal services to the Company. For the year ended December 31, 2019, professional fees totalling $3.9 million (ten months ended December 31, 2018 - $0.6 million, year ended February 28, 2018 - $0.2 million) were incurred for services provided by this firm. At December 31, 2019, the Company owed $0.4 million (December 31, 2018 - $0.3 million) relating to various corporate matters and financings.

During the year ended December 31, 2019, the Company entered into an agreement with an employee to acquire certain equipment for $0.9 million.

During the ten months ended December 31, 2018, the Company forgave $5 thousand in debt owed by a former officer of the Company.

During the ten months ended December 31, 2018, a now former officer of Sundial was paid $7 thousand with respect to accommodations for staff housing (year ended February 28, 2018 - $6 thousand). Included in the asset impairment for the year ended February 28, 2018, was $75 thousand related to farm and shop equipment that was previously purchased from the same officer.

During the ten months ended December 31, 2018, a now former member of the Board of Directors provided consulting services to the Company for which she was paid nil (year ended February 28, 2018 - $29.6 thousand). In addition, director fees of nil and $60.0 thousand were paid during the respective periods. The Company also forgave $20.0 thousand in debt owed by this former member of the Board of Directors. This director resigned from the Board effective January 15, 2018.

All transactions were conducted at the exchange amount agreed to between related parties.

F-42


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

 

b)

Compensation of key management personnel

The Company considers directors and officers of the Company as key management personnel.

 

Year ended

December 31

 

Ten months ended December 31

 

Year ended

February 28

 

 

2019

 

2018

 

2018

 

Salaries and short-term benefits

 

3,295

 

 

1,237

 

 

320

 

Share-based compensation

 

23,715

 

 

2,414

 

 

4,173

 

 

 

27,010

 

 

3,651

 

 

4,493

 

As at December 31, 2019, $nil (December 31, 2018 - $367 thousand) was owed to the Company from key management personnel.

28.

Capital management

The Company defines its capital as its shareholder’s equity and debt. Except as otherwise disclosed in these consolidated financial statements, there are no restrictions on the Company’s capital. The Company’s objectives with respect to the management of capital are to:

 

Maintain financial flexibility in order to preserve its ability to meet financial obligations;

 

Deploy capital to provide an appropriate investment return to its shareholders; and,

 

Maintain a capital structure that allows various financing alternatives to the Company as required.

The Company is an early-stage company and has accumulated significant losses. Furthermore, the Company and certain of its subsidiaries have a limited operating history and a history of negative cash flow from operating activities. During the year ended December 31, 2019, the Company sourced the capital and liquidity to advance its strategic growth initiatives by way of the following capital transactions:

 

Completed an initial public offering of 11 million common shares for gross proceeds of $189.5 million (note 19b);

 

Entered a $115 million Term Debt Facility (note 13c) to fund the acquisition of Bridge Farm (note 5a), repay Bridge Farm debt and fund capital expenditures in the UK;

 

Issued $93.2 million of Senior Convertible Notes which were converted into common shares following the initial public offering (note 14);

 

Converted $21.2 million and USD$2.5 million principal number of convertible notes into equity units consisting of 6.2 million common shares and 3.6 million warrants (note 19) and;

 

Entered into a new $90 million Syndicated Credit Agreement whereby a portion of the proceeds were used to repay all amounts outstanding under the Credit Facilities (note 13).

As disclosed in note 1, the Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital, continued support from its lenders, its ability to successfully obtain or maintain licenses to produce and sell cannabis, its ability to achieve sustainable revenues and profitable operations and, in the meantime, its ability to obtain the necessary financing to meet its obligations and repay its liabilities when they become due.

29.

Commitments and contingencies

 

(a)

Commitments

The Company has entered into certain supply agreements to provide dried cannabis and cannabis products to third parties. The contracts require the provision of various amounts of dried cannabis on or before certain dates. Should the Company not deliver the product in the agreed timeframe, financial penalties apply which may be paid either in product in-kind or cash. Under these agreements, the Company has accrued financial penalties payable as at December 31, 2019 of $1.5 million (December 31, 2018 - $3.3 million).

Commitments related to the license agreement with Pathway and Sun 8 have been disclosed in note 5(c) and note 11 respectively.

Under employment agreements with certain management personnel, the Company has commitments to those management personnel in the event of termination of employment.

F-43


Sundial Growers Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2019

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

 

 

 

(b)

Contingencies

From time to time, the Company is involved in various claims and legal actions which occurred in the ordinary course of operations, the losses from which, if any, are not anticipated to be material to the financial statements.

30.

Subsequent events

The global impact of Covid-19 has resulted in significant declines in global stock markets and has contributed to a great deal  of uncertainty as to the health of the global economy over the next 12 to 18 months. The Company has at least one employee at Bridge Farm who has tested positive for the COVID-19 virus and is being attended to by health professionals. Although we do not expect to close the Bridge Farm facilities, we have taken additional precautions and plan to reduce operations at Bridge Farm starting April 1, 2020. There can be no guarantee that we will not have to suspend operations at Bridge Farm for a significant period of time

The impact of COVID-19 is likely to have a negative impact on the Company’s ability to raise financing in the near future or on terms favourable to the Company (see Note 1). The potential impact that Covid-19 will have on the Company’s business or financial results cannot be reasonably estimated at this time. However, any shutdowns requested or mandated by government authorities in response to the outbreak of COVID-19 that may affect the Company, its suppliers, distribution channels or customers may have a material impact to the Company’s planned operations.

 

F-44

 

Exhibit 2.4

DESCRIPTION OF SECURITIES REGISTERED UNDER SECTION 12 OF THE EXCHANGE ACT

Sundial Growers Inc. (“Sundial” or the “Company”) has the following securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Exchange Act”):

Title of each class

     

Trading symbol

     

Name of each exchange on which registered

Common Shares

 

SNDL

 

The NASDAQ Global Select Market

 

This exhibit contains a description of the rights of the holders of common shares. The following summary is subject to and qualified in its entirety by Sundial’s articles of incorporation (the “Articles of Incorporation”), bylaws (the “Bylaws”) and by applicable Alberta and Canadian law, particularly the Business Corporations Act (Alberta) (the “ABCA”). This is not a summary of all the significant provisions of the Articles of Incorporation, Bylaws or of Alberta or Canadian law and does not purport to be complete. Capitalized terms used but not defined herein have the meanings given to them in the Company’s annual report on Form 20-F to which this description of securities registered under section 12 of the Exchange Act (the “Description of Securities”) is an exhibit.

 

Item 9. General

Item 9.A.3 Pre-emptive rights

The Articles of Incorporation permit the issuance of an unlimited number of common shares, and shareholders have no pre-emptive rights in connection with such further issuance.

Item 9.A.5 Type and class of securities

The Company is authorized to issue an unlimited number of common shares, no par value. All common shares are issued in registered form.

Item 9.A.6 Limitations or qualifications

Not applicable.

Item 9.A.7 Other rights

Not applicable.

Item 10.B Memorandum and articles of association

Item 10.B.3 Shareholder rights

Dividends

The holders of common shares are entitled to receive any dividend declared by the Company on the common shares, provided that Sundial shall be entitled to declare dividends on any other classes of shares without being obliged to declare dividends on the common shares.

 


 

Sundial is authorized to issue an unlimited number of preferred shares, issuable in series, none of which are issued and outstanding as of the date hereof. With respect to the payment of dividends, Sundial’s preferred shares, if issued, would be entitled to preference over the common shares.

Voting Rights

The holders of common shares are entitled to attend and vote at all meetings of the shareholders of the Company.

Rights Upon Dissolution

Subject to the rights, privileges, restrictions and conditions attaching to any other class of Sundial’s shares, the holders of the common shares are entitled to share equally in such of the Company’s property as is distributable to the holders of common shares. With respect to the distribution of assets or the return of capital in the event of liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, any preferred shares, if issued, would be entitled to preference over the common shares.

 

Item 10.B.4 Changes to shareholder rights

Action Necessary to Change the Rights of Shareholders

Sundial’s shareholders can authorize the alteration or amendment of the Articles of Incorporation to create or vary the rights, privileges, restrictions and conditions attached to any of Sundial’s shares by passing a special resolution. However, the rights, privileges, restrictions and conditions attached to any class or series of shares may not be amended unless the shareholders holding shares of that class or series to which the right or special right is attached consent by a separate special resolution (subject to certain exceptions for separate class votes). A special resolution means a resolution passed by: (a) a majority of not less than two thirds of the votes cast by the applicable class or series of shareholders who vote in person or by proxy at a meeting, or (b) a resolution consented to in writing by all of the shareholders entitled to vote holding the applicable class or series of shares.

Amendments to the Bylaws

Sundial’s board of directors may make, amend or repeal any bylaw that regulates the business or affairs of the Company. If the directors make, amend or repeal a by-law, they are required under the ABCA to submit such action to the shareholders at the next meeting of shareholders and the shareholders may confirm, reject or amend the action by an ordinary resolution. If the action is rejected by the shareholders or if the directors do not submit the action to shareholders at the next shareholder meeting, the action will cease to be effective and no subsequent resolution of the directors to make, amend or repeal a by-law that has substantially the same purpose or effect will be effective until it is confirmed by the shareholders.

 

Item 10.B.6 Limitations

There are no restrictions on the rights of non-resident or foreign shareholders to hold or exercise voting rights with respect to Sundial’s common shares.

Item 10.B.7 Change in control

The Articles of Incorporation do not contain any change of control limitations with respect to a merger, acquisition or corporate restructuring that involves Sundial. Although applicable securities laws regarding shareholder ownership by certain persons require disclosure, the Articles of Incorporation do not provide for any ownership threshold above which shareholder ownership must be disclosed.

 

Item 10.B.8 Disclosure of shareholdings

2


 

Although applicable securities laws regarding shareholder ownership by certain persons require disclosure, the Articles of Incorporation do not provide for any ownership threshold above which shareholder ownership must be disclosed.

Item 10.B.9 Differences in the law

Voting Rights

Alberta. Each shareholder of the Company is entitled to one vote per share. Under the ABCA, the vote of a majority of shares voted on any matter (including the election of directors) at a meeting of shareholders at which a quorum is present is the act of such shareholders on the matter, unless the vote of a greater number is required by law or by the articles of the corporation.

Shareholders as of the record date for the meeting are entitled to vote at the meeting, and the directors may fix in advance a date as the record date for that determination of shareholders, but that record date shall not precede by more than 50 days or by less than 21 days the date on which the meeting is to be held. If no record date is fixed, the record date for the determination of shareholders entitled to receive notice of a meeting shall be at the close of business on the last business day preceding the day on which the notice is sent, or, if no notice is sent, the day on which the meeting is held.

Delaware. Under the DGCL, each stockholder is entitled to one vote per share of stock, unless the certificate of incorporation provides otherwise. In addition, the certificate of incorporation may provide for cumulative voting at all elections of directors of the corporation, or at elections held under specified circumstances. Either the certificate of incorporation or the bylaws may specify the number of shares and/or the amount of other securities that must be represented at a meeting in order to constitute a quorum, but in no event can a quorum consist of less than one-third of the shares entitled to vote at a meeting.

Stockholders as of the record date for the meeting are entitled to vote at the meeting, and the board of directors may fix a record date that is no more than 60 nor less than 10 days before the date of the meeting, and if no record date is set then the record date is the close of business on the day next preceding the day on which notice is given, or if notice is waived then the record date is the close of business on the day next preceding the day on which the meeting is held. The determination of the stockholders of record entitled to notice or to vote at a meeting of stockholders shall apply to any adjournment of the meeting, but the board of directors may fix a new record date for the adjourned meeting.

 

Shareholder Proposals

Alberta. Under the ABCA, a registered holder or beneficial owner of shares may submit to the corporation notice of any matter related to the business or affairs of the corporation that the registered holder or beneficial owner of shares proposes to raise at the meeting, and discuss at the meeting any matter in respect of which the registered holder or beneficial owner of the shares would have been entitled to submit a proposal. To be eligible to make a proposal a person must: (a) be a registered holder or beneficial owner of at least one percent (1%) of all issued voting shares of the corporation for at least six months or with a fair market value of a least $2,000 for at least six months; (b) have the support of other registered holders or beneficial owners of shares of at least five percent of the issued voting shares of the corporation; (c) provide to the corporation his or her name and address and the names and addresses of those registered holders or beneficial owners of shares who support the proposal; and (d) continue to hold or own the prescribed number of shares up to and including the day of the meeting at which the proposal is to be made.

Delaware. Delaware law does not specifically grant stockholders the right to bring business before an annual or special meeting of stockholders. However, if a Delaware corporation is subject to the SEC’s proxy rules, a stockholder who owns at least $2,000 in market value, or 1% of the corporation’s securities entitled to vote, may propose a matter for a vote at an annual or special meeting in accordance with those rules.

3


 

Action by Written Consent

Alberta. Under Alberta law, a written resolution signed by all the shareholders of the corporation who would have been entitled to vote on the resolution at a meeting is effective to approve the resolution.

Delaware. Under Delaware law, a written consent signed by stockholders having not less than the minimum number of votes that would be required to authorize or take such action is effective to approve such action. However, publicly listed companies do not typically permit stockholders of a corporation to take action by written consent.

Appraisal Rights

Alberta. The ABCA provides that shareholders of a corporation are entitled to exercise dissent rights and to be paid the fair value of their shares in connection with specified matters, including:

 

any amalgamation with another corporation (other than with certain affiliated corporations);

 

an amendment to the corporation’s articles to add, change or remove any provisions restricting or constraining the issue or transfer of shares of the class in respect of which a shareholder is dissenting;

 

an amendment to the corporation’s articles to add or remove an express statement establishing the unlimited liability of shareholders;

 

an amendment to the corporation’s articles to add, change or remove any restriction upon the business or businesses that the corporation may carry on;

 

a continuance under the laws of another jurisdiction;

 

a sale, lease or exchange of all, or substantially all, of the property of the corporation other than in the ordinary course of business; and

 

certain amendments to the articles of a corporation which require a separate class or series vote by a holder of shares of any class or series.

Delaware. The DGCL provides for stockholder appraisal rights, or the right to demand payment in cash of the judicially determined fair value of the stockholder’s shares, in connection with certain mergers and consolidations.

 

Compulsory Acquisition

Alberta. The ABCA provides that if, within 120 days after the making of an offer to acquire shares, or any class of shares, of a corporation, the offer is accepted by the holders of not less than 90% of the shares (other than the shares held by the offeror or an affiliate of the offeror) of any class of shares to which the offer relates, the offeror is entitled, upon giving proper notice within 180 days after the date of the offer, to acquire (on the same terms on which the offeror acquired shares from those holders of shares who accepted the offer) the shares held by those holders of shares of that class who did not accept the offer. Offerees may apply to the court, within 20 days of the offeror paying the money or transferring the consideration for the shares, and the court may set a different price or terms of payment and may make any consequential orders or directions as it considers appropriate.

Delaware. Under the DGCL, mergers in which one corporation owns 90% or more of each class of stock of a second corporation may be completed without the vote of the second corporation’s board of directors or shareholders.

Shareholder Suits

Alberta. Under Alberta law, a “complainant” may bring an action in the name of and on behalf of a corporation or any of its affiliates, or intervene in an existing action to which the corporation is a party, if the

4


 

complainant has given reasonable notice to the directors of the corporation and the complainant satisfies the court that:

 

the directors of the corporation will not bring, diligently prosecute or defend or discontinue the action;

 

the complainant is acting in good faith; and

 

it appears to be in the interest of the corporation that the action be brought, prosecuted, defended or discontinued.

In connection with any derivative action initiated by the complainant, the court may at any time make any order it thinks fit.

Delaware. Under the DGCL, a stockholder may bring a derivative action on behalf of the corporation to enforce the rights of the corporation. An individual also may commence a class action suit on behalf of himself and other similarly situated stockholders where the requirements for maintaining a class action under Delaware law have been met. A person may institute and maintain such a suit only if that person was a stockholder at the time of the transaction which is the subject of the suit. In addition, under Delaware case law, the plaintiff normally must be a stockholder at the time of the transaction that is the subject of the suit and throughout the duration of the derivative suit. Delaware law also requires that the derivative plaintiff make a demand on the directors of the corporation to assert the corporate claim before the suit may be prosecuted by the derivative plaintiff in court, unless such a demand would be futile.

Oppression Remedy

Alberta. Alberta law provides an oppression remedy that allows a “complainant” who is:

 

a present or former registered or beneficial securityholder of the corporation or its affiliates;

 

a present or former director or officer of the corporation or its affiliates; and

 

any other person who in in the discretion of the court is a proper person to make the application;

to apply to the court for relief where:

 

any act or omission of the corporation or any of its affiliates effects a result;

 

 

the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner; or

 

the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner,

that is oppressive or unfairly prejudicial to or that unfairly disregards the interest of a shareholder, creditor, director or officer. Alberta law permits a court to make any interim or final order it thinks fit to rectify the matters complained of in the application for relief.

Delaware. There is no remedy under the DGCL for oppression. However, minority stockholders may bring oppression-like claims based on other legal principles.

Repurchase of Shares

Alberta. Under the ABCA, a corporation may purchase or otherwise acquire shares issued by it if there are no reasonable grounds for believing that:

 

the corporation is, or would after the payment be, unable to pay its liabilities as they become due; or

5


 

 

the realizable value of the corporation’s assets would after the payment be less than the aggregate of its liabilities and stated capital of all classes.

Delaware. Under the DGCL, a corporation may purchase or redeem its own shares unless the capital of the corporation is impaired or the purchase or redemption would cause an impairment of the capital of the corporation. A Delaware corporation may, however, purchase or redeem out of capital any of its preferred shares or, if no preferred shares are outstanding, any of its own shares if such shares will be retired upon acquisition and the capital of the corporation will be reduced in accordance with specified limitations.

Anti-Takeover Provisions

Alberta. Alberta law does not provide anti-takeover provisions.

Delaware. In addition to other aspects of Delaware law governing fiduciary duties of directors during a potential takeover, the DGCL also contains a business combination statute that protects Delaware companies from hostile takeovers and from actions following the takeover by prohibiting some transactions once an acquirer has gained a significant holding in the corporation.

Section 203 of the DGCL prohibits “business combinations,” including mergers, sales and leases of assets, issuances of securities and similar transactions by a corporation or a subsidiary with an interested stockholder that beneficially owns 15% or more of a corporation’s voting stock, within three years after the person becomes an interested stockholder, unless:

 

the transaction that will cause the person to become an interested stockholder is approved by the board of directors of the target prior to the transaction;

 

after the completion of the transaction in which the person becomes an interested stockholder, the interested stockholder holds at least 85% of the voting stock of the corporation not including shares owned by persons who are directors and officers of interested stockholders and shares owned by specified employee benefit plans; or

 

after the person becomes an interested stockholder, the business combination is approved by the board of directors of the corporation and holders of at least 66.67% of the outstanding voting stock, excluding shares held by the interested stockholder.

 

A Delaware corporation may elect not to be governed by Section 203 by a provision contained in the original certificate of incorporation of the corporation or an amendment to the original certificate of incorporation or to the bylaws of the company, which amendment must be approved by a majority of the shares entitled to vote and may not be further amended by the board of directors of the corporation. Such an amendment is not effective until 12 months following its adoption.

Inspection of Books and Records

Alberta. Under the ABCA, any shareholder of a corporation their agents and legal representatives may examine the records of the corporation during the usual business hours of the corporation free of charge.

Delaware. Under the DGCL, any stockholder may inspect certain of the corporation’s books and records, for any proper purpose, during the corporation’s usual hours of business.

Pre-Emptive Rights

Alberta. Under the ABCA, shareholders have no pre-emptive rights to subscribe for additional issuances of shares unless such rights are expressly provided in the articles of the corporation or its unanimous shareholders agreement. Notwithstanding that the articles or unanimous shareholders agreement may provide a pre-emptive right, shareholders have no pre-emptive right in respect of shares to be issued:

 

for a consideration other than money;

6


 

 

as a share dividend; or

 

pursuant to the exercise of conversion privileges, options or rights previously granted by the corporation.

Delaware. Under the DGCL, stockholders have no pre-emptive rights to subscribe for additional issues of stock or to any security convertible into such stock unless, and to the extent that, such rights are expressly provided for in the certificate of incorporation.

Dividends

Alberta. Under the ABCA, a corporation may pay dividends on its shares unless there are reasonable grounds for believing that after such payment either:

 

the Corporation is, or would after the payment be, unable to pay its liabilities as they become due; or

 

the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes of shares.

Delaware. Under the DGCL, a Delaware corporation may pay dividends out of its surplus (the excess of net assets over capital), or in case there is no surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year (provided that the amount of the capital of the corporation is not less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets). In determining the amount of surplus of a Delaware corporation, the assets of the corporation, including stock of subsidiaries owned by the corporation, must be valued at their fair market value as determined by the board of directors, without regard to their historical book value. Dividends may be paid in the form of shares, property or cash.

 

Shareholder Vote on Certain Transactions

Alberta. Under the ABCA, certain extraordinary corporate actions, such as amalgamations (other than with certain affiliated corporations), continuances and sales, leases or exchanges of all, or substantially all, of the property of a corporation other than in the ordinary course of business, and other extraordinary corporate actions such as liquidations, dissolutions and (if ordered by a court) arrangements, are required to be approved by “special resolution”.

 

A “special resolution” is a resolution passed by not less than two-thirds of the votes cast by the shareholders who voted in respect of the resolution or signed by all shareholders entitled to vote on the resolution. A quorum with respect to a special resolution is a majority of the outstanding common shares unless otherwise specified in the corporation’s by-laws.

 

In specified cases, a special resolution to approve an extraordinary corporate action is also required to be approved separately by the holders of a class or series of shares, including in certain cases a class or series of shares not otherwise carrying voting rights.

 

In specified extraordinary corporate actions, all shares have a vote, whether or not they generally vote and, in certain cases, have separate class votes.

Arrangements are permitted under the ABCA. In general, a plan of arrangement is approved by a corporation’s board of directors and then is submitted to a court for approval. It is customary for a company in such circumstances to apply to a court initially for an interim order governing various procedural matters prior to calling any security holder meeting to consider the proposed arrangement. Plans of arrangement involving shareholders must be approved by a majority of at least two-thirds of the votes cast by the shareholders voting on the resolution. The court may, in respect of an arrangement proposed with persons other than shareholders and creditors, require that those persons approve the arrangement in the manner and to the extent required by the court. The court determines, among other things, to whom notice shall be given and whether, and in what manner, approval of any person is to be obtained and also determines whether any shareholders may dissent from the proposed arrangement

7


 

and receive payment of the fair value of their shares. Following compliance with the procedural steps contemplated in any such interim order (including as to obtaining security holder approval), the court would conduct a final hearing, which would, among other things, assess the fairness of the arrangement and approve or reject the proposed arrangement

 

Delaware. Under the DGCL, the vote of a majority of the outstanding shares of capital stock entitled to vote thereon generally is necessary to approve a merger or consolidation or the sale of all or substantially all of the assets of a corporation. The DGCL permits a corporation to include in its certificate of incorporation a provision requiring for any corporate action the vote of a larger portion of the stock or of any class or series of stock than would otherwise be required. However, under the DGCL, no vote of the stockholders of a surviving corporation to a merger is needed, unless required by the certificate of incorporation, if (1) the agreement of merger does not amend in any respect the certificate of incorporation of the surviving corporation, (2) the shares of stock of the surviving corporation are not changed in the merger and (3) the number of shares of common stock of the surviving corporation into which any other shares, securities or obligations to be issued in the merger may be converted does not exceed 20% of the surviving corporation’s common stock outstanding immediately prior to the effective date of the merger. In addition, stockholders may not be entitled to vote in certain mergers with other corporations that own 90% or more of the outstanding shares of each class of stock of such corporation, but the stockholders will be entitled to appraisal rights.

Item 10.B.10 Changes in capital

The requirements imposed by the Articles of Incorporation governing changes in capital are not more stringent than is required by law.

8

Exhibit 4.7

Execution Version

 

 

 

CDN. $84,000,000

SENIOR SECURED NON-REVOLVING TERM CREDIT FACILITY

 

and

 

CDN. $6,000,000

SENIOR SECURED REVOLVING OPERATING FACILITY

 

 

CREDIT AGREEMENT

among SUNDIAL GROWERS INC.

(as Borrower)

 

and

 

THE FINANCIAL INSTITUTIONS FROM TIME TO TIME PARTY HERETO

(as Lenders)

 

-

and -

 

ATB FINANCIAL

(as Administrative Agent for the Lenders)

 

-

with -

 

ATB FINANCIAL and BANK OF MONTREAL

(as Co-Lead Arrangers and Joint Bookrunners)

 

-

and -

 

BANK OF MONTREAL

(as Syndication Agent)

 

 

August 29, 2019

 

9617679.9

 

 


Exhibit 4.7

TABLE OF CONTENTS

 

Page

 

ARTICLE 1 INTERPRETATION1

 

1.1

Definitions1

 

1.2

Headings and Table of Contents39

 

1.3

Terms Generally39

 

1.4

Generally Accepted Accounting Principles39

 

1.5

Accounting Terms:  Changes to Generally Accepted Accounting Principles40

 

1.6

Time41

 

1.7

Payment for Value41

 

1.8

Monetary References41

 

1.9

Lenders in Various Capacities41

ARTICLE 2 REPRESENTATIONS AND WARRANTIES42

 

2.1

Representations and Warranties42

 

2.2

Deemed Representations and Warranties46

ARTICLE 3 THE CREDIT FACILITIES46

 

3.1

Establishment of the Facilities46

 

3.2

Reduction of Syndicated Facility Commitments on Effective Date47

 

3.3

Revolving Feature of Operating Facility47

 

3.4

Purpose47

 

3.5

Borrowings - Syndicated Facility and Operating Facility47

 

3.6

Conditions Applicable to Bankers' Acceptances and BA Equivalent Advances48

 

3.7

Administrative Agent's Duties re: Bankers' Acceptances52

 

3.8

Letters of Credit52

 

3.9

Notice of Repayment56

 

3.10

Pro-Rata Treatment of Borrowings56

 

3.11

Conversion Option57

 

3.12

Rollovers57

 

3.13

Notices Irrevocable58

 

3.14

Takeover Notification58

 

3.15

Lender Swaps59

 

3.16

Overdrafts60

 

3.17

Cash Management Services and Creditcard Facilities60

 

3.18

Development Facility60

ARTICLE 4 REPAYMENT AND PREPAYMENT61

 

4.1

Mandatory Repayments of Syndicated Facility61

 

4.2

Reduction of Commitment62

 

4.3

Cash Collateralization62

 

4.4

Cancellation of Commitment and Prepayment63

 

4.5

Early Repayment of Letters of Credit and Bankers' Acceptances63

 

4.6

Evidence of Indebtedness63

ARTICLE 5 PAYMENT OF INTEREST AND FEES64

 

5.1

Interest on Prime Loans64

 

5.2

Bankers' Acceptance Fees64

 

5.3

Letter of Credit Fees64

9617679.9

 

 


Exhibit 4.7

 

5.4

Interest on Overdue Amounts65

 

5.5

Administrative Agent's Fees65

 

5.6

Maximum Rate Permitted by Law65

 

5.7

Interest Generally65

 

5.8

Standby Fees65

 

5.9

Interest and Fee Adjustment66

ARTICLE 6 SECURITY66

 

6.1

Security66

 

6.2

Form of Security67

 

6.3

Guarantees and Subsidiary Security67

 

6.4

Registrations and Renewals68

 

6.5

Security Effective Notwithstanding Date of Advance68

 

6.6

Extensions, Etc.68

 

6.7

Notices68

 

6.8

No Merger69

 

6.9

Further Assurances - Security69

 

6.10

Release and Amendment of Security69

 

6.11

Security for Swaps with Former Lenders70

 

6.12

Permitted Encumbrances and Permitted Indebtedness70

ARTICLE 7 PAYMENT71

 

7.1

Time, Place and Currency of Payment71

 

7.2

Application of Payments71

 

7.3

Account Debit Authorization71

ARTICLE 8 CONDITIONS PRECEDENT TO DISBURSEMENT OF THE

BORROWINGS71

 

8.1

Effectiveness and Conditions Precedent71

 

8.2

Conditions Precedent to each Utilization74

 

8.3

Waiver of a Condition Precedent74

ARTICLE 9 COVENANTS OF THE BORROWER75

 

9.1

Positive Covenants of the Borrower75

 

9.2

Negative Covenants of the Borrower84

 

9.3

Financial Covenants87

 

9.4

Material Subsidiaries88

ARTICLE 10 EVENTS OF DEFAULT88

 

10.1

Events of Default88

 

10.2

Acceleration91

 

10.3

Demands for Payment92

 

10.4

Borrower Cash Collateral Accounts93

 

10.5

Remedies on Default93

 

10.6

Right of Set-Off94

 

10.7

Application and Sharing of Payments Following Acceleration94

 

10.8

Adjustments95

 

10.9

Calculations as at the Adjustment Time95

 

10.10

Lender May Perform Covenants96

 

10.11

Waiver of Default96

 

ARTICLE 11 INCREASED COST, TAXES, LENDER REPLACEMENT, ILLEGALITY,

 

9617679.9

 

 


Exhibit 4.7

 

SUBSTITUTE BASIS OF BORROWING, FUNDING INDEMNITY

97

 

 

11.1

Increased Cost97

 

11.2

Taxes98

 

11.3

Mitigation Obligations, Replacement of Lenders99

 

11.4

Illegality100

 

11.5

Substitute Basis of Borrowing – Bankers Acceptances100

 

11.6

Funding Indemnity101

ARTICLE 12 THE ADMINISTRATIVE AGENT AND THE LENDERS102

 

12.1

Appointment and Authority102

 

12.2

Additional Rights102

 

12.3

Exculpatory Provisions102

 

12.4

Reliance by Administrative Agent103

 

12.5

Delegation of Duties103

 

12.6

Resignation of Administrative Agent104

 

12.7

Non-Reliance on Administrative Agent and Other Lenders105

 

12.8

No Other Duties, etc.105

 

12.9

Administrative Agent May File Proofs of Claim105

 

12.10

Collateral and Guarantee Matters106

 

12.11

Rights and Obligations of Each Lender106

 

12.12

Notice to Lenders and Swap Lenders107

 

12.13

Notices between the Lenders, the Administrative Agent and the Borrower107

 

12.14

Administrative Agent's Duty to Deliver Documents Obtained from the Borrower107

 

12.15

Arrangements for Borrowings108

 

12.16

Arrangements for Repayment of Borrowings108

 

12.17

Repayments by Lenders to Agent109

 

12.18

Adjustments Among Lenders109

 

12.19

Lenders' Consents to Waivers, Amendments, etc.111

 

12.20

Reimbursement of Administrative Agent's Expenses or Lender's Costs112

 

12.21

Indemnity of Administrative Agent113

 

12.22

Sharing of Information113

 

12.23

Amendment to this Article 12113

 

12.24

The Administrative Agent and Defaulting Lenders114

 

ARTICLE 13 SUCCESSORS AND ASSIGNS, JUDGMENT CURRENCY AND CONFIDENTIAL INFORMATION

115

 

 

13.1

Successors and Assigns115

 

13.2

Judgment Currency118

 

13.3

Swap Lender119

 

13.4

Certain Information; Confidentiality119

ARTICLE 14 MISCELLANEOUS120

 

14.1

Severability120

 

14.2

Defaulting Lenders120

 

14.3

Expenses, Indemnity, Damage Waiver121

 

14.4

Failure to Act123

 

14.5

Waivers123

 

14.6

Amendments123

 

14.7

Notice123

 

14.8

Governing Law125

 

14.9

Term of Agreement and Survival125

9617679.9

 

 


Exhibit 4.7

 

14.10

Time of Essence125

 

14.11

Anti-Money Laundering Legislation125

 

14.12

Conflict with Other Documents126

 

14.13

Saskatchewan Legislation126

 

14.14

Acknowledgement and Consent to Bail-In of EEA Financial Institutions126

 

14.15

Counterparts; Integration, Effectiveness; Electronic Execution127

 

 

 

Schedule "A"-Commitments and Addresses Schedule "B"-Form of Borrowing Notice

Schedule "C"-Form of Notice of Rollover or Notice of Repayment or Notice of Conversion Schedule "D"-Form of Compliance Certificate

Schedule "E"-Assignment and Assumption

Schedule "F"-Power of Attorney Terms - Bankers' Acceptances

Schedule "G"-Form of Power of Attorney Terms - BA Equivalent Advances Schedule "H"-Form of Environmental Certificate

Schedule "I"-Form of Operating Facility Borrowing Base Certificate Schedule "J"-Intellectual Property

Schedule "K"-Material Agreements Schedule "L"-Material Licenses Schedule "M"-Organizational Chart Schedule "N"-Sources and Uses

 

9617679.9

 

 


 

THIS CREDIT AGREEMENT is dated August 29, 2019.

 

 

 

AMONG:

 

SUNDIAL GROWERS INC., as Borrower

 

AND:

 

ATB FINANCIAL, BANK OF MONTREAL AND THE OTHER FINANCIAL INSTITUTIONS NAMED IN ASSIGNMENT AND

ASSUMPTIONS FROM TIME TO TIME, in their capacities as Lenders

 

AND:

 

ATB FINANCIAL, in its capacity as Administrative Agent

 

 

WHEREAS the Borrower has requested and the Lenders have agreed to establish certain secured credit facilities on the terms and conditions set forth herein, and ATB has agreed to act as Administrative Agent for the Lenders under such credit facilities;

 

NOW THEREFORE, in consideration of the premises, the covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto, the parties agree as follows:

 

ARTICLE 1 INTERPRETATION

 

 

1.1

Definitions

 

In this Agreement, including the recitals and the Schedules hereto and in all notices pursuant to this Agreement, unless something in the subject matter or context is inconsistent therewith, the following words and phrases shall have the following meanings:

 

"208" means 2082033 Alberta Ltd., a wholly-owned Subsidiary of the Borrower;

 

"2019 Convertible Debentures" means, collectively, the existing 12% unsecured subordinated convertible notes issued by the Borrower in the aggregate principal amount not exceeding $28,900,000 with maturity dates which range from October 15, 2019 to November 15, 2019;

 

"Acceleration Notice" has the meaning ascribed to it in Section 10.2(b); "Accommodations" means:

 

(a)

the advance of Prime Loans by the Syndicated Lenders and the acceptance and purchase of Bankers' Acceptances, or if applicable, the advance of BA Equivalent Advances, by the Syndicated Lenders (the "Syndicated Accommodations"); and

 

 

9617679.9

 

 


2

 

 

 

 

 

(b)

the advance of Prime Loans by the Operating Lender and the issuing of Letters of Credit by the Operating Lender (the "Operating Accommodations");

 

 

"Accounts" means the accounts and records established by the Administrative Agent and the Operating Lender pursuant to Section 4.6 to record the Borrower's liability to each of the Lenders in respect of the Borrowings and other amounts outstanding by the Borrower to each of the Lenders and the Administrative Agent hereunder;

 

"Accounts Receivable" means any right of a Person to payment for services rendered or goods sold in the ordinary course of business classified as an account receivable in accordance with GAAP;

 

"Acquisition" means, with respect to any Person, any purchase or other acquisition, regardless of how accomplished or effected (including any such purchase or other acquisition effected by way of amalgamation, merger, arrangement, business combination or other form of corporate reorganization or by way of purchase, lease or other acquisition arrangements), of: (a) such number of the issued and outstanding securities of, or such portion of an Equity Interest in, such other Person that such other Person becomes a Subsidiary of the purchaser or of any of its Affiliates), (b) all or substantially all of the Property of any other Person, or (c) any division, business or operation of any other Person or of all or substantially all of the Property of any division, business or operation of any other Person;

 

"Additional Financial Institution" has the meaning ascribed thereto in Section 3.18;

 

"Adjustment Time" means the time of occurrence of the last event necessary (being either the delivery of a Demand for Payment or the occurrence of a Termination Event) to ensure that all amounts secured by the Security are thereafter due and payable and such time shall conclusively be:

 

 

(a)

in the case where such last event is the delivery of a Demand for Payment, the time of delivery of an Acceleration Notice or the last day of the relevant time period set out in Section 10.3; and

 

 

 

(b)

in the case where such last event is the occurrence of a Termination Event, the time of occurrence of such Termination Event determined pursuant to the provisions of the applicable Credit Document giving rise to such Termination Event;

 

 

"Administrative Agent" means ATB and any successor administrative agent appointed pursuant to Section 12.6;

 

"Administrative Agent Parties" has the meaning ascribed to it in Section 14.7(d)(ii);

 

"Administrative Agent's Account for Payments" means the following account maintained by the Administrative Agent to which payments and transfers are to be effected as follows:

 

ATB Financial

102 – 8th Avenue SW Calgary, Alberta T2P 1B3

Swift Code: ATBRCA6EXXX

Beneficiary/for account of: CAD Syndication Agency Suspense Bank Code and Transit No.: 021907609

Beneficiary Account: 00127091500

 

Attention: Manager of Loan Syndications

Reference: Corporate Financial Services for Sundial Growers Inc.

 

9617679.9

 

 


3

 

 

 

 

or such other places or accounts as may be agreed upon by the Administrative Agent and the Borrower from time to time and notified in writing to the Lenders;

 

"Administrative Agent's Branch of Account" means the office of the Administrative Agent located at the address set forth opposite the Administrative Agent's name on the signature pages to this Agreement or such other office or branch of the Administrative Agent in Canada as the Administrative Agent may from time to time advise the Borrower and the Lenders in writing;

 

"Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Administrative Agent;

 

"Affected Lender" has the meaning ascribed to it in Section 11.3(b);

 

"Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified;

 

"Agreement" means this credit agreement, all Schedules attached hereto and any future amendments, amendments and restatements, replacements or supplements hereto or thereto;

 

"AML Legislation" has the meaning ascribed to it in Section 14.11(a); "Annualized Basis" means, with respect to any financial calculation hereunder:

 

(a)

for the first full Fiscal Quarter after the Effective Date, calculated by multiplying the amount derived from such financial calculation for such Fiscal Quarter by four (4);

 

 

 

(b)

for the second full Fiscal Quarter after the Effective Date, calculated by multiplying the aggregate amount derived from such financial calculation for such first two (2) Fiscal Quarters by two (2);

 

 

 

(c)

for the third full Fiscal Quarter after the Effective Date, calculated by multiplying the aggregate amount derived from such financial calculation for such first three (3) Fiscal Quarters by 4/3; and

 

 

 

(d)

thereafter, calculated on a trailing four (4) Fiscal Quarter basis;

 

"Applicable Law" means, in relation to any Person, Property, transaction or event, all applicable provisions (or mandatory applicable provisions, if so specified) of federal, provincial, state or local laws, statutes, rules, regulations, official directives and orders of all Governmental Authorities and Governmental Actions in actions or proceedings in which the Person in question is a party or by which it is bound or having application to the Person, Property, transaction or event;

 

"Applicable Lenders" means (a) in the case of the Syndicated Facility and in respect of a Borrowing Notice, Conversion Notice or Rollover Notice given under the Syndicated Facility, all of the Syndicated Lenders, and (b) in the case of the Operating Facility and in respect of a Borrowing Notice, Conversion Notice or Rollover Notice given under the Operating Facility, only the Operating Lender;

 

"Applicable Margin" means a margin, expressed as a rate per annum, payable to: (i) in the case of the Syndicated Facility, the Administrative Agent on behalf of all of the Lenders, and (ii) in the case of the Operating Facility, the Operating Lender, in each case with respect to Borrowings, as set forth in the table below for the applicable Senior Funded Debt to EBITDA Ratio:

 

9617679.9

 

 


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Level

 

 

 

Senior Funded Debt to EBITDA Ratio

 

 

Prime Loans (bps)

Bankers' Acceptances and Letters of Credit (bps)

 

Standby Fees (bps)(*)

I

≤1.25 to 1:00

125

275

55

II

>1.25 to 1 and ≤ 1.75 to 1:00

150

300

60

III

>1.75 to 1 and ≤ 2.25 to 1:00

200

350

70

IV

>2.25 to 1 and ≤ 2.75 to 1:00

225

375

75

V

>2.75 to 1:00

250

400

80

 

 

 

provided that:

(*) Standby Fees are applicable to the Operating Facility only

 

 

 

(a)

changes in the Applicable Margin shall be effective and adjusted in accordance with Section 5.9;

 

 

(b)

as at the Effective Date:

 

 

(i)

the Applicable Margin (other than with respect to the Fortis LC) shall be set at Level V and shall remain at such Level until the Applicable Margin has been redetermined in respect of the Covenant Conversion Date and thereafter, each in accordance with Section 5.9; and

 

 

 

(ii)

the Applicable Margin for the Fortis LC shall be 175 bps per annum and shall remain as such until the Applicable Margin has been redetermined in respect of the Covenant Conversion Date and thereafter, each in accordance with Section 5.9; for greater certainty, if the Administrative Agent (with the consent of the Operating Lender) at any time prior to the Covenant Conversion Date, agrees to release any cash previously deposited into a Borrower Cash Collateral Account in accordance with Section 3.8(a), the Applicable Margin for the Fortis LC shall, at such time, be re-set at Level V;

 

 

 

(c)

for the purposes of calculating the Applicable Margins for Prime Loans and Bankers'

Acceptances, the per annum rate is expressed on the basis of a 365 day year, as applicable; and

 

 

(d)

upon the occurrence and during the continuance of any Event of Default, each of the above Applicable Margins (other than for the Standby Fees) will increase by 200 bps;

 

 

"Applicable Percentage" means, at any time prior to the Adjustment Time with respect to each Lender and each Facility and the Facilities, as applicable, the proportion that such Lender's aggregate Commitment in respect of such Facility or the Facilities bears to the amount of the total Commitments of all Lenders in respect of such Facility or to the Total Commitment, as applicable, at such time and, if such total Commitment in respect of any such Facility is cancelled or terminated, "Applicable Percentage" shall mean the Applicable Percentage of such Lender in effect immediately prior to such cancellation or termination; provided that when such term is used in reference to or in relation to:

 

 

(a)

the Operating Facility, the Applicable Percentage for the Operating Lender shall be one hundred percent (100%) and for all other Lenders shall be zero percent (0%); and

 

 

 

(b)

the Syndicated Lenders, the Applicable Percentage for a Syndicated Lender shall be the proportion that the Syndicated Facility Commitment of such Syndicated Lender bears to the Total Syndicated Facility Commitment at such time.

 

 

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After the Adjustment Time, the Applicable Percentage of each Lender shall be calculated based on its Applicable Percentage of the Total Commitment, without any distinction as to which Facility may be relevant to such Lender;

 

"Applicable Percentage of the Total Commitment" means in respect of each Lender, the proportion that such Lender's Commitment bears to the Total Commitment;

 

"Appraisal" means an appraisal performed by a qualified independent appraiser satisfactory to the Administrative Agent and the Borrower;

 

"Appraised Value" means the lower of the cost of construction appraised value and the cost of replacement appraised value of all Collateral (for greater certainty, other than Excluded Assets), in either case, as determined pursuant to an Appraisal and, with respect to any real property Collateral, on an "as completed" basis (not on an as-built basis);

 

"Approved Fund" means any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its activities that is administered or managed by:

 

 

(a)

a Lender;

 

 

(b)

an Affiliate of a Lender; or

 

 

(c)

an entity or an Affiliate of an entity that administers or manages a Lender;

 

"Assignment and Assumption" means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 13.1), and accepted by the Administrative Agent, substantially in the form of Schedule "E" or any other form approved by the Administrative Agent in consultation with the Borrower;

 

"ATB" means ATB Financial and its successors and permitted assigns;

 

"Available Cash" means, as at the applicable time or period, the aggregate amount of cash held in a Borrower Cash Collateral Account which is at all times subject to a cash collateral agreement in form and substance satisfactory to the Administrative Agent;

 

"BA Acceptance Fee" means, with respect to Bankers' Acceptances, the fee, expressed as a rate per annum, payable to each Lender or retained by each Lender, in each case with respect to Bankers' Acceptances to be accepted and purchased by such Lender as set forth in the table in the definition of Applicable Margin for Bankers' Acceptances;

 

"BA Equivalent Advance" means an advance made in Canadian Dollars by a Non-Acceptance Lender as part of an Accommodation by way of Bankers' Acceptances;

 

"BA Purchasing Lender" means each Applicable Lender that purchases a Bankers' Acceptance accepted by such Applicable Lender;

 

"Bail-In Action" means the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution;

 

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"Bail-In Legislation" means, with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule;

 

"Bankers' Acceptances" means bankers' acceptances denominated in Cdn. Dollars which are issued by the Borrower pursuant to Sections 3.5, 3.11 or 3.12 and accepted and if applicable, purchased by the Applicable Lender pursuant to Section 3.6;

 

"Bilateral Financial Services Agreements" means, as applicable, each present and future agreement between a Creditcard Lender and a Loan Party with respect to Creditcard Facilities, and each present and future agreement between a Cash Management Lender and a Loan Party with respect to Cash Management Services;

 

"Borrower" means Sundial Growers Inc., a corporation subsisting under the laws of Alberta, and its successors and permitted assigns;

 

"Borrower Cash Collateral Account" means an account with the Administrative Agent, or such other financial institution as designated by the Administrative Agent, from which the Borrower does not have any withdrawal rights or privileges until repayment of the Borrowings in full, termination of the Total Commitment and termination of this Agreement, except to apply the amount represented thereby to the Borrowings or a portion thereof, which account and all funds credited thereto and interest earned thereon (which interest shall be at the prevailing rate of the Administrative Agent or such other financial institution, as the case may be, for demand deposits of comparable amounts) shall be the subject of a Security Interest in favour of the Administrative Agent on behalf of the Lenders;

 

"Borrowing Notice" means a notice to effect an Accommodation delivered under Section 3.5 and substantially in the form of Schedule "B" with all applicable blanks completed;

 

"Borrowings" means, at any time:

 

 

(a)

the principal amount outstanding by way of Prime Loans made by the Syndicated Lenders together with the face amount of Bankers' Acceptances outstanding (and, if applicable, any related BA Equivalent Advances) issued and purchased by the Syndicated Lenders (collectively, the "Syndicated Borrowings"); and

 

 

 

(b)

the principal amount outstanding by way of Prime Loans made by the Operating Lender together with the undrawn amount of all outstanding Letters of Credit issued by the Operating Lender (collectively, the "Operating Borrowings");

 

 

and "Borrowing", "Syndicated Borrowing" and "Operating Borrowing" means any one of such Borrowings, as applicable;

 

"bps" means 1/100th of one percent;

 

"Branch of Account" means, with respect to each Lender, the branch or office of such Lender (being, in the case of the Operating Lender, the Operating Lender's Branch of Account) located at the address set forth under such Lender's name on Schedule "A" or in its Assignment and Assumption, or such other branch or office in Canada as such Lender may from time to time advise the Borrower and the Administrative Agent in writing; provided that, for purposes of delivering any notice required to be delivered by the Administrative Agent to a Lender pursuant to Section 12.13 and for purposes of effecting

 

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7

 

 

 

 

any payments to a Lender in connection with this Agreement, a Lender may specify in writing to the Administrative Agent any other branch or office of such Lender in Canada and such branch or office shall thereafter be the Branch of Account of such Lender for such purpose;

 

"Budgeted Capital Expenditures" means the budgeted amount of capital expenditures shown in the annual consolidated budget for the Borrower, provided such capital expenditures relate to additions to Property of the Loan Parties (for greater certainty, excluding any Non-Material Foreign Subsidiaries) and do not relate to expenditures to be made with the proceeds of insurance or compensation for lost or damaged Property;

 

"Business" means the business of cultivating, producing, processing, packaging, transportation and marketing of Cannabis for distribution and sale, and including, as the case may be, the importation or exportation of such Cannabis products and all other Cannabis-Related Activities related to the foregoing;

 

"Business Day" means a day, excluding Saturday and Sunday, on which banking institutions are open for the transaction of commercial business in Calgary, Alberta, and Toronto, Ontario;

 

"Canadian Dollars", "Cdn. Dollars" and the symbols "Cdn. $" and "$" each mean lawful money of Canada;

 

"Cannabis" means:

 

 

(a)

any plant or seed, whether live or dead, from any species or subspecies of genus Cannabis, including Cannabis sativa, Cannabis indica and Cannabis ruderalis, Marijuana and Industrial Hemp and any part, whether live or dead, of the plant or seed thereof, including any stalk, branch, root, leaf, flower, or trichome;

 

 

 

(b)

any material obtained, extracted, isolated, or purified from the plant or seed or the parts contemplated by paragraph (a) of this definition, including any oil, cannabinoid, terpene, genetic material or any combination thereof;

 

 

 

(c)

any organism engineered to biosynthetically produce the material contemplated by paragraph (b) of this definition, including any microorganism engineered for such purpose;

 

 

 

(d)

any biologically or chemically synthesized version of the material contemplated by paragraph (b) of this definition or any analog thereof, including any product made by any organism contemplated by paragraph (c) of this definition;

 

 

 

(e)

any other meaning ascribed to the term "cannabis" under Applicable Law in any Qualified Jurisdiction, including the Cannabis Act and the Controlled Drugs and Substances Act (Canada); and

 

 

 

(f)

any other meaning ascribed to the term "cannabis" under the Controlled Substances Act (United States);

 

 

"CannabisRelated Activities" means any activities, including advertising or promotional activities, relating to or in connection with the importation, exportation, cultivation, production, purchase, distribution or sale (including the import and export) of Cannabis or Cannabisrelated products;

 

"Cannabis Act" means the Cannabis Act (Canada), S.C. 2018, c. 16;

 

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8

 

 

 

 

"Cannabis Laws" means all Applicable Laws and Governmental Actions with respect to CannabisRelated Activities or in any way affecting or impacting the operation of Cannabis, including, without limitation, the Cannabis Act and the Cannabis Regulations;

 

"Cannabis Regulations" means the Cannabis Regulations (Canada), SOR/2018-144, and all other regulations from time to time promulgated thereunder or under any other statute in any Qualified Jurisdiction;

 

"Cash Management Lender" means a Lender or an Affiliate of a Lender which has provided Cash Management Services to a Loan Party;

 

"Cash Management Obligations" means all indebtedness, liabilities and obligations of any Loan Party to a Cash Management Lender under any Cash Management Services;

 

"Cash Management Services" means cash or treasury management services (including controlled disbursement, automated clearinghouse transactions, return items, daylight overdrafts, interstate depository network services, wire payments, account netting and pooling services and the operation of centralized banking arrangements (whether notional or physical)) or any similar services which the Borrower and/or any Loan Party maintains with a Lender;

 

"CDOR Rate" means on any day:

 

 

(a)

with respect to Bankers' Acceptances having a Standard Term which are required to be accepted and, if applicable, purchased on any day, the arithmetic average of the percentage discount rates for Canadian Dollar bankers' acceptances in comparable amounts having an identical issue and maturity date which are quoted on the "Reuters' Screen CDOR CAD-BA Page" (as defined in the International Swaps and Derivatives Association, Inc. definitions, as modified and amended from time to time) (or if such screen shall not be available any successor or similar service selected by the Administrative Agent) as at approximately 8:00 a.m. (Calgary time) on such day, or if such day is not a Business Day, then on the immediately preceding Business Day (as adjusted by the Administrative Agent in good faith after 8:00 a.m. (Calgary time) or as soon thereafter as practicable to reflect any error in a posted rate of interest or in the posted average annual rate of interest); and

 

 

 

(b)

with respect to Bankers' Acceptances which do not have a Standard Term or if the rate referred to in paragraph (a) of this definition does not appear on such "Reuters Screen CDOR CAD - BA Page" (or a successor service as referred to in paragraph (a) of this definition), the arithmetic average of the percentage discount rate quoted by each Schedule I Reference Lender (determined by the Administrative Agent as of 8:00 a.m. (Calgary time) on such day), which would be applicable in respect of an issue of bankers' acceptances in a comparable amount and with identical maturity dates to the Bankers' Acceptances proposed to be issued by the Borrower on such day or if such day is not a Business Day, then on the immediately preceding Business Day. If any Lender does not furnish a timely quotation, the Administrative Agent shall determine the relevant discount rate on the basis of the quotation or quotations furnished by the remaining Lenders.

 

 

Each determination of the CDOR Rate shall be conclusive and binding, absent manifest error, and be computed using any reasonable averaging and attribution method, provided that, if in either case, the rate determined above shall ever be less than zero, such rate shall be deemed to be zero for purposes of this Agreement;

 

9617679.9

 

 


9

 

 

 

 

"Change in Law" means the occurrence, after the date of this Agreement, of any of the following:

 

 

(a)

the adoption or taking effect of any Applicable Law or treaty;

 

 

(b)

any change in any Applicable Law or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority; or

 

 

 

(c)

the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, to the extent applicable to the Lenders, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the Office of the Superintendent of Financial Institutions of Canada or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a "Change in Law", regardless of the date enacted, adopted or issued;

 

 

"Change of Control" means any circumstances arising after the Effective Date in which a Person or group of Persons), acting jointly or in concert (within the meaning of the Securities Act (Alberta)), acquires:

 

 

(a)

Voting Shares of the Borrower which, together with all other Voting Shares of the Borrower held by such Person or Persons, constitute in the aggregate more than 30% of all outstanding Voting Shares of the Borrower; or

 

 

 

(b)

the right to elect a majority of the directors of the Borrower;

 

"Collateral" is a collective reference to all Property, other than Excluded Assets, rights and things and the proceeds and products thereof, subjected or intended to be subjected from time to time to any Security Interest under any of the Security;

 

"Collateral Mortgage" has the meaning ascribed thereto in Section 6.1(b);

 

"Commitment" means each Lender's Syndicated Facility Commitment or Operating Facility Commitment, as the case may be or, if the context so requires, the aggregate thereof;

 

"Commodity Swap" means an agreement entered into between a Person and a counterparty on a case by case basis, the purpose and effect of which is to mitigate or eliminate such Person's exposure to fluctuations in commodity prices, whether physically or financially settled;

 

"Communications" has the meaning ascribed to it in Section 14.7(d)(ii);

 

"Compliance Certificate" means a compliance certificate substantially in the form attached hereto as Schedule "D" executed by a senior officer of the Borrower;

 

"Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise; "Controlling" and "Controlled" have meanings correlative thereto;

 

"Conversion" means a conversion of a Borrowing (other than a Letter of Credit) or part thereof from one basis of Borrowing to another (other than a Letter of Credit) pursuant to Section 3.11;

 

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"Conversion Date" means each Business Day that the Borrower has notified the Administrative Agent as the date on which the conversion of a Borrowing or a portion thereof is to be made pursuant to a request from the Borrower under Section 3.11;

 

"Conversion Notice" means a notice to effect a Conversion delivered under Section 3.11 and substantially in the form of Schedule "C" with all applicable blanks completed;

 

"Convertible Debentures" means any convertible subordinated debentures issued, created, incurred or assumed by the Borrower which have all of the following characteristics:

 

 

(a)

an initial final maturity or due date in respect of repayment of principal extending beyond the Maturity Date;

 

 

 

(b)

no scheduled or mandatory payment or repurchase of principal thereunder (other than acceleration following an event of default in regard thereto or payment which can be satisfied by the delivery of common shares in the capital stock of the Borrower as contemplated in paragraph

 

(f) of this definition) prior to the Maturity Date;

 

 

(c)

upon and during the continuance of a Default, an Event of Default or acceleration of the time for repayment of any Lender Outstandings which has not been rescinded: (i) all amounts payable in respect of principal, premium (if any) or interest under such debentures are subordinate and junior in right of payment to all such Lender Outstandings; and (ii) no enforcement steps or enforcement proceedings may be commenced in respect of such debentures;

 

 

 

(d)

upon distribution of the assets of the Borrower on any dissolution, winding up, total liquidation or reorganization of the Borrower (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of such Person, or otherwise), all Lender Outstandings shall first be paid in full, or provisions made for such payment, before any payment is made on account on principal, premium (if any) or interest payable in regard to such debentures;

 

 

 

(e)

the occurrence of a Default, an Event of Default or the acceleration of the time for repayment of any of the Lender Outstandings or enforcement of the rights and remedies of the Secured Parties shall not in and of themselves:

 

 

 

(i)

cause a default or event of default (with the passage of time or otherwise) under such debentures or the indenture or instrument governing the same; or

 

 

 

(ii)

cause or permit the obligations under such debentures to be due and payable prior to the stated maturity thereof; and

 

 

 

(f)

except during an "event of default" under and as defined in such debentures and the indenture or agreement governing same, payments of interest or principal due and payable under such debentures can be satisfied, at the option of the Borrower, by delivering common shares in the capital stock of the Borrower in accordance with the indenture or agreement governing such debentures (whether such common shares are received by the holders of such debentures as payment or as sold by a trustee or representative under such indenture or agreement to provide cash for payment to holders of such debentures);

 

 

"Cost Basis Value" means the value, on a cost basis, of all tangible Collateral of the Loan Parties (for greater certainty, other than Excluded Assets), as determined in a manner acceptable to the Administrative

 

9617679.9

 

 


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Agent and Lenders; provided that, (a) for the purposes of determining the Cost Basis Value as at the Effective Date pursuant to Section 8.1(f)(xiv), the Cost Basis Value of the property located at 273209 Range Road 20, Rockyview County No. 44, Airdrie, AB T4B 2A3 and legally described as NE 1/4, section 24, TWP 27, Range 2, W5 shall be deemed to be no less than $15,000,000; and (b) for greater certainty, any value on a cost basis determined or deemed pursuant to the terms hereof shall have no bearing or impact upon any Appraised Value;

 

"Covenant Conversion Date" means March 31, 2020 or such earlier date unanimously agreed to among the Administrative Agent, each of the Lenders and the Borrower;

 

"Credit Documents" mean, collectively, this Agreement, all Swaps with a Swap Lender documented under the applicable ISDA Master Agreements and all Transactions documented thereunder, all agreements between a Creditcard Lender and a Loan Party with respect to Creditcard Facilities, and all agreements between a Cash Management Lender and a Loan Party with respect to Cash Management Services, and "Credit Document" means any of them;

 

"Creditcard Facilities" means any corporate credit card facilities for commercial purposes (including "commercial credit cards" and "purchasing cards");

 

"Creditcard Lender" means a Lender or an Affiliate of a Lender which has provided Creditcard Facilities to a Loan Party, including, for greater certainty, ATB, as provider of the Existing MasterCard Obligations;

 

"Creditcard Obligations" means all indebtedness, liabilities and obligations of any Loan Party to a Creditcard Lender arising under any Creditcard Facilities and on the Effective Date, the Existing MasterCard Obligations shall be deemed to be Creditcard Obligations outstanding to ATB, in its capacity as a Creditcard Lender;

 

"Currency Swap" means a contract entered into between a Person and a counterparty on a case by case basis in connection with forward rate, currency swap or currency exchange and other similar currency related transactions, the purpose and effect of which is to mitigate or eliminate such Person's exposure to fluctuations in exchange rates;

 

"DBRS" means DBRS Limited and any successors thereto;

 

"Debt" means, as at any particular time and as determined on a consolidated basis in respect of the Borrower in accordance with GAAP, but excluding therefrom Non-Material Foreign Subsidiaries, all obligations, indebtedness and liabilities (without duplication):

 

 

(a)

for borrowed money, including by way of overdraft or other extensions of credit, and any Permitted Subordinated Debt;

 

 

 

(b)

arising pursuant to bankers' acceptance facilities, note purchase facilities and commercial paper programs, or the stated amount of letters of credit, letters of guarantee and surety bonds supporting obligations which would otherwise constitute Debt within the meaning of this definition or indemnities issued in connection therewith;

 

 

 

(c)

evidenced by bonds, debentures, notes or other similar instruments (whether or not with respect to the borrowing of money and whether or not payable by, or convertible into, equity);

 

 

9617679.9

 

 


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(d)

arising under Guarantees, indemnities, assurances, legally binding comfort letters or other contingent obligations relating to the indebtedness or other obligations of any other Person which would otherwise constitute Debt within the meaning of this definition;

 

 

 

(e)

incurred for the purpose of or having the effect of providing Financial Assistance relating to obligations of any other Person which would otherwise constitute Debt within the meaning of this definition;

 

 

 

(f)

secured by a Permitted Encumbrance on any Property of the Loan Parties, whether or not assumed by them;

 

 

 

(g)

arising under or in connection with an absolute or limited recourse sale or factoring of accounts receivable or other asset securitization program (with the amount of Debt thereunder deemed to be equal to the net proceeds received by such Person thereunder);

 

 

 

(h)

for or in respect of Financial Leases;

 

 

(i)

for or in respect of the deferred purchase or acquisition price of Property or services (including obligations secured by Purchase Money Security Interests and obligations in respect of a Sale- Leaseback);

 

 

 

(j)

for or in respect of the purchase price of any Property the purchase price in respect of which has been prepaid by the purchaser; and

 

 

 

(k)

for or in respect of redemption obligations with respect to any shares issued by the Borrower or a Subsidiary (excluding shares that may be redeemed in whole or in part in specie) which are not held by the Borrower or its Subsidiaries and which are by their terms or pursuant to any contract, agreement or arrangement:

 

 

 

(i)

redeemable, retractable, payable or required to be purchased or otherwise retired or extinguished, or convertible into Debt in any case, prior to the Maturity Date: (A) at a fixed or determinable date, (B) at the option of any holder thereof, or (C) upon the occurrence of a condition not solely within the control and discretion of the Borrower or such Subsidiary; or

 

 

 

(ii)

convertible into any other shares described in (i) above;

 

"Debtor Relief Laws" means the Bankruptcy and Insolvency Act (Canada), the Companies Creditors' Arrangement Act (Canada) and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization or similar debtor relief laws of Canada or other applicable jurisdictions from time to time in effect;

 

"Default" shall mean the occurrence of any of the events specified in Section 10.1, whether or not any requirement for notice or lapse of time or other condition precedent has been satisfied;

 

"Defaulting Lender" means, subject to Section 14.2(c), any Lender that:

 

 

(a)

has failed to (i) fund all or any portion of any Accommodation required to be made by it hereunder within two Business Days of the date such Accommodation was required to be funded hereunder unless such Lender notifies the Administrative Agent and the Borrower in writing that such failure is the result of such Lender's determination that one or more conditions precedent to

 

 

9617679.9

 

 


13

 

 

 

 

funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied, or (ii) pay to the Administrative Agent or any Lender any other amount required to be paid by it hereunder within two Business Days of the date when due;

 

 

(b)

has notified the Borrower, the Administrative Agent or any Lender (verbally or in writing) that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect (unless such writing or public statement relates to such Lender's obligation to fund an Accommodation hereunder and states that such position is based on such Lender's determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied);

 

 

 

(c)

has failed, within three Business Days after written request by the Administrative Agent or the Borrower, to confirm in writing to the Administrative Agent and the Borrower that it will comply with its prospective funding obligations hereunder (provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written confirmation by the Administrative Agent and the Borrower);

 

 

 

(d)

that has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within three Business Days of the date when due, unless the subject of a good faith dispute;

 

 

 

(e)

has, or its Lender Parent has, (i) become the subject of a proceeding under any Debtor Relief Law, (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or Property; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any Equity Interest in that Lender or Lender Parent by a Governmental Authority so long as such Equity Interest does not result in or provide such Lender or Lender Parent with immunity from the jurisdiction of courts within Canada or from the enforcement of judgments or writs of attachment on its Property or permit such Lender or Lender Parent (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender or Lender Parent, or (iii) become the subject of a Bail-In Action; or

 

 

 

(f)

that is generally in default of its obligations under other existing credit or loan documentation under which it has commitments to extend credit.

 

 

Any determination by the Administrative Agent that a Lender is a Defaulting Lender under clauses (a) through (f) above shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 14.2(c)) upon delivery of written notice from the Administrative Agent of such determination to the Borrower and each Lender;

 

"Demand for Payment" means delivery of an Acceleration Notice or a Swap Demand for Payment; "Development Facility" has the meaning ascribed thereto in Section 3.18;

"Discount Proceeds" means, in respect of any Bankers' Acceptance required to be purchased by a Lender hereunder, an amount (rounded to the nearest whole cent with one-half of one cent being rounded up) determined as of the applicable Drawdown Date, Conversion Date or Rollover Date which is equal to:

 

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Face Amount  x  Price

 

where "Face Amount" is the face amount of such bankers' acceptance and "Price" is equal to:

 

1

1 + (Rate x Term)

365

 

where the "Rate" is the applicable Discount Rate expressed as a decimal on the day of purchase; the "Term" is the term of such Bankers' Acceptance expressed as a number of days; and the Price as so determined is rounded up or down to the fifth decimal place with .000005 being rounded up;

 

"Discount Rate" means:

 

 

(a)

with respect to an issue of Bankers' Acceptances having the same maturity date accepted by a Lender that is a bank under Schedule I of the Bank Act (Canada), the CDOR Rate; and

 

 

 

(b)

with respect to an issue of Bankers' Acceptances having the same maturity date accepted by a Lender that is not a bank under Schedule I to the Bank Act (Canada), the CDOR Rate plus 10 bps;

 

 

"Disposition" means any sale, assignment, transfer, conveyance, lease or other disposition of all or any portion of any Property of any Loan Party, including, for greater certainty, pursuant to a Sale/Leaseback, in a single transaction or a series of related transactions and the word "Dispose" shall have a correlative meaning;

 

"Distribution" by a Person means:

 

 

(a)

any declaration, payment or setting aside for payment of any dividend, return of capital or other distribution on or in respect of any of the Equity Interests of such Person;

 

 

 

(b)

any redemption, retraction, purchase, retirement or other acquisition, in whole or in part, of any of the Equity Interests of such Person;

 

 

 

(c)

the payment of any principal, interest, fees, redemption amounts or other amounts on or in respect of any loans, advances or other indebtedness owing at any time by such Person to a holder of Equity Interests of such Person or an Affiliate of such holder;

 

 

 

(d)

any loan, advance, payment of management or consulting fees or reimbursement of costs which is made by the Person to or in favour of a holder of Equity Interests of such Person or an Affiliate of such holder except where any such payment is made to any such holder in such holder's capacity as an officer, director or employee of such Person in the ordinary course of business; or

 

 

 

(e)

the transfer by the Person of any Property for consideration of less than its or their fair market value or on non-arms' length terms and conditions to a holder of Equity Interests of such Person or an Affiliate of such holder;

 

 

whether any of the foregoing is made, paid or satisfied in or for cash, property or both;

 

"Drawdown" means the advance of a Borrowing other than as a result of a Conversion, Rollover or a drawing under a Letter of Credit;

 

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"Drawdown Date" means each Business Day on which Borrowings are to be made pursuant to a request from the Borrower under Section 3.5;

 

"EBITDA" means, for any fiscal period ending at a particular time and as determined in accordance with GAAP on a consolidated basis in respect of the Borrower, but excluding therefrom all Non-Material Foreign Subsidiaries, the sum of:

 

 

(a)

all Net Income for such period;

 

 

(b)

all Interest Expense to the extent deducted in determining such Net Income;

 

 

(c)

all amounts deducted in the calculation of such Net Income in respect of the provision for income taxes;

 

 

 

(d)

all amounts deducted in the calculation of such Net Income in respect of non-cash items, including depreciation and amortization, future taxes, non-cash losses or write-downs resulting from foreign currency obligations (in accordance with GAAP) or from the Mark-to-Market of outstanding Swaps (in accordance with GAAP), stock-based compensation and the write down or impairment of Property;

 

 

 

(e)

all non-recurring extraordinary losses (other than in the ordinary course of business) acceptable to the Lenders (acting reasonably), to the extent deducted in the calculation of such Net Income;

 

 

 

(f)

any other unusual or non-recurring cash charges, expenses or losses designated by the Borrower with the prior written consent of the Lenders (in their sole discretion), in each case, to the extent deducted in the calculation of such Net Income; and

 

 

 

(g)

all losses attributable to minority Equity Interests in any Person or Distributions received in cash in respect of any minority Equity Interest in any Person, in each case, to the extent deducted in the calculation of such Net Income;

 

 

less (on a consolidated basis in respect of the Borrower, but excluding therefrom all Non-Material Foreign Subsidiaries, without duplication), to the extent included in the calculation of such Net Income:

 

 

(h)

earnings attributable to extraordinary and non-recurring earnings and gains (other than in the ordinary course of business) acceptable to the Lenders (acting reasonably);

 

 

 

(i)

earnings attributable to minority Equity Interests (unless and to the extent actually distributed to the Borrower or a Subsidiary of the Borrower); and

 

 

 

(j)

any other non-cash items increasing such Net Income for such period including non-cash gains or write-ups resulting from foreign currency obligations (in accordance with GAAP) or from the Mark-to-Market of outstanding Swaps (in accordance with GAAP);

 

 

provided that, for the purposes of this definition:

 

 

(i)

EBITDA as at the end of any particular Fiscal Quarter shall be calculated on an Annualized Basis; and

 

 

 

(ii)

to the extent acceptable by the Administrative Agent and the Lenders:

 

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(A)

if any Material Acquisition of Collateral is made by a Loan Party (whether by amalgamation, asset or share acquisition or otherwise) at any time during the relevant period of calculation, such Material Acquisition shall be deemed to have been made on and as of the first day of such calculation period; and

 

 

 

(B)

if any Material Disposition of Collateral is made by a Loan Party (whether by asset or share disposition or otherwise) at any time during the relevant period of calculation, or the Collateral ceases to be owned by a Loan Party, such Material Disposition shall be deemed to have been made on and as of the first day of such calculation period;

 

 

"EEA Financial Institution" means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a Lender Parent of an institution described in clause (a) of this definition, or (c) any institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its Lender Parent;

 

"EEA Member Country" means any of the member states of the European Union, Iceland, Liechtenstein and Norway;

 

"EEA Resolution Authority" means any public administrative authority or any Person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution;

 

"Effective Date" means the date on which all of the conditions precedent under Section 8.1 have been satisfied;

 

"Eligible Accounts Receivable" means at any time, any Account Receivable of the Borrower, on a consolidated basis (excluding all Account Receivables of Non-Material Foreign Subsidiaries) (net of any credit balances, returns, trade discounts, or unbilled amounts or retention) that satisfies and at all times continues to satisfies the following criteria of eligibility (and the Borrower by including such Account Receivable in any computation of the Operating Facility Borrowing Base shall be deemed to represent and warrant to the Administrative Agent and the Lenders that to the knowledge of the Borrower all of the following statements are accurate and complete with respect to such Account Receivable):

 

 

(a)

such Account Receivable is a valid and legally enforceable obligation of the applicable account debtor;

 

 

 

(b)

such Account Receivable is genuine as appearing on its face or as represented in the books and records of the Borrower on a consolidated basis;

 

 

 

(c)

such Account Receivable is free from valid claims regarding rescission, cancellation or avoidance, whether by operation of Applicable Law or otherwise, and except to the extent of any reduction made pursuant to paragraph (e) of this definition is net of all then applicable holdbacks and prepayment credits;

 

 

 

(d)

such Account Receivable does not relate to services not as of yet completed;

 

 

(e)

without limiting the generality of paragraph (c) of this definition, such Account Receivable is not subject to any offset, counterclaim or other defence on the part of the account debtor or any claim

 

 

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by the account debtor that denies liability in whole or in part; and, if the account debtor denies liability only in part, the undisputed portion of the Account Receivable shall be allowed so long as the account debtor has agreed that it will pay such portion not in dispute in accordance with its terms;

 

 

(f)

such Account Receivable is not outstanding more than 90 days after its billing date, provided that the under 90-day portion may be included where: (i) the over 90 day portion is less than 10% of the entire Account Receivable, (ii) the Operating Lender has nevertheless designated the Account Receivable as good, or (iii) the account debtor has a rating of BBB or better from each of S&P or DBRS;

 

 

 

(g)

such Account Receivable is owed by an account debtor whose principal place of business is located in a Qualified Jurisdiction and, if an account debtor's principal place of business is located in a Qualified Jurisdiction other than Canada, such Account Receivable is also supported by a letter of credit acceptable to the Administrative Agent, in its sole discretion;

 

 

 

(h)

such Account Receivable is denominated in Canadian Dollars;

 

 

(i)

such Account Receivable is subject to a perfected Security Interest in favour of the Administrative Agent;

 

 

 

(j)

such Account Receivable is, and at all times will be, free and clear of all Security Interests other than Priority Payables and any other Permitted Encumbrances;

 

 

 

(k)

such Account Receivable is not in respect of a builder's lien or similar holdbacks;

 

 

(l)

the Account Receivable does not arise from a sale or lease to or rendering of services to an Affiliate of any Loan Party or to an employee, agent, shareholder, director or other representative of any Loan Party, or, in each case, to their respective Affiliates;

 

 

 

(m)

in the case of the sale of goods, the subject goods have been sold to an account debtor on a true sale basis on open account, or subject to contract, and not on consignment, on approval or on a "sale or return" basis or subject to any other repurchase or return agreement, no material part of the subject goods has been returned, rejected, lost or damaged, and such Account Receivable is not evidenced by chattel paper or an instrument of any kind unless possession or control of such chattel paper or instrument has been delivered to the Administrative Agent on terms acceptable to the Administrative Agent;

 

 

 

(n)

the account debtor of the Account Receivable is not a Governmental Authority except to the extent the Account Receivable is assignable without consent or all necessary consents to assignment have been obtained and all applicable statutory requirements for consent have been obtained; and

 

 

 

(o)

the account debtor obligated on the Account Receivable has not ceased to carry on business or become insolvent, admitted its inability to pay its debts as they come due or that it is otherwise insolvent, made a general assignment for the benefit of its creditors, or consented to or applied for the appointment of a Receiver, trustee, custodian, liquidator for itself or any material part of its property, and no petition has been filed by or against the account debtor under any Debtor Relief Law which is outstanding at such date.

 

 

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Any Accounts Receivable which are at any time Eligible Accounts Receivable but which subsequently fail to meet any of the foregoing requirements shall immediately cease to constitute Eligible Accounts Receivable hereunder;

 

"Eligible Assignee" means  any  Person  that  meets  the  requirements  to  be  an  assignee  under  Section 13.1(b)(iii), 13.1(b)(v) and 13.1(b)(vi) (subject to such consents, if any, as may be required under Section 13.1(b)(iii));

 

"Environmental Certificate" means a certificate substantially in the form of Schedule "H" hereto;

 

"Environmental Laws" means all Applicable Laws and Governmental Actions regarding the environment or pursuant to which Environmental Liabilities could arise or have arisen, including all Applicable Laws and Governmental Actions relating to the Release or threatened Release of any contaminant or the generation, use, storage or transportation of any contaminant;

 

"Environmental Liabilities" means any and all liabilities for any Release, any environmental damage, any contamination or any other environmental problem caused or alleged to have been caused to any Person, Property or the environment as a result of any Release or the condition of any Property, whether or not caused by a breach of Applicable Laws, including all liabilities arising from or related to any surface, underground, air, groundwater, or surface water contamination; the abandonment or plugging of any well; restorations and reclamations; the removal of or failure to remove any foundations, structures or equipment; the cleaning up or reclamation of storage sites; any Release; violation of pollution standards; and personal injury (including sickness, disease or death) and property damage arising from the foregoing;

 

"Environmental Report" means a detailed independent Phase I environmental report prepared by John Wood Group PLC or another independent environmental consultant or firm thereof satisfactory to the Majority Lenders, acting reasonably, which report shall be in form and substance satisfactory to the Majority Lenders, acting reasonably;

 

"Equity Interest" means:

 

 

(a)

in the case of any corporation, all capital stock and any securities exchangeable for or convertible into capital stock;

 

 

 

(b)

in the case of an association or business entity, any and all shares, interests, participation rights or other equivalents of corporate stock (however designated) in or to such association or entity;

 

 

 

(c)

in the case of a partnership, limited liability company or unlimited liability company, partnership or membership interests (whether general or limited), as applicable; and

 

 

 

(d)

any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distribution of Property of, the issuing Person,

 

 

and including, in all of the foregoing cases described in clauses (a), (b), (c) or (d), any warrants, rights or other options to purchase or otherwise acquire any of the interests described in any of the foregoing cases;

 

"Equivalent Amount" in one currency (the "First Currency") of an amount in another currency (the "Other Currency") means, as of the date of determination, the amount of the First Currency which would be required to purchase such amount of the Other Currency at the spot rate of exchange for such conversion as quoted by the Bank of Canada at 4:30 p.m. (Toronto time) on the Business Day that such

 

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conversion is to be made or, if such conversion is to be made before 4:30 p.m. on such Business Day, 4:30 p.m. on the immediately preceding Business Day or, if such date of determination is not a Business Day, on the Business Day immediately preceding such date of determination, and, in either case, if no such rate is quoted, at such other rate as may have been agreed to by the Borrower and the Administrative Agent;

 

"Escrow Funds" has the meaning ascribed thereto in Section 10.4;

 

"EU Bail-In Legislation Schedule" means the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor Person), as in effect from time to time;

 

"Event of Default" means any of the events or circumstances specified in Section 10.1; "Excluded Assets" means, collectively:

 

(a)

all Property owned from time to time by any Subsidiary that is a Non-Material Foreign Subsidiary (but, for greater certainty, only while it is a Non-Material Foreign Subsidiary); and

 

 

 

(b)

all Equity Interests held by the Borrower or any Material Subsidiary in a Non-Material Foreign Subsidiary (but, for greater certainty, only while it is a Non-Material Foreign Subsidiary);

 

 

"Excluded Taxes" means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder;

 

 

(a)

taxes imposed on or measured by its overall net income (however denominated), and franchise taxes imposed on it, by the jurisdiction (or any political subdivision thereof) under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located or which otherwise has jurisdiction over such Lender;

 

 

 

(b)

any branch profits taxes or any similar tax imposed by any jurisdiction in which the Borrower is located; and

 

 

 

(c)

in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 11.3(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party hereto (or designates a new lending office) or is attributable to such Foreign Lender's failure or inability (other than as a result of a Change in Law) to comply with Section 11.2(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 11.2(a);

 

 

"Existing ATB Commitment Letter" means the amended and restated commitment letter dated as of December 19, 2018 provided by ATB, as lender, to the Borrower, as borrower;

 

"Existing MasterCard Obligations" means the indebtedness, liabilities and obligations of the Borrower to ATB arising under the corporate MasterCard facilities provided by ATB to the Borrower in connection with the Existing ATB Commitment Letter;

 

"Facilities" means, collectively, the Syndicated Facility and the Operating Facility and "Facility" means either of them;

 

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"Financial Assistance" means, with respect to any Person and without duplication, any loan, Guarantee, indemnity, assurance, acceptance, extension of credit, loan purchase, share purchase, equity or capital contribution, equity or capital investment or other form of direct or indirect financial assistance or support by such Person of any other Person or in respect of any obligation of such other Person (contingent or otherwise). The amount of any Financial Assistance is the amount of any loan, investment or other direct or indirect financial assistance or support, without duplication, given, unless the Financial Assistance is limited to a determinable amount, in which case the amount of the Financial Assistance is the determinable amount;

 

"Financial Lease" means any lease of Property, or any similar arrangement which would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on a balance sheet of a lessee, where the lessee is the Borrower or a Subsidiary of the Borrower, but for certainty does not include an Operating Lease or a premises lease, in each case entered into in the ordinary course of business (and, for certainty, no Sale/Leaseback shall be considered to be entered into in the ordinary course of business);

 

"Fiscal Quarter" means the three month period commencing on the first day of each Fiscal Year and each successive three month period thereafter during such Fiscal Year;

 

"Fiscal Year" means the Borrower's fiscal year commencing on January 1 of each year and ending on December 31 of such year;

 

"Fixed Charge Coverage Ratio" means, as at the Covenant Conversion Date and as at the end of each Fiscal Quarter thereafter, the ratio of (i) EBITDA as at such Fiscal Quarter, less Unfunded Capital Expenditures, cash taxes and preferred cash payments and tax distribution amounts paid during such period (each calculated on an Annualized Basis), to (ii) Fixed Charges as at such Fiscal Quarter, but excluding therefrom the aggregate amount of any Borrowings permanently prepaid by the Borrower during such period on a dollar-for-dollar basis;

 

"Fixed Charges" means, for any fiscal period ending at a particular time, Interest Expense, together with the aggregate amount of all:

 

 

(a)

scheduled principal payments in respect of any Senior Funded Debt (including any Senior Funded Debt arising under this Agreement, any Bilateral Financial Services Agreement or a Permitted Swap);

 

 

 

(b)

payments made in respect of Other Financial Assistance; and

 

 

(c)

lease payments in respect of real or personal property leases;

 

provided that, for the purposes of this definition, Fixed Charges as at the end of any particular Fiscal Quarter shall be calculated on an Annualized Basis;

 

"Foreign Lender" means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is resident for tax purposes. For purposes of this definition, Canada and each province and territory thereof shall be deemed to constitute a single jurisdiction;

 

"Fortis LC" means the Letter of Credit in the amount of $5,329,900, issued by the Operating Lender to FortisAlberta Inc. for the benefit of the Borrower on the Effective Date;

 

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"GAAP" means generally accepted accounting principles which are in effect from time to time in Canada, and which effective January 1, 2011 encompass International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board and interpretations of the International Financial Reporting Interpretations Committee as issued by the International Accounting Standards Board;

 

"Governmental Action" means an authorization, consent, approval, waiver, order, decree, licence, exemption, permit, registration, filing, qualification or declaration of or with any Governmental Authority (other than routine reporting requirements) or the giving of notice to any Governmental Authority or any other action in respect of a Governmental Authority;

 

"Governmental Authority" means the government of Canada or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank) and including a Minister of the Crown, the Superintendent of Financial Institutions, Health Canada or any other comparable or similar authority or agency;

 

"Guarantee" means any undertaking, whether direct or indirect, contingent or otherwise, to assume, guarantee, endorse, contingently agree to purchase or to provide funds for the payment of, or otherwise become liable in respect of, any indebtedness or liability of any Person, or indemnifying any Person against loss in any manner, whether direct or indirect; provided that the amount of each Guarantee shall be deemed to be the amount of the indebtedness or liability guaranteed, indemnified or assured thereby, unless the Guarantee is limited to a specified amount or to realization on specified Property, in which case the amount of such Guarantee shall be deemed to be the lesser of such specified amount or the fair market value of such specified Property, as the case may be, or the amount of such indebtedness or liability;

 

"Health Canada Licence" means, collectively, any licence issued by Health Canada to any of the Loan Parties in respect of the Business, including without limitation: (a) licence no. LIC-K8399K3QIB-2018-4 dated effective June 21, 2019 granted to the Borrower to process and cultivate Cannabis at 6102 48th Avenue, Olds, Alberta, T4H 1V1, as the same may be amended, supplemented or otherwise modified from time to time; (b) licence no. LIC-4QZ85KDBPT-2018-1 dated effective December 14, 2018 granted to the Borrower to cultivate, process and sell (for medical purposes) Cannabis, and (c) import permit no. IMP-0047-2019 dated effective May 3, 2019 granted to the Borrower in connection with the importation of Cannabis;

 

"Hellard SPA" means the share purchase agreement among Edward Hellard and the Borrower dated July 17, 2019 whereby the Borrower agrees to purchase all of the outstanding shares in 208;

 

"Hellard SPA Permitted Debt" has the meaning ascribed thereto in paragraph (c) of the definition of Permitted Subordinated Debt;

 

"Indemnified Taxes" means Taxes other than Excluded Taxes; "Indemnitee" has the meaning ascribed thereto in Section 14.3(c);

"Industrial Hemp" has the meaning ascribed to such term or the term "hemp" under: (a) the Applicable Law of any Qualified Jurisdiction, including the Industrial Hemp Regulations (Canada) issued under the Cannabis Act, or (ii) the Agricultural Marketing Act of 1946 (United States);

 

"Information" has the meaning ascribed thereto in Section 13.4;

 

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"Insurance Consultant" means INTECH Risk Management Inc. or such other independent consultant satisfactory to the Administrative Agent, in its sole discretion;

 

"Intellectual Property" means all patents, trademarks, tradenames, copyrights, technology, software and other Property customarily considered to be intellectual property;

 

"Intercreditor Agreement" means the intercreditor agreement dated as of the date hereof entered into among, inter alios, the Administrative Agent, for and on behalf of the Lenders, the SAF Agent, for and on behalf of the SAF Lenders and the Loan Parties;

 

"Interest Coverage Ratio" means, as at the end of each relevant Fiscal Quarter of the Borrower commencing with the Fiscal Quarter ending September 30, 2019, the ratio of: (i) EBITDA as at such Fiscal Quarter, to (ii) Interest Expense as at such Fiscal Quarter;

 

"Interest Expense" means for any fiscal period ending at a particular time, without duplication, interest expense of the Borrower determined on a consolidated basis in accordance with GAAP (excluding Non- Material Foreign Subsidiaries) in respect of Senior Funded Debt, as the same would be set forth or reflected in a consolidated statement of operations of the Borrower and, in any event, shall include:

 

 

(a)

all interest accrued or payable in respect of such period, including capitalized interest and imputed interest with respect to lease obligations included as Debt;

 

 

 

(b)

all fees (including standby and commitment fees, acceptance fees in respect of bankers' acceptances and fees payable in respect of letters of credit, letters of guarantee and similar instruments) accrued or payable in respect of such period, prorated (as required) over such period;

 

 

 

(c)

any difference between the face amount and the discount proceeds of any bankers' acceptances, commercial paper and other obligations issued at a discount, prorated (as required) over such period;

 

 

 

(d)

the aggregate of all purchase discounts relating to the sale of Accounts Receivable in connection with any asset securitization program; and

 

 

 

(e)

all net amounts charged or credited to interest expense under any Interest Swap in respect of such period;

 

 

provided that, for the purposes of this definition, Interest Expense as at the end of any particular Fiscal Quarter shall be calculated on an Annualized Basis;

 

"Interest Date" means the last Business Day of each month;

 

"Interest Swap" means a contract entered into between a Person and a counterparty, on a case by case basis, in connection with interest rate swap transactions, interest rate options, cap transactions, floor transactions, collar transactions and other similar interest rate related transactions, the purpose and effect of which is to mitigate or eliminate such Person's exposure to fluctuations in interest rates;

 

"ISDA Master Agreement" means either the 1992 form of Master Agreement (Multi Currency-Cross Border) or the 2002 form of Master Agreement or any successor form thereof, in each case published and as from time to time amended, restated or replaced by the International Swaps and Derivatives Association, Inc. and as used in this Agreement in relation to Lender Swaps means the form of such agreement as entered into between the applicable Loan Party and the applicable Swap Lender;

 

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"Kamloops Property" means the real property located at 8170 Dallas Road in Kamloops, British Columbia and any buildings or fixtures thereon;

 

"Lender BA Suspension Notice" has the meaning ascribed thereto in Section 11.5(b);

 

"Lender Outstandings" means collectively all Borrowings, Cash Management Obligations, Creditcard Obligations and Permitted Swap Indebtedness;

 

"Lender Parent" means any Person that directly or indirectly controls a Lender and, for the purposes of this definition, "control" shall have the same meaning as set forth in the definition of "Affiliate" contained herein;

 

"Lender Swap" means any Swap entered into by any Loan Party where the other party (other than such Loan Party), at the time the Swap was entered into, is a Lender or an Affiliate of a Lender, whether or not such Lender remains a Lender thereafter;

 

"Lenders" means the Persons listed on the signature pages hereto as Lenders and any other Person that shall have become party hereto pursuant to an Assignment and Assumption, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Assumption, and "Lender" means any one of them;

 

"Letter of Credit" means a standby or documentary letter of credit or letter of guarantee in Cdn. Dollars issued by the Operating Lender at the request of the Borrower pursuant to this Agreement, but which, at all times, serves as a payment guarantee of the Borrower's financial obligations and is treated as a direct credit substitute for purposes of applicable capital adequacy guidelines;

 

"Letter of Credit Fee" means, with respect to each Letter of Credit, a fee based on the applicable Level as set forth in the table in the definition of Applicable Margin for Letters of Credit and expressed as a rate per 365 day period with respect to Letters of Credit issued by the Operating Lender hereunder;

 

"Loan Documents" means this Agreement, the Loan Party Guarantee, all other Security, the Intercreditor Agreement, each Bankers' Acceptance, each application and indemnity with respect to a Letter of Credit, arrangement/syndication fee agreements, agency agreements, and all other agreements, certificates, instruments and documents delivered by or on behalf of any Loan Party in connection herewith or therewith from time to time and all future renewals, extensions, or restatements of, or amendments, modifications or supplements to, all or any part of the foregoing, but for greater certainty shall exclude any Bilateral Financial Services Agreements, ISDA Master Agreements and Lender Swaps;

 

"Loan Parties" means, collectively, the Borrower and each Material Subsidiary and "Loan Party" means any of them;

 

"Loan Party Guarantee" means the unlimited liability loan party guarantee dated on or about the date hereof executed by each of the Loan Parties in existence on the Effective Date in favour of the Administrative Agent, for the benefit of the Secured Parties, guaranteeing the Secured Obligations of each other Loan Party then in existence, as amended or supplemented from time to time pursuant to one or more joinder agreements;

 

"Loan to Appraised Value Ratio" means a ratio of the Total Syndicated Facility Commitment to the aggregate Appraised Value;

 

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"Loan to Cost Ratio" means a ratio of the Total Syndicated Facility Commitment to the aggregate Cost Basis Value;

 

"Majority Lenders" means:

 

 

(a)

when there are less than three Lenders, all of the Lenders;

 

 

(b)

during the continuance of a Default or an Event of Default when there are any Borrowings, and subject to Section 10.5(a), those Lenders to whom there is owing 66⅔% or more of the aggregate Borrowings under the Syndicated Facility and Operating Facility; and

 

 

 

(c)

at any other time, those Lenders whose Commitments are, in the aggregate, at least 66⅔% of the Total Commitment;

 

 

provided that the Borrowings and Commitments of any Defaulting Lender shall be disregarded in determining Majority Lenders from time to time;

 

"Marijuana" has the meaning ascribed to such term under: (a) the Applicable Law in any Qualified Jurisdiction, or (b) the Controlled Substances Act (United States);

 

"Mark-to-Market" means, in respect of any Swap and for any day on which the Mark-to-Market is calculated, the amount, if any, that would be payable by any Loan Party to a counterparty (expressed as a positive number), or by such counterparty to such Loan Party (expressed as a negative number), estimated by making at mid-market the calculations required by the ISDA Master Agreement between such counterparty, on the one hand, and such Loan Party, on the other hand, as if such ISDA Master Agreement were being terminated as a result of a Termination Event (as defined in the ISDA Master Agreement) with two Affected Parties (as defined in the ISDA Master Agreement) on that day of calculation;

 

"Material Acquisition" means any Acquisition which, individually or together with all Acquisitions completed in such Fiscal Year, increases the consolidated Canadian assets of the Borrower (as shown on the combined consolidated balance sheet of the Borrower in the financial statements most recently provided to the Administrative Agent) by more than 5.0%;

 

"Material Adverse Effect" means any event, circumstance, occurrence or change which would reasonably be expected to:

 

 

(a)

impair in any material manner the ability of any Loan Party to perform any of its obligations under this Agreement or any other Loan Document;

 

 

 

(b)

have any material and adverse effect upon the validity or enforceability of any of the Security or upon the ranking of any of the Security Interests granted thereby or the rights or remedies intended or purported to be granted to the Administrative Agent under or pursuant to the Security; or

 

 

 

(c)

be material and adverse to the business, operations, Property, condition (financial or otherwise), results of operations or prospects of the Loan Parties, on a consolidated basis and taken as a whole;

 

 

"Material Agreement" means each agreement listed in Schedule "K" and any other contract, undertaking, agreement or other instrument to which a Loan Party is a party or to which any of its

 

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Property may be subject: (a) pursuant to which any Loan Party is bound or to which it or any of its Property is subject, pursuant to which a Loan Party (i) generated revenues or incurred expenditures, in either case, greater than the Threshold Amount during the immediately preceding Fiscal Year, or (ii) is projected to generate revenues or incur expenditures, in either case greater than the Threshold Amount during the then current or immediately succeeding Fiscal Year, or (b) for which breach, non-performance, cancellation, termination or failure to renew could reasonably be expected to have a Material Adverse Effect;

 

"Material Disposition" means a Disposition which, individually or together with all Dispositions completed in such Fiscal Year, decreases the consolidated Canadian assets of the Borrower (as shown on the combined consolidated balance sheet of the Borrower in the financial statements most recently provided to the Administrative Agent) by more than 5.0%;

 

"Material Licenses" means each Health Canada License, each licence, permit or approval listed in Schedule "L" and any other licence, permit, registration, qualification or approval (or application therefor) issued by any Governmental Authority to any Loan Party for which breach, non-performance, cancellation, termination or failure to renew could reasonably be expected to have a Material Adverse Effect;

 

"Material Subsidiary" means any wholly-owned direct or indirect Subsidiary of the Borrower that is designated by the Borrower as a Material Subsidiary in accordance with Section 9.4 and which has provided Security in accordance with Article 6 but only for so long as it remains, in the case of a corporation, a corporation of which all shareholders are Loan Parties, in the case of a partnership, a partnership in which all partners are Loan Parties and, in the case of a trust, a trust in which all beneficiaries are Loan Parties, unless otherwise agreed to in writing by the Majority Lenders; provided that, notwithstanding the foregoing, no Non-Material Foreign Subsidiary will be a Material Subsidiary;

 

"Maturity Date" means the earlier of August 27, 2021 and the date on which the Facilities are terminated pursuant to Section 10.2;

 

"Net Income" means, for any fiscal period, the net income or net loss of the Borrower determined on a consolidated basis in accordance with GAAP, as set forth in the consolidated financial statements of the Borrower for such period;

 

"Non-Acceptance Discount Rate" means, for any day, the Discount Rate in paragraph (b) of the definition thereof, other than as it relates to ATB, where it shall mean the CDOR Rate;

 

"Non-Acceptance Lender" means a Lender which does not accept bankers' acceptances in the ordinary course of its business;

 

"Non-Consenting Lender" means any Lender that does not approve any consent, waiver or amendment that (i) requires the approval of all affected Lenders in accordance with the terms of Section 12.19 and (ii) has been approved by the Majority Lenders;

 

"Non-Defaulting Lender" means, at any time, each Lender that is not a Defaulting Lender at such time;

 

"Non-Material Foreign Subsidiary" means SGI Partnership, Sundial Managing Partner Inc., Sundial UK Limited, Project Seed Topco Limited, Project Seed Bidco Limited, Bridge Farm Nurseries Limited, Neame Lea Marketing Limited, Neame Lea Nursery Limited, Neame Lea Fresh Limited, Sundial Portugal, Unipessoal LDA, Sundial Deutschland GmbH and any other direct or indirect Subsidiary of the Borrower incorporated or formed outside of Canada; provided that no such Subsidiary, at any time, has

 

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any assets located or domiciled in Canada (other than Sundial Managing Partner Inc.'s Equity Interests in SGI Partnership and SGI Partnership's Equity Interests in Sundial UK Limited) or operations or revenue originating or derived from the Business in Canada;

 

"Non-Material Canadian Subsidiary" means any Subsidiary of the Borrower which is neither a  Material Subsidiary nor a Non-Material Foreign Subsidiary;

 

"Non-Takeover Lenders" has the meaning ascribed to it in Section 3.14(b); "Old GAAP" has the meaning ascribed to it in Section 1.5(b);

"One Month BA Rate" means, on any day, the CDOR Rate (determined as of 8:00 a.m. Calgary time on such day) which would be applicable in respect of an issuance of Bankers' Acceptances with a term to maturity of one month issued on such day, or if such day is not a Business Day, then on the immediately preceding Business Day;

 

"Operating Facility" has the meaning set forth in Section 3.1(a)(ii); "Operating Facility Amount" means Cdn. $6,000,000;

"Operating Facility Borrowing Base" means an amount equal to 75% of the aggregate value of all Eligible Accounts Receivable, less the aggregate amount of all Priority Payables, plus the aggregate amount of all cash deposited into a Borrower Cash Collateral Account pursuant to Section 3.8(a) (in respect of Letters of Credit issued by the Operating Lender), calculated monthly;

 

"Operating Facility Borrowing Base Certificate" means a certificate substantially in the form attached hereto as Schedule "I";

 

"Operating Facility Commitment" means, with respect to the Operating Lender, its obligation to provide Operating Accommodations to the Borrower, subject to the terms of this Agreement, in an aggregate amount not at any time in excess of the Operating Facility Amount, as such amount may hereafter be cancelled, reduced, increased or terminated from time to time pursuant to the provisions of this Agreement;

 

"Operating Lease" means a lease of real or personal property which would have been classified as an operating lease under GAAP as in effect prior to December 31, 2018;

 

"Operating Lender" means ATB in its capacity as the provider of the Operating Facility and any successor pursuant to terms hereof;

 

"Operating Lender's Account for Payments" means the following account maintained by the Operating Lender to which payments and transfers are to be effected as follows:

 

ATB Financial

102 - 8th Avenue S.W. Calgary, Alberta T2P 1B3

Swift Code: ATBRCA6EXXX

Beneficiary/For Account of: Sundial Growers Inc.

Address: Suite 600, 215 – 2nd Street S.W., Calgary, Alberta T2P 1M4 Transit: 021908219

Account: 00260965700

 

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or such other place or account as may be agreed upon by the Operating Lender and the Borrower from time to time;

 

"Operating Lender's Branch of Account" means the office or branch of the Operating Lender located at the address set forth under the Operating Lender's name on Schedule "A" or such other office or branch of the Operating Lender in Canada as the Operating Lender may advise the Borrower in writing;

 

"Organizational Chart" means the organizational chart relating to the Loan Parties attached hereto as Schedule "M";

 

"Other Financial Assistance" has the meaning ascribed thereto in paragraph (h) of the definition of Permitted Financial Assistance;

 

"Other Taxes" means all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or under any other Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document;

 

"Overdraft" means, in respect of the Operating Facility, an amount owing by the Borrower to the Operating Lender from time to time as a result of clearance of cheques or drafts drawn on, or transfers of funds from, accounts that the Borrower maintains with the Operating Lender at the Operating Lender's Branch of Account for such purpose;

 

"Participant" has the meaning assigned to such term in Section 13.1(d);

 

"Pension Plan" means a plan or arrangement maintained, sponsored or funded by any Loan Party or in respect of which any Loan Party has any liability, contingent or otherwise, in each case, that is or is intended to be a "registered pension plan" as such term is defined in the Income Tax Act (Canada) (including any such plan that contains a "defined benefit provision" as such term is defined in the Income Tax Act (Canada));

 

"Permitted Acquisition" means:

 

 

(a)

any Acquisition in respect of which each of the following criteria shall have been satisfied:

 

 

(i)

the aggregate cash consideration paid, directly or indirectly, by the Loan Parties in respect thereof (but for certainty excluding consideration in the form of Equity Interests or funded using the proceeds of an offering of Convertible Debentures constituting Permitted Subordinated Debt or an equity issuance by the Borrower), taken together with the aggregate amount of (A) the cash consideration in respect of all other Acquisitions completed by the Loan Parties prior to the Maturity Date and (B) all Financial Assistance permitted pursuant to paragraph (g) of the definition of Permitted Financial Assistance, does not, at any time, exceed $5,000,000;

 

 

 

(ii)

the business or operating assets related to the Acquisition are located in country which is not a Prohibited Country;

 

 

 

(iii)

the Acquisition is not a hostile acquisition;

 

 

(iv)

the Acquisition is related to the Business;

 

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(v)

the Administrative Agent has received 30 days prior to the closing of the Acquisition due diligence materials including without limitation, the purchase and sale agreement, financial information, any fairness opinions and any Appraisals (if applicable);

 

 

 

(vi)

the Administrative Agent has received evidence that all operating permits, approvals and consents are in place;

 

 

 

(vii)

the Administrative Agent has received evidence of completion of legal and  environmental due diligence along with an officer's certificate certifying there are no environmental liabilities or outstanding litigation that would cause a Material Adverse Effect;

 

 

 

(viii)

if the Acquisition is of a Canadian entity, the Administrative Agent has received evidence that the business or assets acquired shall be free and clear of all Security Interests other than Permitted Encumbrances;

 

 

 

(ix)

no Default or Event of Default has occurred and is continuing immediately prior to the Acquisition, or would occur as a result thereof; and

 

 

 

(x)

the Acquisition could not reasonably be expected to cause or result in a Material Adverse Effect; or

 

 

 

(b)

any Acquisition which is consented to in writing by the Administrative Agent on behalf of the Majority Lenders;

 

 

"Permitted Contest" means any action taken by a Loan Party in good faith by appropriate proceedings diligently pursued to contest or appeal any Taxes, Security Interests or other claims (each, a "contest"), provided that:

 

 

(a)

such Loan Party has established reasonable reserves for such contest in accordance with GAAP;

 

 

(b)

proceeding with such contest does not have, and would not reasonably be expected to have a Material Adverse Effect; and

 

 

 

(c)

proceeding with such contest will not create a material risk of sale, forfeiture or loss of, or interference with the use or operation of, a material part of the Property of such Loan Party;

 

 

"Permitted Dispositions" means, in respect of the Loan Parties:

 

 

(a)

a Disposition of inventory in the ordinary course of business and in keeping with prudent industry practice;

 

 

 

(b)

a Disposition of any tools, implements, Parts, equipment or machinery which may have become worn out, unservable, unserviceable, obsolete, unsuitable or unnecessary in its operations or activities, provided that such Disposition is in the ordinary course of business and in keeping with prudent industry practice;

 

 

 

(c)

a Disposition of the Kamloops Property;

 

 

(d)

abandonments, surrenders or terminations of immaterial rights or interests effected in the ordinary course of business in accordance with prudent industry practice;

 

 

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29

 

 

 

 

 

(e)

a Disposition by a Loan Party to another Loan Party;

 

 

(f)

any Disposition by a Loan Party of Excluded Assets;

 

 

(g)

any Disposition of Property not otherwise described in paragraphs (a) through (f) above, provided that the aggregate fair market value of the Property so Disposed of in any Fiscal Year does not exceed $1,000,000; and

 

 

 

(h)

any other Disposition to which the Majority Lenders agree in writing;

 

provided that, in the case of paragraphs (c) or (g) above, no Default or Event of Default has occurred and is continuing or would result therefrom;

 

"Permitted Distributions" means for the Loan Parties, Distributions:

 

 

(a)

to another Loan Party; and

 

 

(b)

solely in the form of Equity Interests;

 

provided that, in each case, no Default or Event of Default has occurred and is continuing or would reasonably be expected to result therefrom;

 

"Permitted Encumbrances" means any of the following Security Interests or other encumbrances:

 

 

(a)

Security Interests for Taxes, assessments or governmental charges and any other statutory Security Interests which are either not due or delinquent or relate to claims which are subject to a Permitted Contest;

 

 

 

(b)

any Security Interest arising in connection with worker's compensation, unemployment insurance, pension and employment laws, or other social benefits laws or regulations which are:

 

 

 

(i)

not due or delinquent and which have not at such time been filed pursuant to law and no other statutory proceedings have been taken to enforce the same; or

 

 

 

(ii)

subject to a Permitted Contest;

 

 

(c)

the Security Interest of any judgment rendered, or claim filed, against a Loan Party which is subject to a Permitted Contest, provided that no proceedings have been taken to enforce the same or the execution thereof has been stayed;

 

 

 

(d)

undetermined or inchoate Security Interests arising in the ordinary course of business and incidental to construction or current operations which relate to obligations not due or delinquent or which have not at such time been filed pursuant to law, and no other statutory proceedings have been taken to enforce the same;

 

 

 

(e)

Security Interests arising by operation of law such as builder's liens, carriers' liens, materialmens' liens and other liens of a similar nature which relate to obligations not due or delinquent;

 

 

 

(f)

easements, rights-of-way, servitudes or other similar rights in real property (including rights-of- way and servitudes for railways, sewers, drains, pipe lines, gas and water mains, electric light and power and telephone or telegraph or cable television conduits, poles, wires and cables) granted to or reserved or taken by other Persons and other minor defects, encumbrances and restrictions

 

 

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which either alone or in the aggregate do not materially detract from the value of such real property or materially impair its use in the operation of the Business of such Loan Party;

 

 

(g)

Security Interests given by a Loan Party to a public utility or any municipality or governmental or other public authority when required by such public utility or municipality or other governmental authority in the ordinary course of the business of such Loan Party provided such Security Interests do not either alone or in the aggregate materially detract from the value of the Property affected thereby or materially impair its use in the operation of the Business of such Loan Party;

 

 

 

(h)

inchoate liens or any rights of distress reserved in or exercisable under any real property lease or sublease to which any Loan Party is a lessee which secure the payment of rent or compliance with the terms of such lease or sublease, provided that such rent is not then overdue and such Loan Party is then in compliance in all material respects with such terms;

 

 

 

(i)

liens securing the performance of bids, tenders, leases, contracts (other than for the repayment of borrowed money), surety and appeal bonds and performance bonds and other obligations of like nature, incurred as an incident to and in the ordinary course of business;

 

 

 

(j)

the Security Interests granted under the Security and any Security Interests created in favour of the Administrative Agent pursuant to any of the Loan Documents (other than the Intercreditor Agreement);

 

 

 

(k)

reservations, limitations, provisos and conditions expressed in any original grant from the Crown of any real property or interests therein and statutory exceptions to title;

 

 

 

(l)

Security Interests constituted by Financial Leases and Sale/Leasebacks, where the principal amount of indebtedness, obligations or liabilities secured thereby does not exceed the Threshold Amount in aggregate at any one time for all Loan Parties;

 

 

 

(m)

Purchase Money Security Interests provided that: (i) such Security Interests are granted at the time of or within 60 days of the acquisition of the Property subject thereto and are limited to the Property so acquired; and (ii) the principal amount of indebtedness, obligations or liabilities secured thereby does not exceed the Threshold Amount in aggregate at any one time for all Loan Parties;

 

 

 

(n)

Security Interests over specific Property (and for greater certainty excluding general Security Interests such as floating charges and general security agreements with respect to all or substantially all the Property of a Loan Party) which are not otherwise Permitted Encumbrances if the value of the Property secured thereby does not exceed the Threshold Amount in aggregate at any one time for all Loan Parties;

 

 

 

(o)

Security Interests granted by a Loan Party to another Loan Party if such Security Interests have been subordinated and postponed to the Security by a subordination agreement satisfactory to the Administrative Agent acting reasonably;

 

 

 

(p)

Security Interests granted by a Loan Party in favour of the SAF Agent pursuant to the terms of the SAF Documents but subject, at all times, to the Intercreditor Agreement; and

 

 

 

(q)

all such other claims and encumbrances as are specifically disclosed by notice in writing from the Borrower to the Administrative Agent to the extent that the Majority Lenders, by specific notice

 

 

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in writing to the Borrower, consent to such claims and encumbrances as Permitted Encumbrances;

 

"Permitted Financial Assistance" means:

 

 

(a)

Financial Assistance pursuant to the Loan Party Guarantee;

 

 

(b)

Financial Assistance provided to senior employee personnel of a Loan Party in an amount not exceeding $1,000,000 in the aggregate at any one time;

 

 

 

(c)

Financial Assistance provided by a Loan Party to, or for the benefit of, another Loan Party;

 

 

(d)

Financial Assistance that is, by its terms, satisfied in the form of Equity Interests or otherwise financed exclusively using the proceeds of an offering of Convertible Debentures constituting Permitted Subordinated Debt or an equity offering by the Borrower;

 

 

 

(e)

Financial Assistance provided in connection with the SAF Credit Agreement but subject, at all times, to the Intercreditor Agreement;

 

 

 

(f)

Financial Assistance provided by the Borrower pursuant to the sale and purchase agreement between Sundial UK Limited, as buyer, Sundial Growers Inc., as guarantor, and Northedge Capital Fund II LP, Northedge Capital Coinvestment II LP, David Ball, Andrew Higginson and others, as sellers, dated February 22, 2019, in an aggregate amount not exceeding the Threshold Amount at any time;

 

 

 

(g)

Financial Assistance provided by a Loan Party to or for the benefit of a non-Canadian Subsidiary in an aggregate amount not exceeding $5,000,000 at any time and subject at all times to the applicable limitations provided for in paragraph (a)(i) of the definition of Permitted Acquisitions; and

 

 

 

(h)

Financial Assistance not otherwise captured above given only after the Covenant Conversion Date in an aggregate amount not exceeding $5,000,000 as at such time or at any time thereafter; provided that: (i) the Borrower is in compliance with all Financial Covenants applicable on and after the Covenant Conversion Date and the Borrower has delivered a Compliance Certificate evidencing such compliance in accordance with Section 9.1(y), and (ii) 100% of the net proceeds of such Financial Assistance shall be used exclusively to support the Loan Parties' Business in Canada (collectively, the "Other Financial Assistance");

 

 

provided further that, in respect of each of paragraphs (b) and (d) through (h) above, no Default or Event of Default has occurred and is continuing or would result therefrom;

 

"Permitted Indebtedness" means:

 

 

(a)

all Debt of a Loan Party to the Administrative Agent, the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders under this Agreement, any Bilateral Financial Services Agreement or a Permitted Swap;

 

 

 

(b)

all Debt of a Loan Party to another Loan Party;

 

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(c)

Debt secured by a Permitted Encumbrance provided that such Debt is within any applicable limitations provided for in the definition of Permitted Encumbrances and the aggregate amount of all such Debt does not, at any time, exceed the Threshold Amount;

 

 

 

(d)

all Debt to the extent constituting Permitted Financial Assistance, provided that such Debt is within any applicable limitations provided for in the definition of Permitted Financial Assistance;

 

 

 

(e)

the SAF Indebtedness in an aggregate principal amount not exceeding $159,575,000 while the Intercreditor Agreement is in effect;

 

 

 

(f)

all Permitted Subordinated Debt; and

 

(g)such other Debt of a Loan Party which the Majority Lenders have consented to in writing; "Permitted Subordinated Debt" means, collectively:

 

(a)

the 2019 Convertible Debentures;

 

 

(b)

the Pre-IPO Convertible Debentures;

 

 

(c)

deferred cash consideration in an amount not exceeding $9,500,000 payable by the Borrower to Edward Hellard in accordance with the terms of the Hellard SPA (the "Hellard SPA Permitted Debt");

 

 

 

(d)

any other Convertible Debentures; and

 

 

(e)

other unsecured Debt of a Loan Party to an Affiliate thereof;

 

provided that, in each case, (i) such Debt is unsecured, and (ii) with the exception of the 2019 Convertible Debentures, the Pre-IPO Convertible Debentures and the Hellard SPA Permitted Debt, such Debt has been fully and absolutely subordinated and postponed in favour of the Secured Obligations pursuant to a written agreement with the Administrative Agent, in form and substance acceptable to the Administrative Agent and the Lenders;

 

"Permitted Swap Indebtedness" means Swap Indebtedness of any Loan Party to a Swap Lender under a Permitted Swap and for which the only security is the Security;

 

"Permitted Swaps" means any Swap permitted by the provisions of Section 9.2(m);

 

"Person" means any natural person, corporation, limited liability company, trust, association, company, partnership, Governmental Authority or other entity;

 

"Platform" has the meaning ascribed to it in Section 14.7(d)(i);

 

"Pre-IPO Convertible Debentures" means the 8% unsecured subordinated convertible notes issued by the Borrower in the aggregate principal amount not exceeding $110,000,000 maturing five (5) years from the date of issuance thereof (being May 10, 2019, May 22, 2019 and May 31, 2019, as applicable);

 

"Prime Loans" means the advances or any portion thereof made available by the Lenders to the Borrower pursuant to either Section 3.5, 3.8, 3.11, 3.12 or 3.16 and outstanding from time to time, which are denominated in Canadian Dollars and on which the Borrower has agreed to pay interest in accordance with Section 5.1;

 

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"Prime Rate" means, with respect to Prime Loans on any day, the greater of:

 

 

(a)

the annual rate of interest announced from time to time by the Administrative Agent or the Operating Lender, as applicable, as being its reference rate then in effect for determining interest rates on Canadian Dollar denominated commercial loans made by the Administrative Agent or the Operating Lender, as applicable, in Canada; and

 

 

 

(b)

the One Month BA Rate in effect on such day plus 100 bps;

 

provided that, if the rate determined above shall ever be less than zero, such rate shall be deemed to be zero for purposes of this Agreement;

 

"Priority Payables" means, at any time, the aggregate of all amounts owing or required to be paid, where the failure to pay any such amount could give rise to a claim which, pursuant to any Applicable Law ranks or is capable of ranking in priority to or pari passu with the Security Interests created by the Security including amounts owing for wages, vacation pay, severance pay, employee deductions, sales tax, excise tax, tax payable pursuant to Part IX of the Excise Tax Act (Canada) (net of GST input credits), income tax, workers compensation, government royalties, pension fund obligations, overdue rents or taxes, holdbacks pursuant to the Builders' Lien Act (Alberta) (or any other similar legislation), unpaid amounts for supplied materials or services which give the supplier or provider thereof the right to assert a Security Interest or holdback claim and other statutory or other claims that have or may have priority over, or rank pari passu with, the Security Interests created by the Security;

 

"Prohibited Country" means any state, country or jurisdiction:

 

 

(a)

which is subject to any Sanction or any other sanction or embargo by the United Nations, Canada, the United States of America, the European Union or the United Kingdom;

 

 

 

(b)

with which either Canada or the United States of America does not maintain diplomatic relations;

 

 

(c)

in relation to which a Loan Party is prohibited by an internal regulation from contracting with a Person resident or connected to that state, country or jurisdiction; or

 

 

 

(d)

which is not a Qualified Jurisdiction;

 

"Project Monitor" means Cuthbert Smith Group Inc. or such other entity acceptable to the Administrative Agent, in its capacity as the project monitor of the Loan Parties' Business in Canada;

 

"Property" means, with respect to any Person, all or any portion of its undertaking, property, equipment and assets for the time being, both real and personal, tangible and intangible, and including, for greater certainty, cash, securities, accounts and contract rights;

 

"Proportionately" means, subject to adjustment pursuant to Section 10.8, the proportion that the Lender Outstandings of any Lender, Swap Lender, Cash Management Lender or Creditcard Lender, as applicable, bears to the aggregate of the Lender Outstandings of all Lenders, Swap Lenders, Cash Management Lenders and Creditcard Lenders, as determined at the Adjustment Time;

 

"Purchase Money Security Interest" means:

 

 

(a)

a Security Interest taken or reserved in Property to secure payment of all or part of its purchase price; and

 

 

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(b)

a Security Interest taken in Property by a Person who gives value for the purpose of enabling a Loan Party to acquire rights in such Property, to the extent that the value is applied to acquire those rights;

 

 

but does not include a Financial Lease or an Operating Lease;

 

"Qualified Jurisdiction" means a country in which it is legal in all political subdivisions therein (including for greater certainty on a federal, state and municipal basis) to undertake any CannabisRelated Activities and the Business of the Loan Parties; provided that in each case: (a) such country has been approved in writing by the Majority Lenders in their discretion, (b) such country does not include the United States of America without the prior written consent of the Administrative Agent and each Lender, and (c) if required by the Administrative Agent, the ability to undertake CannabisRelated Activities to the extent permitted by Applicable Law therein is confirmed by a legal opinion provided by the Borrower's counsel in such jurisdiction, in form and substance satisfactory to the Administrative Agent. The Majority Lenders may in their discretion from time to time: (i) upon receipt of a written request by the Borrower, designate any jurisdiction a Qualified Jurisdiction provided that the above-noted criteria are satisfied; and (ii) revoke the designation of any jurisdiction as a Qualified Jurisdiction by written notice to the Borrower if such criteria are not satisfied. Each of Canada, Australia, Brazil, Germany, Portugal, the United Kingdom and Uruguay is a Qualified Jurisdiction as at the date of this Agreement;

 

"Register" has the meaning ascribed to it in Section 13.1(c);

 

"Related Parties" means, with respect to any Person, such Person's Affiliates and the partners, directors, officers, employees, agents, trustees, administrators, managers, advisors and representatives of such Person and of such Person's Affiliates;

 

"Release" means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, leeching or migration of any element or compound in or into the indoor or outdoor environment (including the abandonment or disposal of any barrels, tanks, containers or receptacles containing any contaminant), or in, into or out of any vessel or facility, including the movement of any contaminant through the air, soil, subsoil, surface, water, groundwater, rock formation or otherwise;

 

"Removal Effective Date" has the meaning set forth in Section 12.6(b);

 

"Repayment Notice" means a notice to effect a repayment of Borrowings delivered under Section 3.9 and substantially in the form of Schedule "C" with all applicable blanks completed;

 

"Resignation Effective Date" has the meaning set forth in Section 12.6(a);

 

"Rollover" means, in respect of a maturing Bankers' Acceptance, the provision by a Lender of a further Borrowing by way of a Bankers' Acceptance, the proceeds of which are to be applied in whole or part to the repayment of the maturing Borrowing;

 

"Rollover Date" means that date that a Rollover is to be made pursuant to a Rollover Notice;

 

"Rollover Notice" means a notice to effect a Rollover delivered under Section 3.12 and substantially in the form of Schedule "C" with all applicable blanks completed;

 

"S&P" means the Standard & Poor's Rating Group, a division of Standard & Poor's Financial Services LLC and any successors thereto;

 

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"SAF Agent" means SAF Jackson II LP, in its capacity as administrative agent for and on behalf of the lenders party from time to time to the SAF Credit Agreement;

 

"SAF Credit Agreement" means the credit agreement dated as of June 27, 2019 among SGI Partnership, as borrower, the SAF Lenders and the SAF Agent, as agent;

 

"SAF Documents" means, collectively, the SAF Credit Agreement, all Guarantees provided in connection therewith, all documents providing a Security Interest in favour of the SAF Agent or any of the SAF Lenders, and all other agreements, instruments and other documents governing or relating thereto as permitted hereunder and under the Intercreditor Agreement; and "SAF Document" means any of them;

 

"SAF Indebtedness" means, collectively (but without duplication), the aggregate amount of Debt (direct or indirect) arising under the terms of the SAF Credit Agreement or any Guarantee granted in respect thereof, subject at all times to the terms of the Intercreditor Agreement;

 

"SAF Lenders" means, collectively, the lenders party from time to time to the SAF Credit Agreement, as lenders;

 

"Sale/Leaseback" means an arrangement under which title to any Property, or an interest therein, is transferred by a Person (the "First-Mentioned Person") to some other Person which leases or otherwise gives or grants the right to use such Property therein to the First-Mentioned Person, whether or not in connection therewith the First Mentioned Person also acquires a right or is subject to an obligation to re- acquire the Property and regardless of the accounting treatment of such arrangement;

 

"Schedule I Reference Lender" means up to two Canadian chartered banks listed on Schedule I to the

Bank Act (Canada) as are determined from time to time by the Administrative Agent; "Scheduled Repayment Date" has the meaning set forth in Section 4.1(a);

"Secured Obligations" at any time means, in relation to the Loan Documents and the other Credit Documents, all indebtedness, financial obligations and financial liabilities of each Loan Party to the Secured Parties, direct or indirect, present or future, absolute or contingent and matured or not, including the aggregate at any such time of:

 

 

(a)

the Lender Outstandings and all accrued and unpaid interest outstanding in respect of Prime Loans and all other interest and fees payable pursuant to Article 5;

 

 

 

(b)

the Creditcard Obligations;

 

 

(c)

the Cash Management Obligations;

 

 

(d)

all other Swap Indebtedness; and

 

 

(e)

all fees, expenses, reimbursement obligations, indemnities (including environmental indemnities included in the Security) and other amounts of any nature or kind that are payable under this Agreement or any other Loan Documents or Credit Documents but not included in any of the foregoing, whether matured or unmatured;

 

 

"Secured Parties" means, collectively and without duplication, the Administrative Agent, the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders, and "Secured Party" means any one of them;

 

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"Security" has the meaning ascribed thereto in Section 6.1, and, for certainty, includes all documents, instruments or agreements directly or indirectly assuring or securing the Secured Parties in respect of the Secured Obligations, any amendments to any of the foregoing, any indentures or instruments supplemental to or in implementation of any of the foregoing, and any and all other documents, instruments or agreements pursuant to which the Secured Parties are assured or granted or receive a Security Interest pursuant to the terms hereof (including as provided in Section 6.1) or thereof;

 

"Security Interest" means any assignment, mortgage, charge, pledge, lien, hypothec, encumbrance securing or in effect securing an obligation or any indebtedness of any Person, conditional sale, title retention agreement or security interest whatsoever, howsoever created or arising, whether absolute or contingent, fixed or floating, legal or equitable, perfected or not, and includes the rights of a lessor pursuant to a Financial Lease, Sale/Leaseback or any other lease financing (but not under an Operating Lease or a premises lease, in each case entered into in the ordinary course of business, and, for certainty, no Sale/Leaseback shall be considered to be entered into in the ordinary course of business) and the rights of a purchaser under an absolute or limited recourse sale or factoring of Accounts Receivable or other asset securitization program, but does not include a right of set-off or a set-off unless such right of set-off has been created expressly for the purpose of securing Debt;

 

"Senior Funded Debt" means, for any period, the aggregate amount of all Debt, but excluding (to the extent included therein) accrued liabilities, minority Equity Interests, income taxes payable, deferred income taxes, any Permitted Subordinated Debt and the SAF Indebtedness;

 

"Senior Funded Debt to EBITDA Ratio" means, as at the Covenant Conversion Date and as at the end of each Fiscal Quarter thereafter, the ratio of: (i) Senior Funded Debt as at such Fiscal Quarter, to (ii) EBITDA as at such Fiscal Quarter;

 

"Solvent" means, with respect to any Person, on a particular date, that on such date, (a) such Person is not for any reason unable to meet its obligations as they generally become due, (b) the aggregate Property of such Person is, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would be sufficient, to enable payment of all its obligations, due and accruing due, and (c) such Person has not ceased paying its current obligations in the ordinary course of business as they generally become due; for purposes of this definition, the amount of any contingent obligation at such time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability;

 

"Sources and Uses" means the sources and uses set forth in Schedule "N";

 

"Standard Term" means the term to maturity of a Bankers' Acceptance (subject to availability) of approximately one month, two months, three months or six months (as selected by the Borrower and notified to the Administrative Agent pursuant to Section 3.5 or 3.6) for which a quote is available pursuant to paragraph (a) of the definition of CDOR Rate, commencing on and including the Drawdown Date, Conversion Date or Rollover Date, as the case may be, applicable to such Bankers' Acceptance;

 

"Standby Fee Rate" means, at any time, the rate, expressed as a rate per annum based on a year of 365 days, as set forth in the table in the definition of Applicable Margin in this Agreement, under the heading "Standby Fees (bps)", based on the applicable Level therein;

 

"Subsidiary" means:

 

 

(a)

a Person of which another Person alone or in conjunction with its other Subsidiaries owns an aggregate number of the Voting Shares sufficient to enable the election of a majority of the

 

 

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directors (or other Persons performing similar functions) regardless of the manner in which other Voting Shares are voted;

 

 

(b)

a Person of which another Person alone or in conjunction with its other Subsidiaries has, through the operation of any agreement or otherwise, the ability to elect or cause the election of a majority of the directors (or other Persons performing similar functions) or otherwise exercise control over the management and policies of such Person; and

 

 

 

(c)

any partnership or trust of which any Loan Party:

 

 

(i)

is the general or managing partner or trustee; or

 

 

(ii)

directly or indirectly owns more than 50% of the Equity Interests or beneficial interest thereof;

 

 

and shall include any Person in like relation to a Subsidiary;

 

"Swap" means a Commodity Swap, Currency Swap or Interest Swap;

 

"Swap Demand for Payment" means a demand made by a Swap Lender pursuant to an agreement evidencing a Lender Swap demanding payment of all obligations relating thereto and shall include any notice under any agreement evidencing a Lender Swap which, when delivered, would require an early termination thereof and may require a payment by any Loan Party in settlement of obligations thereunder as a result of such early termination;

 

"Swap Indebtedness" means, at any time, the aggregate amount owing by the Loan Parties under all Lender Swaps, and when such amount is calculated at any time on or after the Adjustment Time means, for each Swap Lender an amount determined by such Swap Lender by calculating for each of its Lender Swaps, the Termination Amount and determining the difference, if positive, of the aggregate net amounts payable by any Loan Party to such Swap Lender;

 

"Swap Lender" means a Person which, at the time that it entered into any Swap with any Loan Party, was a Lender or an Affiliate of a Lender;

 

"Syndicated Facility" has the meaning set forth in Section 3.1(a)(i);

 

"Syndicated Facility Commitment" means, with respect to each Syndicated Lender, such Lender's obligation to provide Syndicated Accommodations to the Borrower, subject to the terms of this Agreement, in an aggregate amount not at any time in excess of the amount set forth under such Lender's name on Schedule "A" (or in any Assignment and Assumption executed hereafter) as such Lender's Syndicated Facility Commitment, as such amount may hereafter be cancelled, reduced, increased or terminated from time to time pursuant to the provisions of this Agreement;

 

"Syndicated Lender" means a Lender in its capacity as a provider of the Syndicated Facility and in no other capacity;

 

"Takeover" has the meaning ascribed to it in Section 3.14; "Takeover Lender" has the meaning ascribed to it in Section 3.14(a); "Takeover Loan" has the meaning ascribed to it in Section 3.14(b);

 

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"Target" has the meaning ascribed to it in Section 3.14;

 

"Taxes" means all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto;

 

"Termination Amount" means, in respect of a Lender Swap on any day, the amount (whether positive or negative) determined by the Swap Lender thereunder in accordance with its customary practices and acting reasonably as of the close of business as though such day were an "Early Termination Date" and the Swap was a "Terminated Transaction" in accordance with the payment measures provided for in the ISDA Master Agreement between any Loan Party and such Swap Lender, with any such termination amount being expressed in Canadian Dollars and all defined terms used in this definition and not otherwise defined in this Agreement having the meaning ascribed thereto in such ISDA Master Agreement;

 

"Termination Event" means:

 

 

(a)

an automatic acceleration of the repayment of indebtedness outstanding hereunder pursuant to Section 10.2 without any notice being required thereunder from the Administrative Agent or any Lender; or

 

 

 

(b)

an automatic early termination of obligations relating to a Lender Swap, without any notice being required from the Swap Lender;

 

 

"Threshold Amount" means an amount equal to Cdn. $2,500,000 (or the Equivalent Amount thereof in any other currency relevant to the context in which such definition is used);

 

"Total Commitment" means the aggregate of the Operating Facility Commitment and the Total Syndicated Facility Commitment;

 

"Total Syndicated Facility Commitment" means, at any time, the amount equal to the aggregate of the Syndicated Facility Commitment of each Syndicated Lender at such time;

 

"Transaction" has the meaning ascribed thereto in the applicable ISDA Master Agreement between any Loan Party and a Swap Lender;

 

"Unfunded Capital Expenditures" means, for any period, all Budgeted Capital Expenditures (which have been approved by the Majority Lenders) of the Loan Parties made during such period, where such expenditures are not funded by Debt or equity investments made by the holders of shares in any Loan Party; provided that the term "Unfunded Capital Expenditures" shall exclude expenditures made in connection with the replacement, substitution or restoration of Property to the extent financed from insurance proceeds paid on account of the loss of or damage to the Property being replaced or restored;

 

"Voting Shares" means:

 

 

(a)

share capital of any class of any corporation or securities of any other Person which carry voting rights to elect the board of directors or other body exercising similar functions under any circumstances, but shares or other securities which carry the right to so vote conditionally upon the happening of an event shall not be considered Voting Shares until the occurrence of such event; and

 

 

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(b)

an interest in a general partnership, limited partnership, trust, joint venture or similar Person which entitles the holder of such interest to receive a share of the profits, or on dissolution or partition, of the Property, of such Person; and

 

 

"Write-Down and Conversion Powers" means with respect to any EEA Resolution Authority, the write- down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule.

 

 

1.2

Headings and Table of Contents

 

The headings, the table of contents and the Article and Section titles are inserted for convenience of reference only and shall not affect the construction or interpretation of this Agreement.

 

 

1.3

Terms Generally

 

The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" shall  be deemed to be followed by the phrase "without limitation." The word "will" shall be construed to have  the same meaning and effect as the word "shall." Unless the context requires otherwise:

 

 

(a)

any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, restated, replaced, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein);

 

 

 

(b)

any reference herein to any Person shall be construed to include such Person's successors and assigns;

 

 

 

(c)

the words "herein," "hereof" and "hereunder," and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof;

 

 

 

(d)

all references herein to Articles, Sections and Schedules shall be construed to refer to Articles and Sections of, and Schedules to, this Agreement;

 

 

 

(e)

any reference to any law, statute or regulation herein shall, unless otherwise specified, refer to such law, statute or regulation as amended, modified, supplemented, restated or replaced from time to time; and

 

 

 

(f)

"year" means calendar year, "month" means calendar month, "quarter" means calendar quarter, and "in writing" or "written" includes printing, typewriting or any electronic means of communication capable of being visibly reproduced at the point of reception, including facsimile or email (PDF) transmission.

 

 

 

1.4

Generally Accepted Accounting Principles

 

All financial statements required to be furnished by the Borrower to the Administrative Agent hereunder shall be prepared in accordance with GAAP. Each accounting term used in this Agreement, unless otherwise defined herein, has the meaning assigned to it under GAAP and, except as otherwise provided herein, reference to any balance sheet item, statement of income item or statement of

 

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cash flows item means such item as computed from the applicable financial statement prepared in accordance with GAAP.

 

 

1.5

Accounting Terms: Changes to Generally Accepted Accounting Principles

 

 

(a)

Each accounting term used in this Agreement, unless otherwise defined herein, has the meaning assigned to it under GAAP applied consistently throughout the relevant period and relevant prior periods.

 

 

 

(b)

If the Borrower, the Administrative Agent or the Majority Lenders acting reasonably determine at any time that any amount required to be determined hereunder would be materially different if such amount were determined in accordance with:

 

 

 

(i)

Generally Accepted Accounting Principles applied by the Borrower in respect of its financial statements on the date hereof ("Old GAAP"), rather than

 

 

 

(ii)

Generally Accepted Accounting Principles subsequently in effect in Canada and applied by the Borrower in respect of its financial statements and utilized for purposes of determining such amount;

 

 

then written notice of such determination shall be delivered by the Borrower to the Administrative Agent, in the case of a determination by the Borrower, or by the Administrative Agent to the Borrower, in the case of a determination by the Administrative Agent or the Majority Lenders.

 

 

(c)

If the Borrower adopts a change in an accounting policy in the preparation of its financial statements in order to conform to accounting recommendations, guidelines, or similar pronouncements, or legislative requirements, and such change would require disclosure thereof under Old GAAP, or would reasonably be expected to materially adversely affect (i) the rights of, or the protections afforded to, the Administrative Agent or the Lenders hereunder or (ii) the position of the Borrower or of the Administrative Agent or the Lenders hereunder, the Borrower shall so notify the Administrative Agent, describing the nature of the change and its effect on the current and immediately prior year's financial statements in accordance with Old GAAP and in detail sufficient for the Administrative Agent and the Lenders to make the determination required of them in the following sentence. If either the Borrower, the Administrative Agent or the Majority Lenders determine at any time that such change in accounting policy results in a material adverse change either (A) in the rights of, or protections afforded to, the Administrative Agent or the Lenders intended to be derived, or provided for, hereunder or (B) in the position of the Borrower or of the Administrative Agent and the Lenders hereunder, written notice of such determination shall be delivered by the Borrower to the Administrative Agent, in the case of a determination by the Borrower, or by the Administrative Agent to the Borrower, in the case of a determination by the Administrative Agent or the Majority Lenders.

 

 

 

(d)

Upon the delivery of a written notice pursuant to Section 1.5(b) or Section 1.5(c), the Borrower and the Administrative Agent on behalf of the Lenders shall meet to consider the impact of such change in Old GAAP or such change in accounting policy, as the case may be, on the rights of, or protections afforded to, the Administrative Agent and the Lenders or on the position of the Borrower or of the Administrative Agent and the Lenders and shall in good faith negotiate to execute and deliver an amendment or amendments to this Agreement in order to preserve and protect the intended rights of, or protections afforded to, the Administrative Agent and the Lenders on the date hereof or the position of the Borrower or the Administrative Agent and the

 

 

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Lenders (as the case may be); provided that, until this Agreement has been amended in accordance with the foregoing, then for all purposes hereof, the applicable changes from Old GAAP or in accounting policy (as the case may be) shall be disregarded hereunder and any amount required to be determined hereunder shall, nevertheless, continue to be determined under Old GAAP and the Borrower's prior accounting policy, as applicable. For the purposes of this Section 1.5, the Borrower, the Lenders and the Administrative Agent acknowledge that the amendment or amendments to this Agreement are to provide substantially the same rights and protection to the Administrative Agent and the Lenders as is intended by this Agreement on the date hereof. If the Borrower and the Administrative Agent on behalf of the Majority Lenders do not (for any reason whatsoever) mutually agree (in their respective sole discretions, without any obligation to so agree) on such amendment or amendments to the Agreement within 60 days following the date of delivery of such written notice, the Borrower shall provide such financial information as the Administrative Agent may reasonably request in order for any amount required to be determined hereunder to be determined in accordance with Old GAAP; and, for all purposes hereof, the applicable changes from Old GAAP or in accounting policy (as the case may be) shall be disregarded hereunder and any amount required to be determined hereunder shall, nevertheless, continue to be determined under Old GAAP and the Borrower's prior accounting policy, as applicable.

 

 

(e)

For the purposes of this Agreement, including all financial calculations to be made hereunder, any lease which would be accounted for as an operating lease under IFRS as in effect on December 31, 2018 shall be, notwithstanding any subsequent change in IFRS, deemed to be accounted for as an operating lease and not as a capital lease or a financial lease (regardless of whether such lease is entered into or assumed before or after December 31, 2018).

 

 

 

1.6

Time

 

Unless otherwise provided herein, all references to a time in this Agreement shall mean local time in the city of Calgary, Alberta.

 

 

1.7

Payment for Value

 

All payments required to be made hereunder shall be made for value on the required day in same day immediately available funds.

 

 

1.8

Monetary References

 

Whenever an amount of money is referred to herein, such amount shall, unless otherwise expressly stated, be in Canadian Dollars.

 

 

1.9

Lenders in Various Capacities

 

Each of the Lenders acknowledges and agrees that where in this Agreement there are references to Swap Lenders, Cash Management Lenders and Creditcard Lenders, and a Lender or an Affiliate thereof is providing Lender Swaps, Cash Management Services or Creditcard Facilities, such Lender shall, in such other capacities, comply with and agree to be bound by, and cause its Affiliates to comply with and agree to be bound by, the provisions hereof dealing with Swap Lenders, Cash Management Lenders and Creditcard Lenders.

 

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ARTICLE 2 REPRESENTATIONS AND WARRANTIES

 

 

2.1

Representations and Warranties

 

The Borrower represents and warrants to each of the Lenders and the Administrative Agent (all of which representations and warranties the Borrower hereby acknowledges are being relied upon by the Lenders and the Administrative Agent in entering into this Agreement) that:

 

 

(a)

Existence: each Loan Party is a duly incorporated and organized corporation or a duly created partnership or trust, as applicable, under the laws of Canada or a Province of Canada, is validly existing under such laws, and is duly registered and qualified as an extra-provincial corporation, partnership or trust, as applicable, under the laws of each jurisdiction in which the nature of any business transacted by it or the character of any Property owned or leased by it requires such registration and qualification, except where the failure to be so registered or qualified would not reasonably be expected to have a Material Adverse Effect;

 

 

 

(b)

Power: each Loan Party has full corporate, partnership or trust, as applicable, capacity, power and authority to own its Property, to conduct its Business as now conducted and as proposed to be conducted, to execute and deliver each Loan Document to which it is a party and to perform its obligations thereunder;

 

 

 

(c)

Authorization: the execution, delivery and performance by each Loan Party of each of the Loan Documents to which it is a party have been duly authorized by all necessary corporate, partnership, trust or other action;

 

 

 

(d)

Execution: each Loan Document to which any Loan Party is a party has been duly executed and delivered by it;

 

 

 

(e)

Binding Obligations: each Loan Document to which any Loan Party is a party is a legal, valid and binding obligation of each Loan Party that is a party thereto enforceable against such Loan Party or other party thereto, as applicable, in accordance with its terms except as enforceability may be limited by general principles of equity and by Applicable Laws regarding bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and by moratorium laws from time to time in effect;

 

 

 

(f)

Violations and Approvals: the execution, delivery and performance by each Loan Party of each Loan Document to which it is a party:

 

 

 

(i)

does not and will not violate its articles, by-laws, partnership agreement, trust indenture (each as applicable) or other governing documents;

 

 

 

(ii)

does not and will not result in a breach of or constitute a default or require any consent under, or result in the creation of any Security Interest, other than a Permitted Encumbrance, upon any of its Property pursuant to any Material Agreement or Material License to which it is a party or by which it or its Property may be bound or affected;

 

 

 

(iii)

does not require any Governmental Action, licence, consent or approval of or notice to or filing with any Governmental Authority other than such as are necessary with respect to the registration and perfection of the Security and the Security Interests constituted thereby; and

 

 

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(iv)

does not and will not contravene any presently existing provision of Applicable Law or any Governmental Action applicable to it or any of its Property;

 

 

 

(g)

Security: the Security Interests created by the Security granted by each Loan Party to the Administrative Agent rank as first priority Security Interests in priority to all other Security Interests over the Collateral, subject only to Permitted Encumbrances which, under Applicable Law, may rank in priority thereto;

 

 

 

(h)

Title to Property: each Loan Party has good and marketable title to all of its Property free and clear of all Security Interests, claims and encumbrances other than Permitted Encumbrances which are applicable to it and, to the best of its knowledge, information and belief, no Person is asserting or has given notice of its intention to assert any Security Interest other than Permitted Encumbrances relating to any such Property;

 

 

 

(i)

Intellectual Property: as of the Effective Date, Schedule "J" sets out all Intellectual Property used in or necessary for the conduct of the Business of the Loan Parties as currently conducted as well as the particulars of any registrations thereof with the Canadian Intellectual Property Office. The Borrower and each of the other Loan Parties possesses and is the sole legal and beneficial owner of or has licensed to it on normal commercial terms all the Intellectual Property necessary for the conduct of the Business of the Loan Parties, each of which is in good standing and in full force and effect, except where the failure to possess or maintain in good standing and in full force and effect such Intellectual Property, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. To the best knowledge of the Borrower, neither it nor any of the other Loan Parties is infringing or is alleged to be infringing on the rights of any Person with respect to any Intellectual Property (or any application or registration in respect thereof or any licence, discovery, improvement, process, formula, know-how, data, plan or specification). The Borrower and each of the other Loan Parties has taken all formal or procedural actions (including payment of fees) required to maintain any material Intellectual Property and licences owned by it;

 

 

 

(j)

Litigation: there are no actions, suits or proceedings pending or, to the best of the knowledge, information and belief of any Loan Party, threatened against any Loan Party at law or in equity by or before any court, tribunal, governmental department, commission, board, bureau, Administrative Agent or instrumentality, domestic or foreign, or before any arbitrator of any kind which would reasonably be expected to have a Material Adverse Effect and no Loan Party is in default with respect to any judgment, order, writ, injunction, decree, award, rule or regulation of any court, tribunal, governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign or any arbitrator of any kind which, in the aggregate, would reasonably be expected to have a Material Adverse Effect;

 

 

 

(k)

Books and Records; Financial Condition: Each Loan Party maintains records and books of account in which true and complete entries are made in a manner sufficient to enable the preparation of financial statements in accordance with GAAP. All financial statements of the Loan Parties provided to the Administrative Agent by or on behalf of any Loan Party fairly reflect, as of the dates thereof, the financial condition of the Loan Parties in all material respects and the results of their operations for the periods covered thereby, have been prepared in accordance with GAAP (except that any unconsolidated financial statements of any Subsidiary may be prepared without notes) and, from the date of the latest of such financial statements submitted to the Administrative Agent, no event or circumstance has occurred which would reasonably be expected to have a Material Adverse Effect;

 

 

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(l)

Taxes: all material income tax and other returns required to be filed prior to the date hereof have been filed by or on behalf of each Loan Party to the relevant taxation or other authorities and no Loan Party is in default of payment of any taxes of any material amount, except for taxes the payment of which is subject to a Permitted Contest, and no reassessment, appeal or material claim is, to the best of the knowledge, information and belief of any Loan Party, being asserted or processed with respect to taxes which is not disclosed in the financial statements referred to in Section 2.1(k), in respect of periods to which such financial statements relate;

 

 

 

(m)

Insurance: each Loan Party has in full force and effect such policies of insurance in such amounts issued by insurers of recognized standing insuring its Property and providing such coverage as would be maintained by Persons engaged in the same or similar business in the localities where its Property is located or, if such insurance is not available on commercially reasonable terms, such other insurance to the satisfaction of the Lenders, acting reasonably;

 

 

 

(n)

Compliance with Applicable Laws: each Loan Party is in compliance with all Applicable Laws (except for any non-compliance which would not reasonably be expected to have a Material Adverse Effect). Without limiting the generality of the foregoing, the Borrower and each of the other Loan Parties is in compliance with all Cannabis Laws applicable to it and its Business, except where any failure to do so is capable of being remedied, and is being diligently remedied, within the time periods permitted by the applicable Governmental Authority and specifically, but without limitation, none of (i) the purchase from any Loan Party, or import from Canada, of Cannabis by a Person resident (or otherwise located) in a Qualified Jurisdiction, or (ii) the sale to a Person resident (or otherwise located) in a Qualified Jurisdiction, or export to such Qualified Jurisdiction, of Cannabis by any Loan Party, will violate or result in a breach of any applicable Cannabis Laws;

 

 

 

(o)

Environmental Laws: each Loan Party:

 

 

(i)

has obtained, made or given all Governmental Actions which are required under all applicable Environmental Laws except to the extent that failure to obtain, make or give the same would not reasonably be expected to have a Material Adverse Effect;

 

 

 

(ii)

is in compliance with all Environmental Laws and all terms and conditions of all such Governmental Actions, except to the extent failure to comply would not reasonably be expected to have a Material Adverse Effect; and

 

 

 

(iii)

has not received any notice of non-compliance with any Environmental Laws from any Governmental Authority or other Person or that any Release has occurred of, from, around, under or in respect of any of the Collateral which would reasonably be expected to have a Material Adverse Effect;

 

 

 

(p)

Indebtedness: no Loan Party has any Debt other than Permitted Indebtedness;

 

 

(q)

Financial Assistance: no Loan Party has provided any Financial Assistance to any Person or Persons other than Permitted Financial Assistance;

 

 

 

(r)

Material Agreements; Material Licenses: as of the Effective Date: (i) Schedule "K" contains a true and complete list of all Material Agreements, and (ii) Schedule "L" contains a true and complete list of all Material Licenses. Each Material Agreement and each Material License is in good standing and in full force and effect and none of the Loan Parties is in breach of any of the terms or conditions of any Material Contract or Material License to which it is a party (or

 

 

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otherwise applicable to it). Except as disclosed in writing to the Administrative Agent and as permitted hereby, no Material Agreement or Material License has been amended, supplemented or revised since the date of execution thereof;

 

 

(s)

Organizational Chart; Subsidiaries and Affiliates: as of the Effective Date:

 

 

(i)

the Organizational Chart set forth in Schedule "M" is true and correct; and

 

 

(ii)

the Borrower has no Subsidiaries or Affiliates organized under the laws of any jurisdiction in Canada other than 208, SGI Partnership, Sundial Managing Partner Inc., Kamcan Products Inc., Sprout Technologies Inc. and 2011296 Alberta Inc., and the Borrower directly or indirectly owns all of the issued and outstanding Voting Shares of 208, SGI Partnership, Sundial Managing Partner Inc., Kamcan Products Inc., Sprout Technologies Inc. and 2011296 Alberta Inc.;

 

 

 

(t)

Loan Parties: as of the Effective Date, the only Loan Parties are: the Borrower, Kamcan Products Inc., Sprout Technologies Inc. and 2011296 Alberta Inc.;

 

 

 

(u)

Chief Executive Office: as of the Effective Date, the chief executive office and registered office of the Borrower and each other Loan Party is located in Alberta;

 

 

 

(v)

Location of Business and Collateral: as of the Effective Date, no Loan Party (other than the Borrower) carries on business in any jurisdictions other than Alberta and British Columbia and the only Canadian jurisdictions in which the Borrower carries on business are Alberta and British Columbia. As of the Effective Date, all tangible Collateral of the Loan Parties, real or personal, is located in Alberta or British Columbia;

 

 

 

(w)

Leased Property: as of the Effective Date, the aggregate value of all inventory, equipment and other Property of the Loan Parties located on the premises of any real property leased by a Loan Party does not exceed $2,000,000;

 

 

 

(x)

Fiscal Year End: as of the Effective Date, the Borrower's Fiscal Year end is on December 31;

 

 

(y)

SAF Documents: no default or event of default under the SAF Documents, has occurred and is continuing;

 

 

 

(z)

Pension Plans; Labour Matters: neither the Borrower nor any of the other Loan Parties has any Pension Plans. There are no existing or, to the best knowledge of the Borrower, threatened strikes, lock-outs or other disputes relating to any collective bargaining agreement to which the Borrower or any other Loan Party is a party and no trade union, council of trade unions or employee bargaining agency has applied or, to the best knowledge of the Borrower, threatened to apply to be certified as the bargaining agent of any of the employees of the Borrower or any other Loan Party in the last three (3) years. The hours worked and payments made to employees of the Borrower and each other Loan Party have not been in violation of any Applicable Laws, except where such violations would not reasonably be expected to result in a Material Adverse Effect;

 

 

(aa)Events of Default: no Default or Event of Default has occurred and is continuing;

 

(bb) Solvency: the Borrower and each of the other Loan Parties is Solvent. No corporate action, legal proceeding or other procedure or step described in Section 10.1(h) or Section 10.1(i), or creditors' process described in Section 10.1(h) or Section 10.1(i) has been taken or, to the knowledge of the

 

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Borrower, is threatened in relation to any Loan Party, and none of the circumstances described in Section 10.1(h) or Section 10.1(i) applies to any Loan Party;

 

(cc) Accuracy of Information: all Appraisals, budgets, economic models and other information (including financial information and cash flow or other projections), materials and documents delivered by or on behalf of the Borrower or any other Loan Party to the Administrative Agent in contemplation of the transactions contemplated by this Agreement or as required by the terms of this Agreement were:

 

 

(i)

in the case of all such Appraisals, budgets, economic models and other information, materials and documents (but excluding therefrom any projections), true, complete and accurate in all material respects as at their respective dates; and

 

 

 

(ii)

in the case of any such projections, prepared in good faith based upon assumptions believed to be reasonable at the time made;

 

 

provided that, with respect to any such Appraisals, budgets, economic models and other information, materials and documents provided by a third party, this representation is limited to the knowledge of the Loan Parties; and

 

(dd) Sanctions: neither the Borrower nor any Affiliate of the Borrower (i) is a Person described or designated under the provisions of the Special Economic Measures Act (Canada) or the United Nations Act (Canada) or any associated regulations (each a "Canadian Sanctions Designated Person"), or (ii) engages in any dealings or transactions with any Canadian Sanctions Designated Person.

 

 

2.2

Deemed Representations and Warranties

 

Each request by the Borrower for Accommodations on any Drawdown Date after the Effective Date shall be deemed to be a representation and warranty by the Borrower to the Administrative Agent and each Lender that the representations and warranties contained in Section 2.1 (other than those made as of a specific date) are, as of the date of such request, and will be, as of the applicable Drawdown Date, true and correct in all material respects and each request by the Borrower for a Conversion or Rollover shall be deemed to be a representation and warranty by the Borrower to the Administrative Agent and each Lender that as of the date of such request and as of the applicable Conversion Date or Rollover Date, there exists no Default or Event of Default.

 

ARTICLE 3

THE CREDIT FACILITIES

 

 

3.1

Establishment of the Facilities

 

 

(a)

Availment Options: From and after the Effective Date and relying on each of the  representations and warranties set out in Article 2 and subject to the terms and conditions of this Agreement:

 

 

 

(i)

each Syndicated Lender agrees to make Syndicated Accommodations available to the Borrower, up to the amount of its Syndicated Facility Commitment, by way of a non- revolving term credit facility for the purposes set forth in Section 3.4(a), commencing on the Effective Date and ending on the Maturity Date (the "Syndicated Facility"); and

 

 

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(ii)

the Operating Lender agrees to make Operating Accommodations available to the Borrower up to the aggregate amount equal to the lesser of: (A) the Operating Facility Commitment, and (B) the Operating Facility Borrowing Base, by way of a revolving credit facility for the purposes set forth in Section 3.4(b), commencing on the Effective Date and ending on the Maturity Date (the "Operating Facility").

 

 

 

(b)

Maximum Amount: Subject to the terms and conditions of this Agreement, at no time shall:

 

 

(i)

the aggregate Syndicated Borrowings exceed the lesser of: (A) the Total Syndicated Facility Commitment, and (B) such amount required to ensure that the Loan to Cost Ratio is less than 0.63 to 1.00; and

 

 

 

(ii)

the Operating Borrowings exceed the lesser of: (A) the amount of the Operating Facility Borrowing Base, and (B) the amount of the Operating Facility Commitment.

 

 

 

3.2

Reduction of Syndicated Facility Commitments on Effective Date

 

If the entire amount of Syndicated Facility Commitments is not drawn on the Effective Date, the amount of the Syndicated Facility Commitments shall be reduced to the amount of the Syndicated Borrowings drawn on such date. Thereafter, the Borrower may only effect Conversions and Rollovers in respect of its Syndicated Borrowings. After the Effective Date, any Syndicated Borrowings repaid or prepaid to a Syndicated Lender under the Syndicated Facility (except upon a Conversion or Rollover) shall effect a permanent reduction of its Syndicated Facility Commitment.

 

 

3.3

Revolving Feature of Operating Facility

 

Until the Maturity Date, the Operating Borrowings may, within the limits herein provided, increase and decrease and the Borrower may borrow, repay and reborrow and obtain Operating Accommodations thereunder.

 

 

3.4

Purpose

 

Borrowings under the Facilities shall be used by the Borrower as follows:

 

 

(a)

Syndicated Facility: Borrowings under the Syndicated Facility shall be used to repay all Debt arising under the Existing ATB Commitment Letter and thereafter for general corporate purposes of the Loan Parties relating to the Loan Parties' Business in Canada in accordance with the Sources and Uses; and

 

 

 

(b)

Operating Facility: Borrowings under the Operating Facility shall, subject to Section 3.14, be used for working capital and general corporate purposes of the Loan Parties relating to the Loan Parties' Business in Canada.

 

 

 

3.5

Borrowings - Syndicated Facility and Operating Facility

 

 

(a)

Syndicated Facility: Subject to the provisions of this Agreement, the Borrower may obtain Syndicated Accommodations from each Syndicated Lender pursuant to the Syndicated Facility up to the Syndicated Facility Commitment of such Syndicated Lender by:

 

 

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(i)

Prime Loans: borrowing Prime Loans from the Syndicated Lenders in minimum aggregate amounts of Cdn. $1,000,000 and in integral multiples of Cdn. $100,000 thereafter, upon at least one (1) Business Day prior written notice; and

 

 

 

(ii)

Bankers' Acceptances: issuing Bankers' Acceptances to be accepted by the Syndicated Lenders in minimum aggregate amounts of Cdn. $1,000,000 and in integral multiples of Cdn. $100,000 thereafter, upon at least two (2) Business Days prior written notice,

 

 

each such notice to be given to the Administrative Agent at or prior to 10:00 a.m. (Calgary time) on the last day on which such notice can be given pursuant to this Section 3.5 and to be substantially in the form of Schedule "B". Any such notice may be given by telephone and if so, shall be followed by delivery of written notice, substantially in the form of Schedule "B", by no later than 2:00 p.m. (Calgary time) on the same day.

 

 

(b)

Operating Facility: Subject to the provisions of this Agreement, the Borrower may obtain Operating Accommodations from the Operating Lender pursuant to the Operating Facility up to the lesser of: (A) the amount of the Operating Facility Commitment, and (B) the amount of the Operating Facility Borrowing Base, by:

 

 

 

(i)

Prime Loans: borrowing Prime Loans from the Operating Lender by Overdraft, without notice; and

 

 

 

(ii)

Letters of Credit: way of the issuance of Letters of Credit in Canadian Dollars on at least three Business Days prior written notice.

 

 

Each Operating Accommodation for Letters of Credit shall require delivery of a Borrowing Notice to the Operating Lender at or prior to 10:00 a.m. (Calgary time) on the last day on which such notice can be given pursuant to this Section 3.5, substantially in the form of Schedule "B". Any such notice may be given by telephone and if so, shall be followed by delivery of written notice, substantially in the form of Schedule "B", by no later than 2:00 p.m. (Calgary time) on the same day.

 

 

3.6

Conditions Applicable to Bankers' Acceptances and BA Equivalent Advances

 

 

(a)

Acceptance of Bankers' Acceptances: Subject to the terms and conditions of this Agreement, each Applicable Lender hereby agrees to accept its Applicable Percentage of Bankers' Acceptances as requested by the Borrower pursuant to a Borrowing Notice, Conversion Notice or Rollover Notice delivered under Sections 3.5, 3.11 or 3.12, as the case may be. Each such Lender shall purchase such Bankers' Acceptances at the applicable Discount Rate and shall deliver the Discount Proceeds thereof (less any BA Acceptance Fees payable to such Lender in respect thereof) for the account of the Borrower through the Administrative Agent's Account For Payment. Notwithstanding the foregoing, no Applicable Lender shall be obligated to purchase a Bankers' Acceptance which is not for a Standard Term, unless each Applicable Lender has consented thereto.

 

 

 

(b)

Payment to Borrower: On the Drawdown Date, Conversion Date or Rollover Date relating to any issue of Bankers' Acceptances:

 

 

 

(i)

on any Drawdown Date, each Applicable Lender shall deliver the Discount Proceeds thereof (less any BA Acceptance Fees payable to such Lender in respect thereof), for the

 

 

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account of the Borrower through the Administrative Agent at the Administrative Agent's Account for Payments;

 

 

(ii)

on any Rollover Date relating to any Rollover of Bankers' Acceptances, the Borrower shall be liable to the Applicable Lenders for the principal amount of maturing Bankers' Acceptances. In order to satisfy the continuing liability of the Borrower to  the  Applicable Lenders for the principal amount of the maturing Bankers' Acceptances, each Applicable Lender shall receive and retain for its own account the Discount Proceeds from the purchase by such Applicable Lender of such new Bankers' Acceptances and the Borrower shall on the maturity date of the maturing Bankers' Acceptances pay to the Administrative Agent, for the benefit of such Applicable Lender an amount equal to the difference between the principal amount of the maturing Bankers Acceptances and the Discount Proceeds from the purchase by such Applicable Lender of such new Bankers' Acceptances together with the BA Acceptance Fees to which such Applicable Lender is entitled pursuant to Section 5.2; and

 

 

 

(iii)

on any Conversion Date relating to Bankers' Acceptances:

 

 

(A)

in the case of a Conversion from a Prime Loan, in order to satisfy the continuing liability of the Borrower to the Applicable Lenders for the amount of the converted Borrowing, each Applicable Lender shall receive for its own account the Discount Proceeds from the purchase by such Applicable Lender of such Bankers' Acceptances and the Borrower shall on the Conversion Date pay to the Administrative Agent for the benefit of such Applicable Lender the difference between the principal amount of the converted Borrowing and the Discount Proceeds from such Bankers' Acceptances together with the BA Acceptance Fees to which such Applicable Lender is entitled pursuant to Section 5.2; and

 

 

 

(B)

in the case of a Conversion from a Bankers' Acceptance, in order to satisfy the continuing liability of the Borrower to the Applicable Lenders for an amount equal to the principal amount of such Bankers' Acceptance, the Administrative Agent shall record the obligation of the Borrower to each Applicable Lender as a Borrowing of the type into which the maturing Bankers' Acceptance has been converted.

 

 

 

(c)

Waiver of Presentment and Other Conditions: The Borrower waives presentment for payment and, except to the extent of the negligence or wilful misconduct of a Lender referred  to in Section 3.6(g), any other defence to payment of any amounts due to a Lender in respect of a Bankers' Acceptance accepted and, if applicable, purchased by it pursuant to this Agreement which might exist solely by reason of such Bankers' Acceptance being held, at the maturity thereof, by such Lender in its own right and the Borrower agrees not to claim any days of grace if such Lender as holder sues the Borrower on the Bankers' Acceptance for payment of the amount payable by the Borrower thereunder. On the specified maturity date of a Bankers' Acceptance, or such earlier date as may be required or permitted pursuant to the provisions of this Agreement, the Borrower shall, subject to Section 3.6(f), pay the Administrative Agent on behalf of the Syndicated Lender that has accepted such Bankers' Acceptance, the full face amount of such Bankers' Acceptance through payment to the Administrative Agent or conversion of such Bankers' Acceptance into a Prime Loan pursuant to Section 3.11.

 

 

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(d)

Terms of Each Bankers' Acceptance: Each Bankers' Acceptance shall:

 

 

(i)

have a maturity date which shall be on a Business Day;

 

 

(ii)

have a Standard Term (excluding days of grace) or, subject to availability and with the consent of each Applicable Lender, have a term which is not a Standard Term but which does not exceed six (6) months (excluding days of grace);

 

 

 

(iii)

be denominated in whole multiples of $100,000;

 

 

(iv)

have a term which does not extend beyond the Maturity Date; and

 

 

(v)

be in the standard form of each Applicable Lender.

 

It is the intention of the parties that, pursuant to the Depository Bills and Notes Act ("DBNA"), all Bankers' Acceptances accepted by the BA Purchasing Lenders under this Agreement shall be issued in the form of a "depository bill" (as defined in the DBNA), deposited with, and made payable to a "clearing house" (as defined in the DBNA) including, without limitation, The Canadian Depository for Securities Limited or its nominee, CDS & Co. ("CDS"). The Administrative Agent and the BA Purchasing Lenders, as applicable, shall, inter alia, effect the following and, subject to the approval of the Borrower, establish and notify the Borrower and the Applicable Lenders of any additional procedures, consistent with the terms of this Agreement and the quarterly requirements of the DBNA, as are reasonably necessary to accomplish such intention including:

 

 

(A)

the instruments or drafts held by the Administrative Agent for the purposes of effecting Bankers' Acceptances will include a notation to the effect that they are issued pursuant to the DBNA;

 

 

 

(B)

any reference to authentication of the Bankers' Acceptance will be removed; and

 

 

(C)

any reference to "bearer" will be removed.

 

 

(e)

Power of Attorney - Bankers' Acceptances: As a condition precedent to each BA Purchasing Lender's obligation to accept and purchase Bankers' Acceptances hereunder and, subject to the DBNA compliance requirements set forth in Section 3.6(d), the Borrower agrees to the Power of Attorney Terms - Bankers' Acceptances set out in Schedule "F" and hereby grants to each BA Purchasing Lender a power of attorney on the terms set out in Schedule "F", provided that if the Borrower revokes such power of attorney, a BA Purchasing Lender shall not be obliged to accept and purchase Bankers' Acceptances (or obtain BA Equivalent Advances) unless the Borrower, the Administrative Agent and all of the BA Purchasing Lenders have agreed on amendments to this Agreement which the BA Purchasing Lenders may require to again accept and purchase Bankers' Acceptances.

 

 

 

(f)

Failure to Give Notice of Repayment: If the Borrower fails to give notice to the Administrative Agent of the method of repayment of a Bankers' Acceptance prior to the date of maturity of such Bankers' Acceptance in accordance with the same period of notice required for the original acceptance of such Bankers' Acceptance as set forth in Section 3.5, the face amount of such Bankers' Acceptance shall be converted on its maturity to a Prime Loan from the Applicable Lender pursuant to Section 3.11.

 

 

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(g)

Unlawful Issue or Use: The Borrower shall pay on demand to the Administrative Agent on behalf of each BA Purchasing Lender the face amount of any bankers' acceptance form of the Borrower presented to such BA Purchasing Lender for payment and paid by such Lender that has been unlawfully issued or used or put into circulation fraudulently or without authority, and shall indemnify such BA Purchasing Lender against any loss, cost, damage, expense or claim regardless of by whomsoever made that such BA Purchasing Lender may suffer or incur by reason of any fraudulent, unauthorized or unlawful issue or use of any such bankers' acceptance form, other than as is caused by the negligence or wilful act or omission of such BA Purchasing Lender or any of its officers, employees, agents or representatives failing to use the same standard of care in the custody of such bankers' acceptance forms as it uses in the custody of its own property of a similar nature.

 

 

 

(h)

BA Equivalent Advances: Notwithstanding Section 3.5(a)(ii), the foregoing provisions of this Section 3.6, and any other provision hereof to the contrary, a Non-Acceptance Lender shall, in lieu of accepting Bankers' Acceptances, make a BA Equivalent Advance. The amount of each  BA Equivalent Advance shall be equal to the Discount Proceeds which would be realized from a hypothetical sale of those Bankers' Acceptances which, but for this Section 3.6(h), such Lender would otherwise be required to accept and purchase as part of such a Borrowing by way of Bankers' Acceptances. To determine the amount of such Discount Proceeds, the hypothetical sale shall be deemed to take place at the Non-Acceptance Discount Rate. Any BA Equivalent Advance shall be made on the relevant Drawdown Date, Conversion Date or Rollover Date, as the case may be, and shall remain outstanding for the term of the Bankers' Acceptances issued concurrently therewith. Concurrently with the making of a BA Equivalent Advance, a Non- Acceptance Lender shall be entitled to deduct therefrom an amount equal to the BA Acceptance Fee which, but for this Section 3.6(h), such Lender would otherwise be entitled to receive as part of such issue of Bankers' Acceptances. The BA Equivalent Advance shall accrue interest at a rate per annum equal to the Non-Acceptance Discount Rate for such Bankers' Acceptance for the term of such BA Equivalent Advance. Upon the maturity date for such Bankers' Acceptances, the Borrower shall pay to each Non-Acceptance Lender, in satisfaction of the BA Equivalent Advance and interest accrued thereon, an amount equal to the face amount of the Bankers' Acceptance which, but for this Section 3.6(h), such Lender would otherwise have been required to accept as part of such Borrowing by way of Bankers' Acceptance, failing which such amount shall be converted to a Prime Loan.

 

 

All BA Equivalent Advances made by a Non-Acceptance Lender shall, if requested by such Lender, be evidenced by promissory notes of the Borrower in form and substance satisfactory to such Lender, acting reasonably.

 

All references herein to "Bankers' Acceptances" shall, unless otherwise expressly provided herein or unless the context otherwise requires, be deemed to include BA Equivalent Advances made by a Non-Acceptance Lender as part of a Borrowing by way of Bankers' Acceptances.

 

As a condition precedent to each Non-Acceptance Lender's obligation to make a BA Equivalent Advance hereunder, the Borrower agrees to the Power of Attorney Terms - BA Equivalent Advances set out in Schedule "G" and hereby grants to each Non-Acceptance Lender a power of attorney on the terms set out in Schedule "G", provided that if the Borrower revokes such power of attorney, it shall not be entitled to obtain BA Equivalent Advances (or issue Bankers' Acceptances) unless the Borrower, the Administrative Agent and all of the Non-Acceptance Lenders have agreed on amendments to this Agreement which would again allow the Borrower to obtain BA Equivalent Advances.

 

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3.7

Administrative Agent's Duties re: Bankers' Acceptances

 

 

(a)

Advice to the Lenders: The Administrative Agent, promptly following receipt of a Borrowing Notice for an Accommodation by way of Bankers' Acceptances, of a Conversion Notice for Conversion of a Borrowing to a Bankers' Acceptance or of a Rollover Notice for a Rollover of a Bankers' Acceptance, shall:

 

 

 

(i)

advise the Borrower of the allocation of Bankers' Acceptances to each Applicable Lender such that the aggregate amount of Bankers' Acceptances required to be accepted by such Applicable Lender hereunder is in a whole multiple of Cdn. $100,000; or

 

 

 

(ii)

advise each BA Purchasing Lender of the face amount of each Bankers' Acceptance to be purchased by it and the term thereof, which term shall be identical for all BA Purchasing Lenders. Promptly on each Drawdown Date, Conversion Date or Rollover Date on  which BA Purchasing Lenders are required to purchase Bankers' Acceptances hereunder, the Administrative Agent shall determine the applicable CDOR Rate in respect of such Bankers' Acceptances.

 

 

 

(b)

Bankers' Acceptances Being Purchased: Promptly on the Drawdown Date, Rollover Date or Conversion Date relating to all Bankers' Acceptances to be purchased by the BA Purchasing Lenders on such date, the Administrative Agent shall provide either written or telephone advice  to the Borrower and each BA Purchasing Lender confirming the particulars with respect to such Bankers' Acceptances. Such advice shall be confirmed in writing by the Administrative Agent on or prior to 2:30 p.m. (Calgary time) on such Drawdown Date, Rollover Date or Conversion Date. Upon receipt of any such notice, each BA Purchasing Lender is thereupon authorized to complete and sign Bankers' Acceptances on behalf of the Borrower in accordance with the Power of Attorney Terms - Bankers' Acceptances and the particulars advised by the Administrative Agent.

 

 

 

3.8

Letters of Credit

 

 

(a)

Cash Collateral: All Letters of Credit issued by the Operating Lender shall be cash collateralized in full and, prior to such issuance, the Borrower shall pay to the Administrative Agent for deposit into a Borrower Cash Collateral Account, for the account of the Operating Lender, an amount no less than the aggregate face amount thereof.

 

 

 

(b)

Issuance: The Borrower may give the Operating Lender a Borrowing Notice requesting that a Letter of Credit be issued by the Operating Lender in accordance with Section 3.5.

 

 

 

(c)

Documentation: The Operating Lender shall not have any obligation to issue a Letter of Credit until the Borrower has executed and delivered to the Operating Lender a duly completed letter of credit application in the Operating Lender's standard form and such ancillary documents, including applications and indemnities, as the Operating Lender generally requires for like transactions and which are consistent with the provisions hereof.

 

 

 

(d)

Records re: Letters of Credit: The Operating Lender shall maintain records showing the undrawn and unexpired amount of each Letter of Credit issued by the Operating Lender and outstanding hereunder and showing for each Letter of Credit issued hereunder:

 

 

 

(i)

the dates of issuance and expiration thereof;

 

 

(ii)

the amount thereof; and

 

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(iii)

the date and amount of all payments made thereunder.

 

The Operating Lender shall make copies of such records available to the Borrower upon its request.

 

 

(e)

Expiry: Each Letter of Credit shall expire not later than one year from the date of its issuance, subject to customary automatic renewal provisions, and in any event not later than the Maturity Date as at the date of such issuance, and shall be in a form satisfactory to the Operating Lender.

 

 

 

(f)

Payment: All payments made by the Operating Lender to any Person pursuant to any Letter of Credit shall, unless the Borrower reimburses the Operating Lender for such payment on or before the date it is made, be deemed as and from the date of such payment to be an advance to the Borrower of a Prime Loan under the Operating Facility with the proceeds of such advance being applied against the Borrower's obligations to reimburse the Operating Lender for payment made under the Letters of Credit, and the provisions hereof relating to such Prime Loans (including interest to be calculated thereon) shall apply thereto. The Operating Lender shall forthwith advise the Borrower of any demand by the beneficiary of a Letter of Credit for payment by  the Operating Lender under such Letter of Credit and of any payment made by it on such Letter of Credit to the beneficiary thereof. In determining whether to pay under a Letter of Credit, the Operating Lender shall be responsible only to determine that the documents and certificates required to be delivered under such Letter of Credit have been delivered and that they comply on their face with the requirements of such Letter of Credit.

 

 

 

(g)

Renewal: At or before 10:00 a.m. (Calgary time) at least 30 days prior to the date of expiry of any Letter of Credit, the Borrower may elect to renew such Letter of Credit by selecting a new expiry date for the Letter of Credit or part thereof being renewed, which shall commence on the expiry date of the Letter of Credit being renewed. Renewal of any such Letter of Credit may only be effected by the Operating Lender extending the expiry date of the existing Letter of Credit and shall be done by any of: (i) the inclusion of auto-renewal clauses in the Letter of Credit, (ii) the issuance of a new Letter of Credit containing the new expiry date or (iii) by an amendment to the existing Letter of Credit, and, in any case, with or without a reduction in the face amount thereof. Renewal of any Letter of Credit shall not be effected to the extent that such renewal would prevent or interfere with any required payment of principal hereunder. Any issuance to a new beneficiary, any increase in the face amount of the Letter of Credit or any other change in the terms thereof shall be considered to be a new Borrowing and may only be effected by the Borrower by delivering a Borrowing Notice to the Operating Lender. Letter of Credit Fees in respect of any renewed or extended Letter of Credit shall be payable pursuant to Section 5.3 and shall be computed for the period of renewal or extension.

 

 

 

(h)

Absolute Obligation: The obligations of the Borrower under this Agreement in respect  of Letters of Credit shall be absolute, unconditional and irrevocable under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment which any Person may have or have had against the Operating Lender or any beneficiary of a Letter of Credit.

 

 

 

(i)

No Defences: The obligations of the Borrower in respect of a Letter of Credit shall not be affected by:

 

 

 

(i)

any lack of validity or enforceability of such Letter of Credit;

 

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(ii)

any draft, demand, certificate or any other document presented under such Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect;

 

 

 

(iii)

a Default or an Event of Default that has occurred and is continuing;

 

 

(iv)

any dispute between or among the Borrower and any beneficiary of such Letter of Credit or any other party to which such Letter of Credit may be transferred;

 

 

 

(v)

any claims, compensation, set-off, defence or other right whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee;

 

 

 

(vi)

payment under such Letter of Credit against presentation of a draft or other document that does not comply strictly with the terms of such Letter of Credit;

 

 

 

(vii)

the existence of any Event of Default specified in Section 10.1(h) or (i) with respect to the Borrower; or

 

 

 

(viii)

any other event or circumstance whatsoever that might, but for the provisions of this Section 3.8(i), constitute a legal or equitable discharge of the obligations of the Borrower hereunder or in respect of such Letter of Credit,

 

 

save and except only for payment under such Letter of Credit other than in compliance with the terms thereof in all material respects or other than as a result of the Operating Lender's gross negligence or wilful misconduct.

 

 

(j)

Uniform Customs: The Uniform Customs and Practice for Documentary Credits as most recently published by the International Chamber of Commerce (the "Uniform Customs") shall in all respects apply to each Letter of Credit unless expressly provided to the contrary therein and shall be deemed for such purpose to be a part of this Agreement as if fully incorporated herein. In the event of any conflict or inconsistency between the Uniform Customs and the governing law of this Agreement, the Uniform Customs shall, to the extent permitted by Applicable Law, prevail to the extent necessary to remove the conflict or inconsistency.

 

 

 

(k)

Action Binding: Any action taken or omitted by the Operating Lender under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or wilful misconduct and in accordance with the standards of care specified in the Uniform Customs, shall be binding on the Borrower and shall not result in any liability of the Operating Lender to the Borrower.

 

 

 

(l)

General: Without limiting the generality of the foregoing:

 

 

(i)

the Operating Lender may accept documents that appear on their face to be in compliance with the terms of a Letter of Credit in all material respects without responsibility for further investigation, regardless of any notice or information to the contrary, and may make payment upon presentation of documents that appear on their face to be in compliance with the terms of such Letter of Credit in all material respects;

 

 

 

(ii)

the Operating Lender shall have the right, in its discretion acting reasonably, to decline to accept such documents and to make such payment if such documents are not in strict compliance with the terms of such Letter of Credit;

 

 

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(iii)

Section 3.8 shall establish the standard of care to be exercised by the Operating Lender when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof (and the parties hereto hereby waive, to the extent permitted by Applicable Law, any standard of care inconsistent with the foregoing); and

 

 

 

(iv)

in the event of any conflict or inconsistency between the provision of any application and/or indemnity provided by the Borrower in connection with any Letter of Credit and this Agreement, the provisions of this Agreement shall prevail.

 

 

 

(m)

Consequential Damages: Notwithstanding anything to the contrary contained herein the Operating Lender shall not be liable to the Borrower for any consequential, indirect, punitive or exemplary damages with respect to action taken or omitted to be taken by it under any Letter of Credit.

 

 

 

(n)

Indemnity: In addition to amounts payable as elsewhere provided for in this Section 3.8, the Borrower hereby agrees to protect, indemnify, pay and save the Operating Lender harmless from and against any and all claims or losses (including reasonable documented legal fees and expenses) which the Operating Lender may incur or be subject to as a consequence, direct or indirect, of:

 

 

 

(i)

the application for or issuance of or drawing under any Letter of Credit, other than as a result of the gross negligence or wilful misconduct of the Operating Lender as determined by a court of competent jurisdiction, provided that the Operating Lender acts in good faith; or

 

 

 

(ii)

the failure of the Operating Lender to honour a drawing under any Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future Governmental Action prohibiting the payment of such drawing.

 

 

 

(o)

Misuse: As between the Borrower and the Operating Lender, the Borrower assumes all risks of the acts and omissions of, or misuse of any Letter of Credit by, the beneficiary of such Letter of Credit.

 

 

 

(p)

No Liability of Operating Lender: Except to ensure compliance with the applicable Letter of Credit, the Operating Lender shall not have any responsibility for:

 

 

 

(i)

the form, validity, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for, issuance of or drawing under any Letter of Credit (even if it should in fact prove to be in any or all respects invalid, inaccurate, fraudulent or forged);

 

 

 

(ii)

the validity or sufficiency of any instrument transferring or assigning (or purporting to transfer or assign) any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason;

 

 

 

(iii)

errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph or otherwise (whether or not they are in cipher);

 

 

 

(iv)

errors in interpretation of technical terms;

 

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(v)

any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof;

 

 

 

(vi)

the misapplication by the beneficiary of any Letter of Credit or of the proceeds of any drawing under such Letter of Credit; and

 

 

 

(vii)

any consequences arising from causes beyond the control of the Operating Lender, including any Government Actions.

 

 

None of the above shall affect, impair, or prevent the vesting of any of the Operating Lender's powers hereunder. Any action taken or omitted by the Operating Lender under or in connection with any Letter of Credit issued by it or the related certificates if taken or omitted in good faith, shall not put the Operating Lender under any resulting liability to the Borrower provided that the Operating Lender acts without gross negligence and has not engaged in wilful misconduct.

 

 

(q)

No Liability: The Borrower shall have no obligation to indemnify the Operating Lender in respect of any liability incurred by the Operating Lender arising out of the gross negligence or wilful misconduct of the Operating Lender as determined by a court of competent jurisdiction.

 

 

 

3.9

Notice of Repayment

 

The Borrower shall give the Administrative Agent or the Operating Lender, as applicable, prior written notice substantially in the form of Schedule "C" of each repayment of Borrowings in accordance with the same period of notice required pursuant to Section 3.5 for the initial drawdown of the basis of Borrowing being repaid. Notwithstanding the foregoing, a Bankers' Acceptance shall only be repaid on its maturity date.

 

 

3.10

Pro-Rata Treatment of Borrowings

 

 

(a)

Pro-Rata Borrowings: Subject to Section 3.10(b) and Section 3.14, each Borrowing under a Facility and each basis of Borrowing shall be made available by each Applicable Lender and all repayments and reductions in respect thereof shall be made and applied in a manner so that the Borrowings under such Facility and each basis of Borrowing outstanding to each Applicable Lender will, to the extent possible, thereafter be in the same proportion as the Applicable Percentage of such Lender under such Facility. The Administrative Agent is authorized by the Borrower and each Syndicated Lender to determine, in its sole and unfettered discretion, the amount of Syndicated Borrowings and each basis of Syndicated Borrowing to be made available by each Syndicated Lender and the application of repayments and reductions of Syndicated Borrowings to give effect to the provisions of this Section 3.10(a) and Section 7.2; provided that, subject to Section 3.10(b), no Syndicated Lender shall, as a result of any such determination, have Syndicated Borrowings outstanding in an amount which is in excess of the amount of its Syndicated Facility Commitment.

 

 

 

(b)

Administrative Agent's Discretion on Allocation: If it is not practicable to allocate Bankers' Acceptances to each Syndicated Lender such that the aggregate amount of Bankers' Acceptances required to be purchased by such Syndicated Lender  hereunder  is  in  a  whole  multiple  of  Cdn. $100,000, the Administrative Agent is authorized by the Borrower and each Syndicated Lender: (i) to make such allocation as the Administrative Agent determines in its sole and unfettered discretion may be equitable in the circumstances, or (ii) in its sole and unfettered discretion, to convert a portion of a Bankers' Acceptance accepted by such Syndicated Lender to  a Prime Loan pursuant to Section 3.11. In no event shall the outstanding Syndicated Borrowings

 

 

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of a Syndicated Lender exceed its Applicable Percentage by more than Cdn. $100,000 as a result of such exercise of discretion by the Administrative Agent. In the event it is not practicable to allocate each basis of Syndicated Borrowing in accordance with Section 3.10(a) by reason of the occurrence of circumstances described in Sections 11.1, 11.4 or 11.5, the Administrative Agent is authorized by the Borrower and each Lender to make such allocation as the Administrative Agent determines in its sole and unfettered discretion may be equitable in the circumstances, but no Syndicated Lender shall, as a result of any such allocation, have any Syndicated Borrowings outstanding in an amount which is in excess of its Syndicated Facility Commitment.

 

 

(c)

Further Assurances by Borrower: To the extent reasonably possible, the Borrower and each Lender agrees to be bound by and to do all things necessary or appropriate to give effect to the provisions of this Section 3.10.

 

 

 

3.11

Conversion Option

 

The Borrower may, during the term of this Agreement, convert any basis of Syndicated Borrowing (other than a Letter of Credit) to another basis of Syndicated Borrowing (other than a Letter of Credit) upon giving the Administrative Agent a Conversion Notice in accordance with the period of notice and other requirements set out in Section 3.5 applicable to the basis of Syndicated Borrowing to which any Syndicated Borrowing is being converted (other than delivery of a Borrowing Notice), provided that:

 

 

(a)

Bankers' Acceptances: a Bankers' Acceptance may only be converted on its maturity date  and, if a Default or Event of Default has occurred and is continuing at such time, shall be converted into a Prime Loan; and

 

 

 

(b)

Prime Loans: a Prime Loan may not be converted if a Default or Event of Default has occurred and is continuing at such time.

 

 

On each Conversion Date, the Borrower shall be required to repay to the Administrative Agent for the account of the Applicable Lenders the basis of Syndicated Borrowing which is being converted and, subject to the provisions of this Agreement, the Applicable Lenders shall be required to make available to the Borrower the Syndicated Borrowings into which such basis of Syndicated Borrowing is being converted; provided that the Borrower shall be entitled to direct the Administrative Agent to use the proceeds of all or any part of a new Syndicated Borrowing to repay the Syndicated Borrowing being converted.

 

 

3.12

Rollovers

 

The Borrower may effect a Rollover of all or, subject to the minimum aggregate amount specified in Section 3.5, a part of a Borrowing outstanding by way of a Bankers' Acceptance upon giving the Administrative Agent a Rollover Notice in accordance with the period of notice and other requirements set out in Section 3.5 applicable to a Borrowing of the same type unless immediately prior to the commencement of the term of any subsequent Bankers' Acceptance, a Default (in respect of which the Administrative Agent has advised the Borrower that no Rollovers will be permitted) or Event of Default shall have occurred and be continuing, in which event the Borrower shall be deemed to have converted to a Prime Loan pursuant to Section 3.11 and the Borrower shall not be entitled to continue such Bankers' Acceptance subsequent to its maturity date. In the event notice of a Rollover of an existing Bankers' Acceptance is not given pursuant to this Section 3.12 or notice of a conversion of such existing Bankers' Acceptance is not given pursuant to Section 3.11, such Bankers' Acceptance shall be converted to a Prime Loan on the maturity date of such Bankers' Acceptance.

 

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3.13

Notices Irrevocable

 

All notices delivered or deemed to be delivered by the Borrower pursuant to this Article 3 shall be irrevocable and shall oblige the Borrower to take the action contemplated on the date specified therein.

 

 

3.14

Takeover Notification

 

If the Borrower wishes to utilize Borrowings to offer to, or to provide funds to any Subsidiary to, acquire or offer to acquire directly or indirectly (which shall include an offer to purchase securities, solicitation of an offer to sell securities, an acceptance of an offer to sell securities, whether or not the offer to sell was solicited, or any combination of the foregoing) outstanding securities of any Person (other than: (i) a private company as defined under the Securities Act (Alberta); (ii) a corporation whose shares are directly or indirectly held by one Person; or (iii) a Person in respect of which the Borrower has provided, prior to the utilization of any Borrowings, evidence satisfactory to the Majority Lenders of the agreement of the board of directors or like body of such Person approving the acquisition by the Borrower or such Subsidiary (which shall be wholly-owned, directly or indirectly by the Borrower)) (the "Target") where, as of the date of the offer to acquire, the securities that are subject to the offer to acquire, together with the securities of such Person that are beneficially owned, or over which control or direction is exercised, by the Borrower or its Subsidiaries and any Person acting jointly or in concert with any thereof on the date that the offer to acquire is made, constitute in the aggregate ten percent (10%) or more of all of the outstanding securities of that class of securities of the Person or are likely to result in a change in the voting control of such Person, if it is a publicly traded corporation (a "Takeover"), then:

 

 

(a)

Lender Consents: the following steps shall be taken:

 

 

(i)

at least seven (7) Business Days prior to the delivery of any notice to the Administrative Agent pursuant to Section 3.5 requesting Accommodations intended to be utilized for such Takeover, the President, the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer or the Treasurer of the Borrower shall advise the Administrative Agent (who shall promptly advise an appropriate officer of each Lender) of the particulars of such Takeover in sufficient detail to enable each Lender to determine whether it will consent to the use of Accommodations from such Lender for such Takeover;

 

 

 

(ii)

within five (5) Business Days of being so advised, each Lender shall notify the Administrative Agent of such Lender's determination as to whether it consents to the use of Accommodations from such Lender for such Takeover (such determination to be made by such Lender in the exercise of its sole discretion having regard to such considerations as it deems appropriate), provided that in the event such Lender does not so notify the Administrative Agent within such five (5) Business Day period, such Lender shall be deemed to have notified the Administrative Agent that it does not so consent; and

 

 

 

(iii)

the Administrative Agent shall promptly notify the President, the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer or the Treasurer of the Borrower of each Lender's determination or deemed determination;

 

 

and in the event that any Lender does not, or is deemed to not, provide such consent, then upon the Administrative Agent so notifying the Borrower, such Lender shall have no obligation to provide Accommodations for such Takeover notwithstanding any other provision of this

 

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Agreement to the contrary; provided, however, that each other Lender (a "Takeover Lender") which does so consent shall have an obligation, up to the amount of its Commitment, to provide Accommodations for such Takeover, and any such Accommodations provided for such Takeover shall be provided by each Takeover Lender in accordance with the ratio that its Applicable Percentage under the applicable Facility bears to the aggregate of the Applicable Percentages of all the Takeover Lenders under such Facility; and

 

 

(b)

Takeover Loans: if Accommodations are utilized for the purposes of a Takeover (a "Takeover Loan") and there are Lenders other than Takeover Lenders (the "Non-Takeover Lenders"), the Applicable Percentage of each Non-Takeover Lender shall be temporarily adjusted in accordance with Section 3.14(a) and, as applicable, subsequent Borrowings shall be funded firstly by Non- Takeover Lenders and subsequent repayments shall be applied firstly to Takeover Lenders, in each case until such time as the Applicable Percentage of each Takeover Lender and Non- Takeover Lender under the applicable Facility is equal to such Applicable Percentage in effect immediately prior to the advance of the Takeover Loan.

 

 

 

3.15

Lender Swaps

 

 

(a)

Swaps: Subject to the terms and conditions hereof (and specifically Section 9.2(m)), each of the Lenders (or an Affiliate of such Lender) may from time to time enter into Swaps with any Loan Party during the term of this Agreement. Prior to engaging in any Lender Swaps, the applicable Loan Party shall enter into an ISDA Master Agreement with the applicable Swap Lender, or a confirmation that incorporates by reference the terms of an ISDA Master Agreement.

 

 

 

(b)

Secured Obligations: The parties agree that all Swap Indebtedness of a Loan Party to a Swap Lender shall be secured by the Security. All Permitted Swap Indebtedness shall, as to the Security, rank pari passu with the Syndicated Borrowings, the Operating Borrowings, the Cash Management Obligations and the Creditcard Obligations. All Swap Indebtedness of a Loan Party to any Swap Lender, other than Permitted Swap Indebtedness, shall, as to the Security, rank junior and be subordinate in every respect to the Syndicated Borrowings, the Operating Borrowings, the Permitted Swap Indebtedness, the Cash Management Obligations and the Creditcard Obligations.

 

 

 

(c)

Determination of Permitted Swaps: The Lender Swaps which constitute Permitted Swaps at any time shall be determined starting with the earliest Lender Swap entered into which is still outstanding on the date such determination is made, and so on chronologically with each subsequent Lender Swap, until the applicable limitations under Section 9.2(m) are exceeded, provided that a Lender Swap shall be deemed to be a Permitted Swap (and the indebtedness thereunder Permitted Swap Indebtedness) if it is entered into by a Swap Lender without actual notice or knowledge that such Lender Swap is not a Permitted Swap.

 

 

 

(d)

Mandatory Lenders Swaps and Prepayments. Notwithstanding any other provision contained herein, the parties hereto acknowledge and agree that each and every Lender Swap entered pursuant to Section 9.1(q) shall include an Additional Termination Event (as defined in the ISDA 2002 Master Agreement) to allow for the termination of such Lender Swap to the extent of any prepayments contemplated by Section 4.4 this Agreement and, for the purposes of such Additional Termination Event, each of the parties to the Lender Swap shall be deemed to be an Affected Party (as defined in the ISDA 2002 Master Agreement) and for any Early Termination Amount (as defined in the ISDA 2002 Master Agreement) relating thereto shall be calculated as contemplated by Section 6(e)(ii)(3) of the ISDA 2002 Master Agreement.

 

 

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3.16

Overdrafts

 

Each advance by the Operating Lender under the Operating Facility by way of Overdraft shall automatically result in a Prime Loan. The Borrower agrees not to effect any Overdraft hereunder which would cause the Operating Borrowings to exceed the Operating Facility Amount from time to time, and acknowledges that the Operating Lender reserves the right to refuse to honour any Overdraft hereunder which, in the opinion of the Operating Lender, would have the effect of causing the Operating Facility Amount to be so exceeded.

 

 

3.17

Cash Management Services and Creditcard Facilities

 

Any Cash Management Lender and any Creditcard Lender may provide Cash Management Services and Creditcard Facilities, as applicable, to the Borrower or any other Loan Party from time to time. The parties agree that all Cash Management Obligations and Creditcard Obligations shall be secured by the Security and shall rank, as to the Security, pari passu with the Syndicated Borrowings, the Operating Borrowings and the Permitted Swap Indebtedness, notwithstanding that they do not form part of the Syndicated Borrowings and Operating Borrowings. The Borrower agrees that it will not, and will not permit any other Loan Party to, incur Creditcard Obligations in excess of a principal amount of $250,000, provided that breach by the Borrower of this limitation shall not have the result of any Creditcard Obligations becoming unsecured.

 

 

3.18

Development Facility

 

The Borrower may at any time and from time to time obtain a supplemental development term credit facility in the aggregate principal amount of up to $50,000,000.00 from one or more additional financial institutions not party to this Agreement (in this Section, an "Additional Financial Institution") or, with the consent of the applicable Lender, from one or more of the Lenders hereunder, in either case, providing for additional advances, on a project by project basis (the "Development Facility"), which Development Facility shall, upon satisfaction of the conditions precedent set forth below, constitute a Facility hereunder subject to the terms hereof and be secured by the Security; provided that, prior to the Development Facility becoming available:

 

 

(a)

no Default or Event of Default has occurred and is continuing or could reasonably be expected to result therefrom;

 

 

 

(b)

each Lender hereunder shall have consented to the terms of such Development Facility and the availability thereof;

 

 

 

(c)

the Administrative Agent shall have consented to such Additional Financial Institution becoming a Lender or, in the case of an existing Lender hereunder, providing commitments under the Development Facility, and the Administrative Agent shall have received evidence of all consents and approvals from each Additional Financial Institution or Lender, as applicable;

 

 

 

(d)

concurrently with the addition of an Additional Financial Institution as a Lender or the agreement of a Lender to provide commitments under the Development Facility, such Additional Financial Institution or Lender, as the case may be, shall purchase from each applicable Lender, such portion of the Borrowings from each Lender as is necessary to ensure that all borrowings of all Lenders, and including therein such Additional Financial Institution and the commitment in respect of the Development Facility of any Lender and Additional Financial Institution, as applicable, are in accordance with the Applicable Percentage under each Facility (including, for the purposes hereof, the Development Facility) of all such Lenders thereunder (including, for the

 

 

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purposes hereof, any Additional Financial Institution) and such Additional Financial Institution shall execute such documentation as is required by the Administrative Agent, acting reasonably, to novate such Additional Financial Institution as a Lender hereunder; provided that with respect to any portion of such Borrowings which are outstanding by way of Bankers' Acceptances, the Additional Financial Institution or such Lender shall provide an indemnity to the other Lenders (provided that no such indemnity may exceed two (2) months in duration unless agreed to by all of the affected Lenders) in order to ensure such Bankers' Acceptances are outstanding in accordance with the new Applicable Percentages; and

 

 

(e)

immediately prior to giving effect to any advance under the Development Facility:

 

 

(i)

this Agreement shall be amended and restated to give effect to the Development Facility; and

 

 

 

(ii)

the Administrative Agent and each Lender and Additional Financial Institution, as applicable, shall have received each of the following, in form and substance satisfactory to each of them:

 

 

 

(A)

evidence satisfactory that certain minimum equity proceeds have been raised by the Borrower and applied to the Canadian Business of the Loan Parties;

 

 

 

(B)

duly executed assignments of all Material Agreements from each Loan Party that is a party thereto, together with a corresponding consent from each counterparty thereto, and any additional Security as the Administrative Agent or any Lender or Additional Financial Institution may reasonably require;

 

 

 

(C)

certified copies of directors' resolutions of the Borrower authorizing the Development Facility, together with a legal opinion from Borrower's counsel with respect thereto; and

 

 

 

(D)

such other documents and documentation which the Administrative Agent and any Lender and Additional Financial Institution, as the case may be, may, in their sole discretion, reasonably request.

 

 

ARTICLE 4 REPAYMENT AND PREPAYMENT

 

 

4.1

Mandatory Repayments of Syndicated Facility

 

 

(a)

Scheduled Repayments: Subject to the terms hereof, commencing on the last Business Day of the first full Fiscal Quarter after the Covenant Conversion Date, and on the last Business Day of each Fiscal Quarter thereafter, until the Maturity Date (each a "Scheduled Repayment Date"), the Borrower shall repay Borrowings under the Syndicated Facility, together with all interest thereunder, by way of equal payments in the amount set forth in one or more repayment  schedules prepared by the Administrative Agent, on behalf of the Lenders and delivered to the Borrower, based on a ten (10) year straight-line amortization (or such other amortization as agreed to between the Administrative Agent (with the consent of all of the Lenders) and the Borrower), provided that the Administrative Agent, on behalf of the Lenders, may, at its discretion, adjust payments periodically, if necessary, to ensure that repayment in full of all Borrowings under the Syndicated Facility shall occur within the stated amortization period.

 

 

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(b)

Other Mandatory Repayments: In addition to the scheduled repayments set forth in Section 4.1(a), the Borrower shall, upon not less than three (3) Business Days' prior written notice to the Administrative Agent, repay Borrowings under the Syndicated Facility from each of the sources set forth below:

 

 

 

(i)

100% of the net cash proceeds (in each case, net of reasonable, bona fide transaction fees, costs and expenses incurred in connection with such Disposition) of any Disposition of any Collateral, other than a Disposition set forth in paragraphs (a) through (f) of the definition of Permitted Dispositions; provided that the Borrower may reinvest such net cash proceeds in its Canadian Business so long as such proceeds are not in excess of

 

$1,000,000 and such reinvestment takes places within 90 days of the receipt of such net cash proceeds; and

 

 

(ii)

100% of the net cash proceeds of any insurance policies for loss of or damage to any Collateral of a Loan Party to the extent such proceeds are not otherwise used to restore or replace such Collateral in accordance with Section 9.1(g)(ii); provided that the Borrower may reinvest such net cash proceeds in its Canadian Business so long as such proceeds are not in excess of $1,000,000 and such reinvestment takes places within 90 days of the receipt of such net cash proceeds.

 

 

 

(c)

Application of Payments: Each repayment of Syndicated Borrowings under this Section 4.1 shall be made to the Administrative Agent for the account of the Syndicated Lenders and shall effect a permanent reduction of the Total Syndicated Facility Commitment in an amount equal to the amount of the applicable repayment.

 

 

 

4.2

Reduction of Commitment

 

On the Maturity Date, the Borrower shall repay all Borrowings, all Creditcard Obligations and all accrued and unpaid interest and fees then outstanding to each Lender and its Affiliates, and the Commitment of each Lender shall be reduced to zero. Payments shall be made to the Administrative Agent, for the account of the Syndicated Lenders (with respect to Syndicated Borrowings) and the Operating Lender (with respect to Operating Borrowings). The Borrower shall ensure that Bankers' Acceptances made by or accepted by each Lender and that all Letters of Credit issued by the Operating Lender mature on or prior to the Maturity Date.

 

 

4.3

Cash Collateralization

 

If, on any day on which payments are required or permitted to be made hereunder, the Borrowings then outstanding include Bankers' Acceptances or Letters of Credit in an amount such that the payment would require the Borrower to be liable under the funding indemnity contained in Section 11.6 or to pay a Bankers' Acceptance prior to its maturity date or to pay a Letter of Credit prior to its expiry date, that portion of the payment which would otherwise be applied against any such Bankers' Acceptance or Letter of Credit may, at the option of the Borrower, be paid to the Administrative Agent for deposit into a Borrower Cash Collateral Account in accordance with Section 10.4 and be applied against such Bankers' Acceptance on its maturity date or to such Letter of Credit, if necessary, on any drawdown thereunder. Any such amounts which remain on deposit in a Borrower Cash Collateral Account after payment of any amounts required to be paid hereunder shall be paid to the Borrower if no Default or Event of Default has then occurred and is continuing.

 

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4.4

Cancellation of Commitment and Prepayment

 

The Borrower may, without penalty or premium, at any time during the term of this Agreement, upon at least five (5) Business Days' prior written notice to the Administrative Agent and the Operating Lender, as applicable, cancel all of the Total Commitment or any portion thereof: (i) with respect of the Total Syndicated Facility Commitment, in minimum amounts of $1,000,000 and whole multiples of $500,000 thereafter, and (ii) with respect to the Operating Facility Commitment, in whole multiples of $100,000 (in each case, with an indication in such notice as to the amount of reduction to be applicable to the Total Syndicated Facility Commitment and the Operating Facility Commitment), provided that on or prior to the last day of such notice period the Borrower has:

 

 

(a)

Prepaid Borrowings: prepaid or otherwise reduced Borrowings outstanding to each Lender in  an amount equal to the amount by which Borrowings outstanding to such Lender would otherwise be in excess of its Applicable Percentage of the Total Syndicated Facility Commitment or the Operating Facility Commitment, as applicable, immediately after the reduction of the Commitments provided for in such notice; and

 

 

 

(b)

Paid Interest: paid all accrued interest and other charges and fees in respect of the Borrowings being repaid or reduced as aforesaid.

 

 

Any such notice of cancellation is irrevocable and the amount of the Total Commitment (and of the Total Syndicated Facility Commitment or the Operating Facility Commitment) so cancelled and reduced may not be reinstated hereunder.

 

 

4.5

Early Repayment of Letters of Credit and Bankers' Acceptances

 

The Borrower shall not cancel all or any portion of the Total Commitment pursuant to Section 4.4 if the Borrowings required to be repaid to a Lender as a result thereof include Letters of Credit with an expiry date falling subsequent to the date of such cancellation or Bankers' Acceptances accepted by such Lender with a maturity date falling subsequent to the date of such cancellation unless, on the date of such cancellation, the Borrower has paid to the Administrative Agent for deposit into a Borrower Cash Collateral Account, for the account of such Lender: (i) in respect of Letters of Credit, the undrawn  amount thereof, and (ii) in respect of Bankers' Acceptances, the face amount thereof. Any such amounts which remain on deposit in a Borrower Cash Collateral Account after payment of any amounts required to be paid hereunder shall be paid to the Borrower if no Default or Event of Default has then occurred and is continuing.

 

 

4.6

Evidence of Indebtedness

 

Each of the Administrative Agent and the Operating Lender, as applicable, shall open and maintain accounts and records on the books of the Administrative Agent at the Administrative Agent's Branch of Account and on the books of the Operating Lender at the Operating Lender's Branch of Account evidencing the Syndicated Borrowings and Operating Borrowings, respectively, and other amounts owing by the Borrower to the Lenders under this Agreement. The Administrative Agent and the Operating Lender, as applicable, shall debit therefrom the amount of such Syndicated Borrowings and Operating Borrowings, respectively, and shall enter therein each payment of principal of and interest on the applicable Borrowings and fees and other amounts payable pursuant to this Agreement and shall record the Bankers' Acceptances purchased by the Lenders and the Letters of Credit issued by the Operating Lender, as applicable, and all other amounts becoming due to the Administrative Agent and each Lender or the Operating Lender, as the case may be, under this Agreement. The accounts and records of the Administrative Agent and the Operating Lender, as applicable, so kept shall constitute, in

 

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the absence of manifest error, prima facie evidence of the indebtedness of the Borrower to the Administrative Agent, the Operating Lender and each other Lender pursuant to this Agreement, the date each such Lender made each Borrowing available to the Borrower and the amounts the Borrower has paid from time to time on account of the principal and interest on the Borrowings, fees payable pursuant to this Agreement and other amounts owing hereunder.

 

ARTICLE 5

PAYMENT OF INTEREST AND FEES

 

 

5.1

Interest on Prime Loans

 

The Borrower shall pay interest in Canadian Dollars on each Prime Loan made by each Lender at the Administrative Agent's Account for Payments, in the case of the Syndicated Facility, and at the Operating Lender's Account for Payments, in the case of the Operating Facility, in each case at a rate per 365 days equal to the Prime Rate plus the Applicable Margin applicable to such Prime Loan. A change in the Prime Rate or the Applicable Margin will simultaneously cause a corresponding change in the interest payable on each Prime Loan. Such interest shall accrue daily based on the Prime Rate and Applicable Margin in effect on such day and is payable monthly in arrears on each Interest Date for the period commencing on and including the immediately prior Interest Date up to but not including the Interest Date on which such interest is to be paid and shall be calculated on a daily basis and on the basis of the actual number of days elapsed in a year of 365 days. The annual rates of interest to which the rates determined in accordance with the foregoing provisions of this Section 5.1 are equivalent, are the rates so determined multiplied by the actual number of days in the relevant year and divided by 365.

 

 

5.2

Bankers' Acceptance Fees

 

The Borrower shall pay acceptance fees in Canadian Dollars at the Administrative Agent's Account for Payments forthwith upon the acceptance by each Lender of each Bankers' Acceptance issued by the Borrower at a rate per 365 day period equal to the BA Acceptance Fee applicable to and in effect on the date of acceptance of such Bankers' Acceptance, calculated on the face amount of such Bankers' Acceptance and on the basis of the number of days in the term of such Bankers' Acceptance divided by 365. Acceptance fees payable to the Administrative Agent pursuant to this  Section 5.2 shall be paid in the manner specified in Section 3.6. All fees payable pursuant  to  this  Section 5.2 on any date in respect of any issuance of Bankers' Acceptances shall be calculated by the Administrative Agent and be payable by the Borrower based on the BA Acceptance Fee in effect on such date (and taking into account such issuance), provided that if during the term of any such Bankers' Acceptance a change in the BA Acceptance Fee occurs, the fees paid by the Borrower in respect of such Bankers' Acceptance shall be adjusted, effective upon the change in the BA Acceptance Fee occurring, to reflect the BA Acceptance Fee for the remaining term (if any) of the Bankers' Acceptance, and the Borrower, in the case of an increase in the BA Acceptance Fee, shall no later than three Business Days after receipt of a notice from the Administrative Agent make such payments to the Administrative Agent at the Administrative Agent's Account for Payments for the account of each Applicable Lender as are necessary to reflect such change, and each Applicable Lender, in the case of a decrease in the BA Acceptance Fee, shall credit any amount which would otherwise be refundable to the Borrower against amounts in respect of interest or fees accruing hereunder in relation to the Borrower.

 

 

5.3

Letter of Credit Fees

 

In consideration of the Operating Lender's commitment to issue a Letter of Credit under the Operating Facility, the Borrower shall pay to the Operating Lender a fee equal to the Letter of Credit Fee then in effect on the date of payment of such fee. Such Letter of Credit Fees shall be payable

 

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quarterly in arrears on the third Business Day of each quarter commencing in the quarter in which the applicable Letter of Credit was issued and shall be calculated based on the number of days during which any such Letter of Credit was outstanding during any such quarter (the "LC Payment Period") divided by 365 and shall be paid in the currency in which such Letter of Credit is denominated. Letter of Credit Fees shall be calculated on the basis of the daily maximum undrawn amount of such Letter of Credit outstanding during each LC Payment Period.

 

 

5.4

Interest on Overdue Amounts

 

Notwithstanding any other provision hereof, in the event that any amount due hereunder (including any interest payment) is not paid when due (whether by acceleration or otherwise), the Borrower shall and hereby agrees to pay to the Applicable Lenders interest on such unpaid amount (including interest on interest), if and to the fullest extent permitted by Applicable Law, from the date that such amount is due until the date that such amount is paid in full (but excluding the date of such payment if the payment is made before 11:00 a.m. Calgary time), and such interest shall accrue daily, be calculated and compounded on the last Business Day of each calendar month and be payable in the currency in which the applicable amount is due, on demand, as well after as before maturity, default and judgment, at a rate per annum that is equal to the interest rate applicable to Prime Loans outstanding from time to time hereunder (whether or not any Prime Loans are then outstanding) plus the Applicable Margin plus two percent (2%) per annum. The Borrower hereby waives, to the fullest extent it may do so  under Applicable Law, any provisions of Applicable Law, including specifically the Interest Act (Canada) or the Judgment Interest Act (Alberta), which may be inconsistent with this Agreement.

 

 

5.5

Administrative Agent's Fees

 

The Borrower shall pay an agency fee to the Administrative Agent (for the Administrative Agent's sole account) at the Administrative Agent's Account for Payments, in an amount as agreed from time to time between the Administrative Agent and the Borrower, on the Effective Date and on each annual anniversary of the Effective Date and such fees shall, for purposes of this Agreement, be deemed to be an amount payable pursuant to this Agreement.

 

 

5.6

Maximum Rate Permitted by Law

 

No interest or fee to be paid hereunder shall be paid at a rate exceeding the maximum rate permitted by Applicable Law. In the event any such interest or fee exceeds such maximum rate, such interest or fee shall be reduced or refunded, as the case may be, so as to be payable at the highest rate recoverable under Applicable Law.

 

 

5.7

Interest Generally

 

The theory of deemed reinvestment shall not apply to the calculation of interest or payment of fees or other amounts hereunder, notwithstanding anything contained in this Agreement or in any other Loan Document now or hereafter granted to or taken by the Administrative Agent or any Lender and all interest and fees payable by the Borrower to a Lender shall accrue from day to day and be computed as described herein in accordance with the "nominal rate" method of interest calculation.

 

 

5.8

Standby Fees

 

Until the Maturity Date, the Borrower shall pay standby fees to the Operating Lender calculated quarterly in arrears to and including the last day of each quarter commencing on and including the Effective Date, and payable on the third Business Day following each such quarter. Each payment of

 

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standby fees shall be calculated for the period commencing on and including the Effective Date or the last date on which such standby fees were payable hereunder, as the case may be, up to and including the last day of the quarter for which such standby fees are to be paid and shall be in an amount equal to the Standby Fee Rate in effect on each day during such period of calculation multiplied by the difference, if positive, obtained by subtracting the Operating Borrowings outstanding from the Operating Lender for each day in the period of the calculation, from the amount of the Operating Facility Commitment, in effect on each such day. Such standby fees shall be calculated on a daily basis and on the basis of a 365 day year.

 

 

5.9

Interest and Fee Adjustment

 

In the event of a change in the Applicable Margin and the Standby Fee Rate in respect of the Covenant Conversion Date and thereafter as a result of a change in the Senior Funded Debt to EBITDA Ratio, such change shall become effective on the day on which the Borrower delivers a Compliance Certificate in accordance with the requirements hereof evidencing such change in the Senior Funded Debt to EBITDA Ratio or, if the Borrower has not delivered a Compliance Certificate as required by the terms hereof within the time permitted by Section 9.1(y), then any change in the Applicable Margin and Standby Fee Rate shall become effective on the latest date permitted hereunder for delivery of such Compliance Certificate, and the Applicable Margin and Standby Fee Rate shall be based on the highest Level in the table in the definition of Applicable Margin for the period from the latest date permitted hereunder for delivery of such Compliance Certificate until the date of delivery thereof.

 

ARTICLE 6 SECURITY

 

 

6.1

Security

 

To secure the payment and performance of all of the Secured Obligations, the Borrower shall execute and deliver, and shall cause each other Loan Party to execute and deliver, to the Administrative Agent, for the benefit of each Secured Party, the following documents (collectively, the "Security"):

 

 

(a)

the Loan Party Guarantee;

 

 

(b)

a collateral mortgage from the Borrower in the amount of $200,000,000 (the "Collateral Mortgage") constituting a first ranking fixed and specific charge over real property owned by the Borrower, registered in Alberta, British Columbia and any other Canadian jurisdiction where the Borrower hereafter owns real property;

 

 

 

(c)

a loan party general security agreement executed by the Loan Parties granting a first priority security interest over all present and after-acquired personal property and a first floating charge over all other present and after-acquired property of such Loan Party (other than Excluded Assets), registered in Alberta, British Columbia and all other Canadian jurisdictions in which each such Loan Party hereafter carries on business or owns material Property;

 

 

 

(d)

to the extent any Loan Party is the registered owner of any material Intellectual Property, specific security agreements in respect of such material Intellectual Property as may be required by the Administrative Agent and the Lenders, in their sole discretion, each to be in form and substance satisfactory to the Administrative Agent; and

 

 

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(e)

such other agreements, documents or instruments reasonably required by the Administrative Agent and the Lenders (or their legal counsel) from time to time.

 

 

6.2

Form of Security

 

Without limiting the foregoing, the Security will be in such form or forms as required by the Administrative Agent, acting reasonably, and, subject to Section 6.4, will be registered in such offices in the provinces of Canada or any other jurisdiction as the Administrative Agent may from time to time reasonably require to protect the Security Interests created thereby. Should the Administrative Agent determine at any time and from time to time that the form and nature of the then existing Security is deficient in any way or does not fully provide the Secured Parties with the Security Interests and priority to which each is entitled hereunder, the Borrower will forthwith execute and deliver or cause to be executed and delivered to the Administrative Agent, at the Borrower's expense, such amendments to the Security or provide such new security as the Administrative Agent may reasonably request, in a form satisfactory to the Administrative Agent, acting reasonably.

 

 

6.3

Guarantees and Subsidiary Security

 

Upon a Subsidiary becoming a Material Subsidiary and to secure the payment and performance of all Secured Obligations, the Borrower shall cause any such Subsidiary to execute and deliver (to the extent not already provided):

 

 

(a)

an unlimited Guarantee (or a joinder or addition agreement to the Loan Party Guarantee) in favour of the Administrative Agent for the benefit of the Secured Parties, guaranteeing the Secured Obligations of each other Loan Party;

 

 

 

(b)

a general security agreement (or a joinder or addition agreement to the existing loan party general security agreement provided by the Loan Parties pursuant to Section 6.1(c)) in favour of the Administrative Agent for the benefit of the Secured Parties granting a first priority Security Interest over all of such Material Subsidiary's present and after-acquired personal property and a first floating charge over all other present and after-acquired property of such Material Subsidiary (other than Excluded Assets), registered in Alberta, British Columbia and all other Canadian jurisdictions in which each such Material Subsidiary hereafter carries on business or owns material Property;

 

 

 

(c)

to the extent such Material Subsidiary owns any fee simple or leasehold interest in any real property in Canada, a collateral mortgage or mortgage of lease, at the case may be, constituting a first ranking fixed and specific charge over such real property; and

 

 

 

(d)

to the extent any Material Subsidiary is the registered owner of any material Intellectual Property, specific security agreements in respect of such material Intellectual Property as may be required by the Administrative Agent and the Lenders, in their sole discretion, each to be in form and substance satisfactory to the Administrative Agent,

 

 

together with certified copies of constating documents and resolutions, a certificate of incumbency, a legal opinion of outside counsel with respect to such Material Subsidiary and the Security provided by it and such other documents as the Administrative Agent and the Lenders (or their counsel) may reasonably require, all in a form substantially similar to those provided by the Borrower and, if applicable, the other Material Subsidiaries on the Effective Date with such changes as may be approved by the Administrative Agent, acting reasonably.

 

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6.4

Registrations and Renewals

 

The Borrower shall and shall cause each other Loan Party, at the Borrower's sole cost and expense, to do all such commercially reasonable acts, execute all such instruments and provide such further assurances as the Administrative Agent may reasonably request from time to time to ensure that the priority of the Security Interests created by all of the Security executed and delivered to the Administrative Agent as contemplated hereby is duly protected and perfected by registration, filing or recordation of such Security or a caution, caveat, security notice or other appropriate instrument at all offices where necessary or of advantage to the protection or perfection thereof and to cooperate with the Administrative Agent and the Administrative Agent's counsel in renewing or refiling any registration, filing or recordation required hereby in order to preserve, protect and maintain the priority of such Security Interests, from time to time. The Administrative Agent may, at the Borrower's sole cost and expense, effect any or all such registrations, filings and recordings should the Borrower fail to do so forthwith upon the Administrative Agent's request as aforesaid.

 

 

6.5

Security Effective Notwithstanding Date of Advance

 

The Security Interests constituted by any of the Security or required to be created hereby or thereby shall be effective, and the undertakings as to Security Interests herein or in any Security shall be continuing, whether the monies hereby or thereby secured or any part thereof shall be advanced before or after or at the same time as the creation of any such Security Interest or before or after or upon the date of execution of this Agreement, and shall not be affected by the Secured Obligations fluctuating from time to time or the accounts established by the Administrative Agent or any Lender ceasing to be in debit balance.

 

 

6.6

Extensions, Etc.

 

The Secured Parties may directly, or through the Administrative Agent or other duly authorized representatives, grant extensions, take and give up securities, accept compositions, grant releases and discharges and otherwise deal with any Loan Party or any other Persons, sureties  or securities as the Lenders, in their sole discretion, may see fit, all without prejudice to the liability of any Loan Party under the Secured Documents or the rights of the Secured Parties under the Secured Documents.

 

 

6.7

Notices

 

The Borrower shall notify the Administrative Agent of any details, as soon as available, of any: (a) decision to change the name of any Loan Party or the location of its chief executive office, (b) movement of Property to, or the acquisition of Property in, a jurisdiction where the Security is not registered or the Security Interests of the Security do not have the benefit of any existing registration, and

(c) acquisition of real property in Canada which is not already subject to the Security Interests granted in favour of the Administrative Agent pursuant to the Collateral Mortgage, and in any event not less than ten

(10) Business Days prior to any such change, movement or acquisition. Upon receiving such information, the Administrative Agent may, at the Borrower's cost and expense, effect any or all such registrations, filings and recordings in such additional jurisdictions at any applicable personal property registry office and obtain local counsel opinions in respect thereof and the Borrower shall, and shall cause each other Loan Party to, at the Borrower's sole cost and expense, do all such commercially reasonable acts, execute all such instruments and provide such further information and assurances as the Administrative Agent may require to promptly effect all such registrations, filings and recordings.

 

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6.8

No Merger

 

The taking of any Security as provided under this Agreement or any Loan Document shall not operate by way of merger of any of the Secured Obligations of any Loan Party or any successor of any Loan Party under any Loan Document, or of any Security Interest, Guarantee, contract, promissory note, bill of exchange or security in any other form, whether or not similar to the foregoing, and no judgment recovered by the Administrative Agent on behalf of any Secured Party shall operate by way of merger or in any way affect the Security provided for in this Agreement, which shall be in addition to and not in substitution for any other security now or hereafter held by the Secured Parties whether for the Secured Obligations hereunder or under any Security. For greater certainty, no judgment recovered by  the Secured Parties shall operate by way of merger or in any way affect the obligations of any Loan Party to pay interest at the rates, times and manner as provided in the Credit Documents.

 

 

6.9

Further Assurances - Security

 

The Borrower shall, forthwith and from time to time on the reasonable request of the Administrative Agent, grant and cause each other Loan Party to grant to the Administrative Agent on behalf of the Secured Parties all such further rights and Security Interests necessary or of advantage to the Administrative Agent to permit it to operate the Business of the Loan Parties in Canada in a liquidation of Property or as a going concern following the occurrence of an Event of Default. Without limiting the foregoing:

 

 

(a)

if, at any time, the aggregate value of all inventory, equipment and other Property of the Loan Parties located on the premises of any real property leased by a Loan Party exceeds $2,000,000, the Borrower shall (or shall cause the applicable Loan Party to) promptly execute and deliver a leasehold mortgage in favour of the Administrative Agent, for the benefit of each Secured Party, constituting a first ranking fixed and specific charge over all real property leased by such Loan Party, registered in Alberta and each other Canadian jurisdiction where such Loan Party leases real property; and

 

 

 

(b)

the Borrower shall and shall cause each other Loan Party to, forthwith and from time to time on the reasonable request of the Administrative Agent, execute and do or cause to be executed and done all assurances and things which, in the opinion of the Administrative Agent, may be necessary or of advantage to give the Secured Parties the Security Interests and the priority intended hereunder to be created by the Security.

 

 

 

6.10

Release and Amendment of Security

 

No Secured Party shall, during the term of this Agreement, discharge, surrender, amend or otherwise modify any Security without the prior written consent of all of the Lenders, provided that the Administrative Agent may discharge Security provided hereunder: (i) at the discretion of the Administrative Agent with respect to Permitted Dispositions (in which case the Security shall cease to apply to the subject matter thereof), and (ii) pursuant to Section 9.4(b).

 

The Lenders, Swap Lenders, Cash Management Lenders and Creditcard Lenders hereby authorize the Administrative Agent, and the Administrative Agent hereby agrees to: (a) discharge the Security at the Borrower's sole cost and expense, forthwith after all of the Lender Outstandings and any other Secured Obligations have been unconditionally and irrevocably paid or performed in full and the Facilities and all Lender Swaps have been terminated or collateralized to the satisfaction of the Administrative Agent, the Lenders and the Swap Lenders as applicable, (b) at the request of the  Borrower, discharge that portion of the Security that applies to a Permitted Disposition or execute a no

 

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interest letter or similar document in connection with such Permitted Disposition, at the Borrower's sole cost and expense, and (c) discharge Security pursuant to Section 9.4(b).

 

 

6.11

Security for Swaps with Former Lenders

 

If a Lender ceases to be a Lender under this Agreement (a "Former Lender"), all Permitted Swap Indebtedness owing to such Former Lender and its Affiliates under Lender Swaps entered into while such Former Lender was a Lender shall remain secured by the Security (equally and rateably) to the extent that such Permitted Swap Indebtedness was secured by the Security prior to such Lender becoming a Former Lender and, subject to the following provisions of this Section 6.11 and unless the context otherwise requires, all references herein or in any other Loan Document to "Permitted Swap Indebtedness" shall include such obligations to a Former Lender and its Affiliates, and all references herein or in any other Loan Document to "Lenders" shall include Former Lenders for the purposes of such obligations. For certainty, any obligations under Swaps entered into with a Former Lender or an Affiliate thereof after the Former Lender has ceased to be a Lender shall not be secured by the Security. Notwithstanding the foregoing, no Former Lender or any Affiliate thereof shall have any right to cause or require the enforcement of the Security or any right to participate in any decisions relating to the Security, including any decisions relating to the enforcement or manner of enforcement of the Security or decisions relating to any amendment to, waiver under, release of or other dealing with all or any part of the Security; for certainty, the sole right of a Former Lender and its Affiliates with respect to the Security is to share, on a pari passu basis, in any proceeds of realization and enforcement of the Security.

 

 

6.12

Permitted Encumbrances and Permitted Indebtedness

 

None of:

 

 

(a)

the fact that any Person is permitted to create or suffer to exist any Permitted Encumbrance or Permitted Indebtedness;

 

 

 

(b)

the fact that any representation, warranty or covenant herein may make an exception for the existence of Permitted Encumbrances or Permitted Indebtedness; or

 

 

 

(c)

the fact that the Security Interests created pursuant to the Loan Documents are stated to be subject to, or are not required to rank in priority to, Permitted Encumbrances;

 

 

shall in any manner, nor in any cause or proceeding, directly or indirectly, be taken to constitute a subordination of any Security Interest created pursuant to the Loan Documents to any Permitted Encumbrance or to any other Security Interest or other obligation whatsoever, or that any of the Secured Obligations are in any way subordinate or junior in right of payment to any Permitted Indebtedness, it being the intention of the parties that all Security Interests created pursuant to the Loan Documents shall at all times, to the maximum extent permitted by Applicable Law, rank as first priority Security Interests in priority to Permitted Encumbrances and all other Security Interests or other obligations whatsoever and that the Secured Obligations will rank in right of payment at all times at least equally with such Permitted Indebtedness.

 

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ARTICLE 7 PAYMENT

 

 

7.1

Time, Place and Currency of Payment

 

Payments of principal, interest, fees and all other amounts payable by the Borrower pursuant to this Agreement shall be paid in the currency in which it is due for value at or before 11:00

a.m. (Calgary time) on the day such payment is due and shall only be considered to have been paid on such day if received at or before such time, failing which such amount shall be considered to have been paid and received on the following day. If any such day is not a Business Day, such amount shall be deemed for all purposes of this Agreement to be due (and with respect to amounts paid, to be received) on the Business Day next following such day and any such extension of time shall be included in the computation of the payment of any interest or fees payable under this Agreement. All payments in  respect of the Syndicated Facility shall be made at the Administrative Agent's Account for Payments and all payments in respect of the Operating Facility shall be made at the Operating Lender's Account for Payments.

 

 

7.2

Application of Payments

 

Except as otherwise agreed to by all of the Lenders in their sole discretion, all payments made by or on behalf of the Borrower pursuant to this Agreement, so long as no Default or Event of Default has occurred and is continuing, shall be applied by the Administrative Agent in accordance with the Borrower's instructions.

 

 

7.3

Account Debit Authorization

 

The Borrower authorizes and directs the Administrative Agent and the Operating Lender, as applicable, in its discretion and upon notice to the Borrower (provided failure to provide such notice shall not constitute a breach of this Agreement by either the Administrative Agent or the Operating Lender, as applicable), to automatically debit, by mechanical, electronic or manual means, the bank accounts of the Borrower maintained with ATB (for so long as ATB is the Administrative Agent and the Operating Lender hereunder) for all amounts payable under the Loan Documents including in respect of principal, interest and fees payable under this Agreement and recoverable expenses due and payable hereunder or under any Loan Document.

 

ARTICLE 8

CONDITIONS PRECEDENT TO DISBURSEMENT OF THE BORROWINGS

 

 

8.1

Effectiveness and Conditions Precedent

 

This Agreement shall become effective at such time as the following conditions precedent have been satisfied:

 

 

(a)

Due Diligence: the Administrative Agent and each of the Lenders shall have confirmed receipt of all financial statements, budgets and other information as the Administrative Agent or such Lenders may require, including, without limitation:

 

 

 

(i)

the Organizational Chart of the Loan Parties;

 

 

(ii)

consolidated and/or combined financial forecasts in respect of the Borrower, prepared on a quarterly basis for a period of two (2) years;

 

 

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(iii)

an updated Environmental Report, together with satisfactory transmittal and reliance letters addressed to the Administrative Agent in relation thereto; and

 

 

 

(iv)

an insurance report prepared by the Insurance Consultant confirming compliance with Section 9.1(g) and otherwise in form and substance satisfactory to the Administrative Agent;

 

 

and shall have completed and be satisfied with: (A) their due diligence and review of any potential environmental, regulatory and litigation matters relating to the Loan Parties, (B) the value of each Loan Party's Property and financial condition, and (C) each Loan Party's ability to carry on its Business in Canada and to repay all Borrowings from time to time;

 

 

(b)

No Event of Default: as of such time, no Default or Event of Default shall have occurred or will result from the initial Drawdown of Borrowings hereunder and the Administrative Agent shall have received a certificate from each Loan Party certifying the same;

 

 

 

(c)

Representations and Warranties True: the representations and warranties  contained  in Article 2 shall be true and correct as of such time, and the Administrative Agent shall have received a certificate from each Loan Party certifying the same;

 

 

 

(d)

Use of Borrowings & Concurrent Payout of Existing ATB Commitment Letter: the Administrative Agent shall be satisfied that the proceeds of the initial Drawdown of Borrowings hereunder shall be utilized in accordance with Section 3.4, including to pay out in full and cancel the Existing ATB Commitment Letter (other than the Existing MasterCard Obligations);

 

 

 

(e)

Available Cash: the Administrative Agent shall be satisfied that the Available Cash is not less than $10,000,000, as at the Effective Date;

 

 

 

(f)

Receipt of Documentation: the Administrative Agent shall have received, in form and  substance satisfactory to the Lenders, the following:

 

 

 

(i)

a duly executed copy of this Agreement;

 

 

(ii)

duly executed copies of the Security as required pursuant to Article 6;

 

 

(iii)

a duly executed copy of the Intercreditor Agreement;

 

 

(iv)

duly executed copy of a cash collateral agreements granted by the Borrower in favour of the Administrative Agent in respect of: (i) the Available Cash, and (ii) the face amount of the Fortis LC;

 

 

 

(v)

evidence that all Permitted Subordinated Debt in existence on the Effective Date (other than the Hellard SPA Permitted Debt), but including all Debt to 208, is fully subordinated and postponed to the Secured Obligations;

 

 

 

(vi)

a Borrowing Notice completed and signed by the Borrower with respect to the initial Drawdown of Borrowings hereunder (such Borrowing Notice to have been delivered at least three (3) Business Days prior to the Effective Date);

 

 

 

(vii)

a direction to pay from the Borrower addressed to the Administrative Agent irrevocably directing all or a portion of the initial Drawdown advanced on the Effective Date to be

 

 

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used to pay out the Existing ATB Commitment Letter, other than the Existing MasterCard Obligations, as contemplated by Section 8.1(d);

 

 

(viii)

a general release and discharge in respect of the Existing ATB Commitment Letter and the Security Interests granted in favour of ATB in connection therewith, to be effective upon receipt by ATB of the payout contemplated by Section 8.1(d);

 

 

 

(ix)

[intentionally deleted];

 

 

(x)

a duly executed Compliance Certificate dated as at the Effective Date, prepared using June 30, 2019 financial information but on a pro forma basis taking into account the Facilities, together with any particulars of any information contained therein as the Administrative Agent or any Lender may reasonably request;

 

 

 

(xi)

certified copies of:

 

 

(A)

each Material Agreement, together with all amendments thereto, in existence as of the Effective Date; and

 

 

 

(B)

all Material Licenses, together with all amendments thereto, in existence as of the Effective Date and all material correspondence received from any Governmental Authority, including communication regarding any non-compliance items;

 

 

 

(xii)

a duly executed Environmental Certificate;

 

 

(xiii)

certificate(s) of insurance showing the Administrative Agent, on behalf of the Secured Parties, as loss payee and additional insured and evidencing compliance with Section 9.1(g);

 

 

 

(xiv)

a report, in form and substance satisfactory to the Administrative Agent and the Lenders, confirming the Cost Basis Value in an amount sufficient to support a determination of the Loan to Cost Ratio being less than 0.63 to 1.00;

 

 

 

(xv)

evidence of the registration of the Security as required hereunder (or appropriate title insurance arrangements satisfactory to the Administrative Agent having been made), including, without limitation, in respect of the Collateral Mortgage at all applicable real property registries in Alberta and British Columbia;

 

 

 

(xvi)

a certificate of status or similar document in respect of each Loan Party issued under the laws of Alberta and British Columbia, as applicable;

 

 

 

(xvii)

an officer's certificate of each Loan Party attaching thereto its constating documents, its bylaws and other governing documents, its authorizing resolutions in respect of this Agreement and the other Loan Documents and an incumbency certificate;

 

 

 

(xviii)

an opinion of McCarthy Tétrault LLP, counsel to the Loan Parties, addressed to the Administrative Agent and each Lender and Lenders' legal counsel, relating to, inter alia, the existence of the Loan Parties and the authorization, execution, delivery and enforceability of the Loan Documents, all in form and substance satisfactory to the Administrative Agent, the Lenders and their legal counsel, and confirming that each Loan

 

 

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Party is qualified to carry on its Business in all applicable jurisdictions and that the Loan Parties' operations and business will not contravene any Applicable Laws;

 

 

(xix)

an opinion of Burnet, Duckworth & Palmer LLP, counsel to the Administrative Agent, addressed to the Administrative Agent and each Lender, in form and substance satisfactory to the Administrative Agent; and

 

 

 

(xx)

such other documents and documentation which the Administrative Agent or any Lender may reasonably request;

 

 

 

(g)

Fees: the Borrower shall have paid (or made arrangements satisfactory to the Administrative Agent to effect the payment of):

 

 

 

(i)

all fees and expenses then due to the Administrative Agent and/or the Lenders in respect of this Agreement and the Facilities; and

 

 

 

(ii)

all documented legal fees and expenses of Burnet, Duckworth & Palmer LLP, the Project Monitor, the Insurance Consultant and any other counsel and consultants employed by the Administrative Agent or any Lender;

 

 

 

(h)

Know-Your-Client Confirmations: no Lender shall have advised the Administrative Agent that such Lender has not received from the Borrower all such information and evidence as such Lender requested of the Borrower prior to the Effective Date as contemplated by Section 14.11; and

 

 

 

(i)

Material Adverse Effect: as of such time, no circumstance or event shall have occurred which would reasonably be expected to have a Material Adverse Effect, and no material adverse change shall have occurred in the operations or financial condition of the Loan Parties or of their Property, taken as a whole, since the date of the most recent audited financial statements provided to the Administrative Agent, and the Administrative Agent shall have received a certificate from each Loan Party as to both such effects.

 

 

 

8.2

Conditions Precedent to each Utilization

 

The obligation of the Lenders to provide any Accommodation to the Borrower, to accept and purchase any Bankers' Acceptances, or to issue any Letter of Credit, or to allow any Conversion or Rollover, is subject to and conditional upon satisfaction of each of the following conditions precedent:

 

 

(a)

on each Drawdown Date, Conversion Date or Rollover Date, as applicable, there exists no Default or Event of Default; and

 

 

 

(b)

on each Drawdown Date, the representations and warranties referred to in Section 2.2, other than those stated to be made as at a specific date, are true and correct in all material respects with the same effect as if made as of such date.

 

 

 

8.3

Waiver of a Condition Precedent

 

The terms and conditions of Sections 8.1 and 8.2 are inserted for the sole benefit of the Administrative Agent and the Lenders and may be waived by the Majority Lenders in respect of an Accommodation under the Syndicated Facility, or the Operating Lender in respect of an Accommodation under the Operating Facility, in whole or in part with or without terms or conditions, in respect of all or

 

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any portion of a Borrowing, without affecting the right of the Administrative Agent or the Lenders to assert such terms and conditions in whole or in part in respect of any other Borrowing.

 

ARTICLE 9 COVENANTS OF THE BORROWER

 

 

9.1

Positive Covenants of the Borrower

 

The Borrower covenants and agrees with each of the Lenders and the Administrative Agent as set forth in this Article 9, unless the Administrative Agent on behalf of the Majority Lenders otherwise consents in writing, each such covenant and agreement to remain in full force and effect for the term of this Agreement as provided in Section 14.9 or, in the case of provisions stated to survive termination of this Agreement as described in Section 14.9, until the discharge thereof by the Administrative Agent in writing. The covenants and agreements set forth in this Article 9 are without limitation to any covenants, undertakings or agreements elsewhere contained herein or in any of the other Loan Documents:

 

General Covenants

 

 

(a)

Payment and Performance: the Borrower shall and shall cause each other Loan Party to duly and punctually pay all indebtedness and liabilities as and when due by it hereunder and perform all other obligations on its part to be performed under the terms of the Loan Documents at the times and places and in the manner provided for therein;

 

 

 

(b)

Maintain Corporate or Other Existence and Status: the Borrower shall and shall cause each other Loan Party to maintain its corporate, partnership or trust existence, as applicable, in good standing and duly register and qualify and remain duly registered and qualified to do business or own or lease Property in each jurisdiction in which the nature of its Business or the character of any Property owned or leased by it, requires such registration or qualification, except to the extent such failure to be so registered or qualified would not reasonably be expected to have a Material Adverse Effect;

 

 

 

(c)

Maintenance of and Access to Books and Records: the Borrower shall and shall cause each other Loan Party to keep proper and adequate records and books of account in which true and complete entries will be made in a manner sufficient to enable the preparation of financial statements in accordance with GAAP, and shall permit and shall cause each other Loan Party to permit the Administrative Agent or its representatives upon reasonable notice and from time to time during normal business hours to enter its premises and to inspect its books of accounts and operations thereof, and the Borrower shall and shall cause each other Loan Party to afford access to the Administrative Agent or its representatives at any time and from time to time upon reasonable notice and during normal business hours to inspect the Loan Parties' Property and operations and, in particular, to review documents, books, studies, reports and records relating to the Collateral and its Business in relation thereto;

 

 

 

(d)

Appraisal: no later than 45 days after the Effective Date, the Borrower shall deliver an Appraisal;

 

 

 

(e)

Loan to Appraised Value Ratio: concurrently with its delivery of the Appraisal pursuant to Section 9.1(d) above, the Borrower shall ensure that the Loan to Appraised Value Ratio is less than 0.63 to 1.00;

 

 

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(f)

Taxes: the Borrower shall and shall cause each other Loan Party to file all income tax returns which are required to be filed, pay or make provision for payment (in accordance with GAAP) of all Taxes which are due and payable, and provide adequate reserves (in accordance with GAAP) for the payment of any Tax the payment of which is subject to a Permitted Contest, and shall provide the Administrative Agent upon request with evidence of such payment, in form and substance satisfactory to the Administrative Agent, acting reasonably, all except to the extent failure to do so would not reasonably be expected to have a Material Adverse Effect;

 

 

 

(g)

Insurance: the Borrower shall and shall cause each other Loan Party to:

 

 

(i)

maintain in full force and effect such policies of insurance issued by insurers of recognized standing, acceptable to the Administrative Agent and the Insurance Consultant, insuring such Property and operations and providing such coverages as would be maintained by Persons engaged in the same or similar business to the Business in the localities where such Property and operations are located, including, without limitation, all-risk property insurance, comprehensive general liability insurance, construction/builder's all risk insurance, business interruption insurance and crop loss and export insurance, in each case, as advised by and to the extent deemed appropriate by the Administrative Agent and the Insurance Consultant, such insurance to be otherwise on such terms and conditions and with such deductibles as deemed acceptable by the Administrative Agent and the Insurance Consultant and provide, by its terms that no such insurance will be cancellable except upon 30 days' prior written notice to the Administrative Agent. The Borrower shall, if required, furnish the Administrative Agent with certificates or other evidence satisfactory to the Administrative Agent demonstrating compliance with the foregoing provisions and, in respect of insurance policies maintained by any of the Loan Parties, the Administrative Agent shall be added as a loss payee and as an additional insured, as its interest may appear; and

 

 

 

(ii)

promptly upon receipt thereof, use 100% of the proceeds received pursuant to an insurance policy for loss of or damage to any of its Collateral to restore or replace such Collateral to the satisfaction of the Administrative Agent; unless such proceeds are reinvested in accordance with, and to the extent permitted by, Section 4.1(b)(ii);

 

 

 

(h)

Compliance With Laws and Regulations; Maintenance of Material Licenses; Material Agreements: the Borrower shall and shall cause each other Loan Party to:

 

 

 

(i)

comply with and manage and operate the applicable Loan Party's Property in compliance with the requirements of all Applicable Laws, rules, regulations and orders of Governmental Authorities, including, without limitation, all Environmental Laws and all Cannabis Laws except, in each case, to the extent failure to do so would not reasonably be expected to have a Material Adverse Effect;

 

 

 

(ii)

observe and conform to all valid requirements, including Governmental Actions, of any Governmental Authority relative to any applicable Loan Party's Property and all covenants, terms and conditions of all agreements upon or under which any of such Property is held, except, in each case, to the extent failure to do so would not reasonably be expected to have a Material Adverse Effect;

 

 

 

(iii)

keep, maintain in effect and comply with all Material Licenses and all other permits, approvals, licences and authorizations required in connection with its Business and

 

 

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ensure that all Cannabis-Related Activities occur solely in accordance with the terms of the Material Licenses;

 

 

(iv)

perform and observe in all respects all terms and provisions of each Material Agreement to be performed or observed by it or such other Loan Party and maintain each Material Agreement in full force and effect;

 

 

 

(v)

maintain in all material respects the employment of any Person whose retention is required as a term of a Health Canada License or any other license issued under the Cannabis Act or the Cannabis Regulations including a senior person in charge, qualified person in charge, master grower, responsible person, head of security and quality assurance person or such alternate individual appointed within the timelines set forth under Cannabis Act or the Cannabis Regulations, as applicable; and

 

 

 

(vi)

store, treat, transport or otherwise handle and dispose of all hazardous materials and waste owned, managed or controlled by the applicable Loan Party in compliance with all Environmental Laws, except, in each case, to the extent failure to do so would not reasonably be expected to have a Material Adverse Effect;

 

 

 

(i)

Defence of Title: if the Security Interests granted in any Loan Document or the title to or the rights of the Administrative Agent in or to any Collateral (including, without limitation, any material Intellectual Property) or any part thereof shall be endangered or shall be attacked, directly or indirectly, or if any legal proceedings are instigated against any Loan Party with respect thereto, the Borrower shall promptly give written notice thereof to the Administrative Agent and the Borrower shall and shall cause each applicable Loan Party to:

 

 

 

(i)

conduct itself diligently to cure any such deficiency that is discovered or validly claimed;

 

 

(ii)

take all necessary and proper steps for the defence of title to such Collateral and the security granted thereunder or under any Security; and

 

 

 

(iii)

take such action, including employment of legal counsel, as is reasonably appropriate to the prosecution or defence of litigation with the view to the release or discharge of claim made against the title to any such Collateral;

 

 

 

(j)

Notice of Certain Events: the Borrower shall provide the Administrative Agent with prompt (and in any event no less than two (2) Business Days') written notice of:

 

 

 

(i)

the occurrence of any Default or Event of Default;

 

 

(ii)

the existence or commencement of any actions, suits, litigation or other proceedings of which the Borrower has knowledge which are commenced against or adversely which affect any Loan Party or any Loan Party's Property and which (together with all other actions, suits, litigation or other proceedings), if adversely determined, would reasonably be expected to have a Material Adverse Effect or result in aggregate liabilities for the Loan Parties in excess of the Threshold Amount;

 

 

 

(iii)

any claim that has been made by any Person against any Loan Party or any Collateral which, if determined adversely, would reasonably be expected to have a Material Adverse Effect;

 

 

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(iv)

any default under, or any other event entitling a counterparty to terminate or suspend any, Material Agreement received or delivered by any Loan Party;

 

 

 

(v)

the occurrence of any material Release or other material breach of Environmental Laws in respect of any Property of any Loan Party;

 

 

 

(vi)

any: (A) amendment, modification, suspension or revocation in respect of any Material License, together with a certified copy of all documents relating thereto, and (B) audit by Health Canada (and the result thereof) or warning, document, letter or notice from Health Canada to any Loan Party or in respect of its Property or any other requirement of a Governmental Authority or Governmental Action reasonably be expected to have a negative or material impact on any Material License held by the Borrower or any other Loan Party, together with the Borrower's or other Loan Party's action plan with respect thereto;

 

 

 

(vii)

any rejection notice in respect of any new or renewal security clearance application for any director or officer of any Loan Party or any other Person required to hold a security clearance pursuant to the Cannabis Act or the Cannabis Regulations;

 

 

 

(viii)

the receipt of proceeds under any insurance claim by any Loan Party;

 

 

(ix)

any change to the Organizational Chart of the Loan Parties; and

 

 

(x)

any other matter, circumstance or event that has had or would reasonably be expected to have a Material Adverse Effect;

 

 

 

(k)

Operational Covenants: the Borrower shall and shall cause each applicable Loan Party to maintain all Property in good repair and working condition and in accordance with good industry practice and to carry on, conduct, manage and operate its Business in a proper and businesslike manner, in accordance with sound industry practice, solely within a Qualified Jurisdiction, in accordance with all Applicable Laws and shall ensure that:

 

 

 

(i)

all cultivation, production and processing of Cannabis and Cannabisrelated products occur solely in facilities licensed by the applicable Governmental Authorities in Qualified Jurisdictions, in accordance with all Applicable Laws; and

 

 

 

(ii)

all activities relating to the sale of Cannabis and Cannabis-related products occur solely in facilities licensed by Governmental Authorities in Qualified Jurisdictions or between entities licensed by Governmental Authorities in Qualified Jurisdictions;

 

 

 

(l)

Environmental Compliance Orders: the Borrower shall forthwith notify the Administrative Agent and shall and shall cause each other Loan Party to make copies available for inspection and review on a confidential basis by representatives of the Administrative Agent upon receipt of all written orders, control orders, directions, action requests, claims and complaints from a Governmental Authority relating to non-compliance with any Environmental Law which would reasonably be expected to have a Material Adverse Effect;

 

 

 

(m)

Environmental Audit: upon the occurrence or discovery of any circumstance, condition  or event which, in the opinion of the Administrative Agent, acting reasonably, would reasonably be expected to result in any Environmental Liability to any Loan Party which would reasonably be expected to have a Material Adverse Effect and, in any event, after the occurrence of an Event of

 

 

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Default which is continuing, the Administrative Agent may, at the expense of the Borrower, arrange for an environmental audit to be conducted by an independent environmental engineer or other environmental consultant (such engineer or consultant to be chosen in consultation with the Borrower prior to the occurrence of an Event or Default which is continuing, provided however that the ultimate decision is to be that of the Administrative Agent), such audit to be carried out, prior to the occurrence of an Event of Default which is continuing, in consultation with the Borrower to expedite the completion in a cost-effective manner. The Borrower shall and shall cause each other Loan Party to, upon reasonable notice, and so long as any such engineer or consultant agrees to comply with the health and safety standards generally applicable to the Property to be audited, provide access to its Property in order for such engineer or consultant to conduct such environmental and other inspections as it deems advisable and in that connection to examine the books, records, assets, affairs and business operations of the Loan Parties and to make inquiries of government offices concerning compliance by the Loan Parties with Environmental Laws;

 

 

(n)

Environmental Indemnity:

 

 

(i)

the Borrower shall and shall cause each other Loan Party to forthwith on demand fully indemnify, defend and save each Secured Party and each of their respective directors, officers, employees and agents, and any of them (in this Section 9.1(n) any one or more or all of such Persons is referred to as the "Indemnified Party"), harmless from and against any and all liabilities, losses, claims, damages and expenses (including all reasonable fees of counsel on a solicitor and his own client basis and accountant fees and reasonable expenses, court costs and all other reasonable out-of-pocket expenses) sustained, paid, incurred or suffered by the Indemnified Party arising in any manner whatsoever out of or as a result of any environmental claims, liabilities or obligations of any and every nature whatsoever relating to or affecting any Loan Party or the Collateral, or the property of others where any Loan Party would be reasonably likely to have any liability in respect thereof under Applicable Law (all or any item or part of the foregoing liabilities, losses, claims, damages and expenses are referred to in this Section 9.1(n) as "Loss"). Notwithstanding the generality of the foregoing, the Loan Parties shall not be obliged to indemnify the Indemnified Party to the extent any Loss has been incurred by reason of the gross negligence or wilful misconduct of such Indemnified Party. The Borrower acknowledges on behalf of itself and each Loan Party that each Lender is entering into the provisions of this Section 9.1(n) on its own behalf and as agent and trustee for its directors, officers, employees and agents;

 

 

 

(ii)

if any claim (in this Section 9.1(n) referred to as a "Claim") shall be asserted by any Person against the Indemnified Party which may give rise to a Loss, the Indemnified Party shall promptly notify the Borrower of all particulars of such Claim upon learning of same. The failure to give any such notice, however, shall not affect any Loan Party's liability to indemnify the Indemnified Party unless such failure adversely and materially affects its ability to defend, object to, oppose or contest that Claim;

 

 

 

(iii)

(A)  each Loan Party shall at all times have the right, if no Default or Event of Default has occurred and is continuing, but shall not be required, at its sole expense, to resist, defend and compromise any Claim in the name of the Indemnified Party, by legal counsel reasonably acceptable to the Indemnified Party who will cooperate in such defence on a reasonable basis; provided that the Indemnified Party shall have the right to participate in the defence or compromise of any Claim by other legal counsel of its choosing if the Indemnified Party, acting

 

 

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reasonably, determines it should so participate;  provided  that  subject  to  Section 9.1(n)(iii)(B) the fees and disbursements of such other counsel shall be paid by the Borrower. The Indemnified Party shall not effect any settlement or compromise of any Claim without the prior written consent of the Borrower. Notwithstanding anything herein to the contrary, the Borrower on its own behalf must defend or must cause the applicable Loan Party to defend such claim, diligently and reasonably throughout the period while such Claim exists. If any Loan Party exercises its rights under this Section 9.1(n), the Borrower shall cause such Loan Party not to compromise or otherwise settle a Claim without the consent of the Indemnified Party suffering such Claim, which consent shall not be unreasonably withheld or delayed. The inability of the Loan Parties to pay such Claim in full shall constitute a sufficient reason to withhold such consent; and

 

(B)     the Loan Parties shall  not, in connection with any Loss in the same jurisdiction,  be liable for the fees and expenses of more than one separate legal firm for the Indemnified Parties unless such representation by the same legal counsel would be inappropriate due to actual or potential differing interests or the employment thereof has been specifically authorized by the Borrower in writing and such firm or firms shall be designated in writing by the Administrative Agent on behalf of each Indemnified Party;

 

 

(o)

Use of Facilities: the Borrower shall, and shall cause each other Loan Party to, ensure that the proceeds of each of the Facilities are used by Loan Parties only and exclusively for the purposes described in Section 3.4, as applicable;

 

 

 

(p)

Bank Accounts: the Borrower shall, and shall cause each other Loan Party to, maintain all of its cash receipts and term deposits and to deposit all of its cheques and other payments (including all proceeds of Collateral, insurance and reinsurance) into an account with the Administrative Agent or a Lender;

 

 

 

(q)

Mandatory Lender Swaps: no later than thirty (30) days after the Effective Date, the Borrower shall deliver evidence satisfactory to the Administrative Agent that the Borrower has entered into Interest Swaps with Swap Lenders, and, subject to Sections 3.15(d) and 4.4, the Borrower shall maintain or replace such Interest Swaps in each case, for a term up to and including the Maturity Date and in a net notional amount which, taken together with the notional amounts of all other Interest Swaps then in effect entered into by the Loan Parties, is equal to no less than 25% of the aggregate amount of all Syndicated Borrowings;

 

 

 

(r)

Material Subsidiary Guarantees: unless otherwise agreed to by the Administrative Agent in writing, the Borrower shall ensure that each Material Subsidiary is at all times a party to the Loan Party Guarantee (or that has granted a similar unlimited Guarantee in respect of the Secured Obligations of the other Loan Parties in form and substance satisfactory to the Administrative Agent), and shall ensure that each Material Subsidiary has provided the other Security required  by Article 6;

 

 

 

(s)

Additional Information: the Borrower shall, and shall cause each other Loan Party to, promptly furnish to the Administrative Agent any additional information regarding the Loan Parties' Business and the affairs, operations and financial condition of each Loan Party as the Administrative Agent shall reasonably request or which the Borrower deems material to the

 

 

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Lenders' continuing due diligence and shall, at all times, ensure the accuracy of all such information in all material respects;

 

 

(t)

Ownership of Properties/EBITDA: the Borrower shall ensure that, at all times, the Loan Parties directly or indirectly:

 

 

 

(i)

own 95% or more of the Borrower's consolidated Canadian assets, as shown on the combined consolidated balance sheet of the Borrower in the financial statements (reflecting Canadian operations only) most recently provided to the Administrative Agent pursuant to Section 9.1(v)(i)(B) or Section 9.1(w)(i), as the case may be; and

 

 

 

(ii)

account for 95% or more of EBITDA for the period covered by the financial statements reflecting Canadian operations only most recently provided to the Administrative Agent pursuant to Section 9.1(v)(i)(B) or Section 9.1(w)(i), as the case may be;

 

 

 

(u)

Further Assurances: the Borrower shall do and shall cause each other Loan Party to do all such further acts and things and execute and deliver all such further documents as shall be reasonably required by the Administrative Agent in order to ensure the terms and provisions of the Loan Documents are fully performed and carried out;

 

 

Reporting Requirements

 

 

(v)

Annual Financial Statements, etc.: the Borrower shall furnish the following to the Administrative Agent as soon as available and in any event within 120 days after the end of each Fiscal Year:

 

 

 

(i)

Audited Financial Statements/MD&A: a consolidated balance sheet as at the close of such Fiscal Year and consolidated statements of income and changes in financial position for such Fiscal Year, setting forth in comparative form the corresponding figures of the preceding Fiscal Year, in respect of each of:

 

 

 

(A)

the Borrower on a fully-consolidated basis (for greater certainty, including all Subsidiaries, i.e. reflecting all Canadian and non-Canadian operations), together with an auditor's report prepared by a qualified firm of accountants confirming that its examinations of such financial statements were made in accordance with generally accepted auditing standards and, accordingly, included such tests and other procedures as it considered necessary in the circumstances and that such financial statements present fairly in all material respects the financial position of the Borrower on a consolidated basis, as of the close of such Fiscal Year and the results of its operations and the changes in its financial position for the Fiscal Year then ended, in accordance with GAAP (except as otherwise noted therein and consented to by the Majority Lenders, such consent not to be unreasonably withheld); and

 

 

 

(B)

the Borrower but excluding Non-Material Foreign Subsidiaries (i.e. reflecting Canadian operations only), together with an auditor's report prepared by a qualified firm of accountants confirming that its examinations of such financial statements were made in accordance with generally accepted auditing standards and, accordingly, included such tests and other procedures as it considered necessary in the circumstances and that such financial statements present fairly in all material respects the financial position of the Borrower on a consolidated

 

 

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basis, as of the close of such Fiscal Year and the results of its operations and the changes in its financial position for the Fiscal Year then ended, in accordance with GAAP (except as otherwise noted therein and consented to by the Majority Lenders, such consent not to be unreasonably withheld),

 

each to be accompanied by a management discussion and analysis report for such Fiscal Year;

 

 

(ii)

Review Engagement Financial Statements: until all SAF Indebtedness shall have been repaid in full and the SAF Credit Agreement shall have been terminated, a consolidated balance sheet as at the close of such Fiscal Year and consolidated statements of income and changes in financial position for such Fiscal Year, setting forth in comparative form the corresponding figures of the preceding Fiscal Year in respect of the Borrower but excluding Material Subsidiaries and Non-Material Canadian Subsidiaries (i.e. reflecting non-Canadian operations only), each prepared in accordance with GAAP on a review- engagement basis by a qualified firm of accountants; and

 

 

 

(iii)

Financial Forecasts: consolidated financial forecasts for the next Fiscal Year in respect of the Borrower but excluding Non-Material Foreign Subsidiaries (i.e. reflecting Canadian operations only) and on a consolidated basis (for greater certainty, including all Subsidiaries (i.e. reflecting all Canadian and non-Canadian operations)) (A) including a forecast balance sheet, forecast cash flow statement, statement of income and statement of changes in financial position for the following Fiscal Year, budget for the next Fiscal Year detailing therein, inter alia, projected revenues, general and administrative costs, operating costs, cash flow projections, Taxes and Budgeted Capital Expenditures, and (B) setting forth the calculation of each financial covenants set forth in Section 9.3 for the following Fiscal Year (to the extent compliance is so required at such time), detailed on the basis of each Fiscal Quarter;

 

 

 

(w)

Quarterly Financial Statements/MD&A: the Borrower shall furnish to the Administrative Agent its quarterly unaudited balance sheets and unaudited statements of income and changes in financial position as soon as available and in any event within 45 days after the end of each of its first three (3) Fiscal Quarters, each as at the end of such Fiscal Quarter and prepared in accordance with GAAP on a consolidated basis consistently applied, in respect of each of:

 

 

 

(i)

the Borrower but excluding Non-Material Foreign Subsidiaries (i.e. with respect to Canadian operations only);

 

 

 

(ii)

the Borrower but excluding Material Subsidiaries and Non-Material Canadian Subsidiaries (i.e. with respect to the non-Canadian operations only); and

 

 

 

(iii)

the Borrower on a fully-consolidated basis (for greater certainty, including all Subsidiaries),

 

 

each to be accompanied by a management discussion and analysis report for such Fiscal Quarter;

 

 

(x)

Monthly Borrowing Base Reporting: the Borrower shall furnish to the Administrative Agent within 30 days of the end of each month, and effective as of the last day of the prior month, a  duly executed and completed Operating Facility Borrowing Base Certificate together with the reports referred to therein and which shall include, without limitation;

 

 

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(i)

an aged summary of all Accounts Receivable of the Loan Parties on an invoice dated basis, including the following information: country of domicile, intercompany accounts, doubtful accounts, accounts in dispute, contra accounts, holdbacks, and any deposits received from each account debtor which remain outstanding at the report date;

 

 

 

(ii)

an aged summary of all accounts payable of the Loan Parties; and

 

 

(iii)

a summary of all amounts which comprise the Priority Payables;

 

 

(y)

Compliance Certificate: the Borrower shall furnish to the Administrative Agent, concurrently with the provision of each of the financial statements pursuant to Section 9.1(v) and 9.1(w), and effective as of the last day of the Fiscal Year or Fiscal Quarter, as applicable, a duly executed and completed Compliance Certificate;

 

 

 

(z)

Insurance: the Borrower shall furnish certificate(s) of insurance showing the Administrative Agent, on behalf of the Secured Parties, as loss payee and additional insured and evidencing compliance with Section 9.1(g) on an annual basis, and in any event within 120 days after the end of each Fiscal Year;

 

 

(aa)  Property Taxes:  on an annual basis,  no later than June 30 in each year, the Borrower shall   provide to the Administrative Agent evidence satisfactory that Taxes relating to the real property of the Loan Parties then due and payable by the Loan Parties have been irrevocably paid in full; provided that if the Borrower fails to provide such evidence the Administrative Agent may obtain tax certificates in respect of the Loan Parties at the expense of the Borrower;

 

(bb)  SAF Documents: the Borrower will promptly furnish to the  Administrative Agent copies of: (i)   all amendments to any SAF Documents, and (ii) all material notices given or received, and all material reports delivered, by the Borrower pursuant to or in connection with the SAF Documents to the extent not already delivered pursuant to this Agreement;

 

(cc)  Provision of Other Information:   without limiting the foregoing, the Borrower shall provide to  the Administrative Agent:

 

 

(i)

copies of all financial statements, reports or other documents delivered to the SAF Agent or any SAF Lender pursuant to or in connection with the SAF Credit Agreement concurrently with the delivery thereof to the SAF Agent or such SAF Lender;

 

 

 

(ii)

copies of all material correspondence and notices received by any Loan Party from any Governmental Authority with respect to any Material License, or relating to any regulatory or other investigations into any Loan Party's Cannabis-Related Activities;

 

 

 

(iii)

copies of all final prospectuses or other similar offering documents such as private placement memorandums, registration statements, material change reports and annual information forms filed by it with any securities regulatory authorities together with such other information relating to the business, affairs, operations and financial condition of any Loan Party as the Administrative Agent may reasonably request provided that, if applicable, the Borrower may satisfy the foregoing by posting such information on www.SEDAR.com or on another website as notified to and agreed to by the Administrative Agent provided that the Administrative Agent is aware of the address of and any relevant password specifications for such website. The Borrower shall forthwith advise the Administrative Agent promptly upon becoming aware that such website

 

 

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cannot be accessed or if the password specifications change or any existing information posted onto such website is amended. If the Administrative Agent cannot access such information on the relevant website, the information will instead be provided to the Administrative Agent in paper form; and

 

 

(iv)

such other information in respect of the conduct of business or financial condition of the Loan Parties, including an updated Appraisal (or update in respect thereof) relating to the Loan Parties' Property relating to the Loan Parties' Business in Canada as reasonably requested by a Lender to the Administrative Agent from time to time; and

 

 

(dd) Post-Closing Covenant: the Borrower shall use commercially reasonable efforts to effect the discharge of the covenant registered as instrument no. KN116222 in favour of the City of Merritt against title to the lands legally described as lot 2, sections 23 and 24, township 91, Kamloops division, Yale district, plan EPP44524 (the "Merritt Lands") and provide to the Administrative Agent a state of title certificate (or other evidence satisfactory to the Administrative Agent) in respect of the Merritt Lands evidencing the same within 45 days following the Effective Date

 

 

9.2

Negative Covenants of the Borrower

 

During the term of this Agreement, the Borrower covenants and agrees with each of the Lenders and the Administrative Agent that it shall not, and shall ensure that each other Loan Party shall not, without the prior written consent of the Administrative Agent on behalf of the Majority Lenders (provided that, in the case of (j) below, such consent shall not be unreasonably withheld):

 

 

(a)

Conduct of Business:

 

 

(i)

engage in any business or make any material investments or enter into any material ventures other than the Business and other activities directly related to the foregoing, nor make or enter into any acquisitions, investments, joint ventures or partnerships which are not in the ordinary course of, and made for the purpose of, conducting the Business of the Loan Parties as described aforesaid; and

 

 

 

(ii)

own assets or carry on, or permit any of its Subsidiaries to own assets or carry on, the Business in any jurisdiction other than in a Qualified Jurisdiction;

 

 

 

(b)

Incur Debt: issue, create, incur, assume, permit or suffer to exist or directly or indirectly be or become in any way liable for or in respect of any Debt, other than Permitted Indebtedness;

 

 

 

(c)

Financial Assistance: provide any form of Financial Assistance to any Person other than Permitted Financial Assistance;

 

 

 

(d)

Distributions: make, give effect to or implement any steps or procedures to make any Distributions, or otherwise reduce the Borrower's equity, other than pursuant to a Permitted Distribution;

 

 

 

(e)

Prohibited Disposition: Dispose of any or all of its right, title, estate and interest in or to all or any part of its Property, other than Permitted Dispositions;

 

 

 

(f)

Acquisitions: make any Acquisition other than Permitted Acquisitions;

 

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(g)

Negative Pledge: create, incur, assume, permit or suffer to exist any Security Interest upon or with respect to any of its Property other than Permitted Encumbrances;

 

 

 

(h)

Transactions with Affiliates: enter into directly or indirectly any transaction or group of related transactions (including the purchase, lease, sale or exchange of Property of any kind or the rendering of any service) with any Affiliate (other than another Loan Party), except in the ordinary course and pursuant to the reasonable requirements of the Business and upon fair and reasonable terms no less favourable to it than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate;

 

 

 

(i)

Change of Fiscal Year: change the fiscal year end of the Borrower from December 31 or the basis on which the financial records of a Loan Party are now maintained, subject to Section 1.5 unless 30 Business Days prior written notice has been provided to the Administrative Agent;

 

 

 

(j)

Corporate Reorganizations: enter into or become party to any transaction (each a "Corporate Transaction") of merger, amalgamation, consolidation, winding-up, plan of arrangement, reorganization or reconstruction with any Person or enter into any transaction by way of transfer, liquidation, sale, lease, disposition or otherwise whereby all or substantially all of its Property would become the Property of any other Person, or take any corporate, partnership or trust action in pursuance of any of the foregoing; provided that any Loan Party may do so if such Corporate Transaction is conducted solely with another Loan Party or between Loan Parties;

 

 

 

(k)

Repayment of Permitted Subordinated Debt: make, give effect to or implement any steps or procedures to make any payment of principal, interest, fees or other amounts owing in respect of any Permitted Subordinated Debt unless: (i) such payment is funded entirely using the proceeds of an equity issuance by the Borrower, and (ii) no Default or Event of Default has occurred and is continuing or would reasonably be expected to result therefrom;

 

 

 

(l)

SAF Indebtedness: notwithstanding the terms of any SAF Document:

 

 

(i)

make any repayment or voluntary prepayment of the SAF Indebtedness or any portion thereof (including any interest or fees thereunder). For greater certainty, no proceeds of any Facility shall be used to finance any such payments; or

 

 

 

(ii)

amend, restate, supplement or otherwise modify the SAF Credit Agreement or any SAF Document if it would: (A) contravene the provisions of the Intercreditor Agreement, (B) result in the aggregate principal amount of the SAF Indebtedness exceeding

 

$159,575,000, (C) increase the applicable rate of interest under the SAF Indebtedness (excluding increases resulting from the accrual of interest at the default rate thereunder, if applicable), (D) add or increase any fees to the SAF Indebtedness from those fees set forth in the SAF Documents (as in effect on the date hereof), (E) increase any default rate that becomes due in connection with an event of default thereunder, (F) change to earlier dates any scheduled dates for payment of principal or interest in respect thereof, (G) change any default or event of default provisions set forth in the SAF Documents in a manner that is materially adverse to the Lenders, (H) change the repayment, prepayment or defeasance provisions set forth in the SAF Documents (other than extensions in the times therefor) in a manner that would require a repayment, prepayment or defeasance not required pursuant to the terms of the SAF Indebtedness as of the date hereof or in a manner otherwise materially adverse to Lenders, (I) modify the Security Interest to the SAF Agent or any SAF Lender in a manner that is materially adverse to the Lenders except as expressly permitted pursuant to the terms and conditions of the Intercreditor

 

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Agreement, (J) modify any financial covenant or negative covenant thereunder to make it more restrictive than those set forth in this Agreement, or (K) otherwise materially increase the obligations of the Borrower or any Material Subsidiary thereunder or confer additional rights on the SAF Agent or any SAF Lender in a manner materially adverse to the Lenders;

 

 

(m)

Swaps: enter into any Swap with a Person other than a Swap Lender nor enter into any Swap outside the ordinary course of its business or for speculative purposes (determined, where relevant, by reference to GAAP); provided that:

 

 

 

(i)

without limiting the generality of the foregoing, the following shall be considered to be Swaps entered into outside of the ordinary course of business or entered into for speculative purposes:

 

 

 

(A)

any Interest Swap if the notional amount of indebtedness under such Interest Swap together with the notional amount of all other Interest Swaps then in effect in respect of the Loan Parties exceeds the underlying exposure to the risk hedged or sought to be hedged by such Interest Swap at the time such Interest Swap is entered into;

 

 

 

(B)

any Currency Swap or Commodity Swap;

 

 

(C)

any Interest Swap (other than, for greater certainty, the Interest Swaps referenced in Section 9.1(q)) or Currency Swap having a term from its inception to maturity exceeding two (2) years; and

 

 

 

(D)

any Swap in respect of which a Security Interest is granted, except for the Security Interests granted under the Security in favour of the Administrative Agent, on behalf of the Secured Parties; and

 

 

 

(ii)

any and all Interest Swaps contemplated by Section 9.1(q) shall be deemed not to be entered into outside the ordinary course of business or for speculative purposes;

 

 

 

(n)

Partnerships: (i) add any Person as a partner to a Material Subsidiary which is a partnership if such Person is not a Loan Party, (ii) transfer any Voting Shares, units or other Equity Interests in any Material Subsidiary which is a partnership if the transferee is not a Loan Party, or (iii) make any changes, amendments or supplements to the partnership agreement relating to such partnership which would reasonably be expected to adversely affect the Lenders in a material manner;

 

 

 

(o)

Insurance Proceeds: make any application or use of any insurance proceeds received by it in respect of any single claim or event except in accordance with Sections 4.1(b)(ii) and 9.1(g)(ii), as the case may be;

 

 

 

(p)

Material Agreements: (i) amend, vary or alter any Material Agreement unless, in each case, the same is solely administrative or, in the opinion of the Administrative Agent, such amendment, variation or alteration would not have, or would not reasonably be expected to have, a Material Adverse Effect, (ii) terminate, surrender or consent to any assignment or transfer of its rights or entitlements under any Material Agreement, or (iii) enter into any new Material Agreement;

 

 

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(q)

Pension Plan: enter into or permit any other Loan Party to enter into any Pension Plan or collective bargaining agreement;

 

 

 

(r)

No-Hoarding: at any time while there are Borrowings, accumulate or maintain cash or cash equivalents (including without limitation using the proceeds of any Accommodation) in one or more accounts (including, for certainty, any depository, investment or securities account) maintained by the Borrower or any of its Subsidiaries in an amount, in the aggregate, greater than the Threshold Amount, but excluding therefrom the proceeds of any equity issuance or other amounts accumulated or maintained therein for a specified business purpose (other than simply accumulating a cash reserve), and the Borrower hereby authorizes the Lenders to refuse to make any requested Accommodation which the Lenders, in their discretion, determine would contravene the foregoing; and

 

 

 

(s)

Cannabis Operations: undertake, or cause or permit any other Loan Party to undertake, advertising or promotional activities, relating to or in connection with the importation, exportation, cultivation, production, processing, packaging, labeling, purchase, distribution, sale or possession of Cannabis, which could directly or indirectly result in the Borrower or such other Loan Party becoming subject to the laws of any jurisdiction other than a Qualified Jurisdiction.

 

 

 

9.3

Financial Covenants

 

During the term of this Agreement, the Borrower covenants and agrees with each of the Lenders and the Administrative Agent that it shall not, without the prior written consent of the Administrative Agent on behalf of each of the Lenders:

 

 

(a)

Available Cash: until delivery of a Compliance Certificate evidencing compliance with the financial covenants set out in Section 9.3(c), permit the Available Cash (including, for the purposes hereof, proceeds of any Syndicated Accommodations) to be less than $10,000,000, provided that the amount of such minimum Available Cash may be reduced to:

 

 

 

(i)

$7,000,000, if the Interest Coverage Ratio is greater than or equal to 2.25 to 1.00 but less than 2.75 to 1.00; and

 

 

 

(ii)

$5,000,000, if the Interest Coverage Ratio is greater than or equal to 2.75 to 1.00;

 

 

(b)

Interest Coverage Ratio: permit the Interest Coverage Ratio to be less than:

 

 

(i)

2.00 to 1.00, as at the end of the Fiscal Quarter ending September 30, 2019; and

 

 

(ii)

2.75 to 1.00, as at the end of the Fiscal Quarter ending December 31, 2019; and

 

 

(c)

Fixed Charge Coverage Ratio; Senior Funded Debt to EBITDA Ratio: as at the Covenant Conversion Date and as at the end of any Fiscal Quarter thereafter, permit:

 

 

 

(i)

the Fixed Charge Coverage Ratio to be less than 1.50 to 1.00; or

 

 

(ii)

the Senior Funded Debt to EBITDA Ratio to be greater than 2.75 to 1.00.

 

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9.4

Material Subsidiaries

 

 

(a)

Designation of Material Subsidiaries: The Borrower shall, from time to time, designate such Material Subsidiaries as it shall determine as Material Subsidiaries and shall notify the Administrative Agent that such Person has become a Material Subsidiary and furnish the Administrative Agent with the name, date and jurisdiction of incorporation or amalgamation, as applicable, description of business and principal place of business address of each Material Subsidiary and shall cause each Material Subsidiary to provide to the Administrative Agent for the benefit of the Lenders, upon it becoming a Material Subsidiary, the Security contemplated by Section 6.3 together with the additional documentation contemplated in such Section 6.3 in relation thereto.

 

 

 

(b)

Release of Material Subsidiary Security: The Borrower shall be entitled to request that a Material Subsidiary which is, or has been designated, a Material Subsidiary be redesignated as a Non-Material Canadian Subsidiary. Upon providing an officer's certificate of each Borrower confirming that no Default or Event of Default has occurred and is continuing (excluding, for certainty, any Default or Event of Default which would no longer exist as a result of such redesignation) and no Default or Event of Default would result from giving effect to such request and the Administrative Agent determining that no Default or Event of Default would result from giving effect to such request, the Administrative Agent shall confirm in writing the redesignation of such Material Subsidiary as a Non-Material Canadian Subsidiary and shall cancel, release and, if applicable, return the Security granted by such Subsidiary.

 

 

 

(c)

Subsidiary Ownership: If a Subsidiary becomes a Material Subsidiary, the Borrower shall ensure at all times that the Borrower beneficially owns either directly or indirectly through one or more Material Subsidiaries, all of the issued and outstanding Voting Shares in the capital stock of each such Material Subsidiary.

 

 

ARTICLE 10 EVENTS OF DEFAULT

 

 

10.1

Events of Default

 

The occurrence of any one or more of the following events or circumstances constitutes an Event of Default under this Agreement:

 

 

(a)

Failure to Pay Principal: the failure of the Borrower to make any payment of any Borrowings when due hereunder;

 

 

 

(b)

Failure to Pay Interest or Fees: the failure of any Loan Party to make any payment of any interest, fees or any other amount (other than the Borrowings) due under any Loan Document when due hereunder and such default shall remain unremedied for a period of three (3) Business Days after written notice from the Administrative Agent to the Borrower that such amount is overdue;

 

 

 

(c)

Breach of Certain Covenants: if there is a breach or failure of due performance or observance by any Loan Party of any covenant or provision set forth in Section 9.1(d), 9.1(q), 9.2 or 9.3;

 

 

 

(d)

Breach of Other Covenants: if there is a breach or failure of due performance or observance by any Loan Party of any covenant or provision of this Agreement or any of the Loan Documents (other than those otherwise dealt with in this Section 10.1), unless such breach or failure is cured

 

 

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(to the extent such breach or failure is capable of being cured), to the satisfaction of the Majority Lenders, acting reasonably, within 20 Business Days after written notice thereof by the Administrative Agent to the Borrower;

 

 

(e)

Misrepresentations: if any representation or warranty made or deemed to be made by the Borrower or any other Loan Party in any Loan Document, certificate or document shall prove to have been incorrect in any material respect when made or deemed to be made or repeated hereunder or thereunder; provided that if the matter, defect or deficiency which is the subject matter of the misrepresentation is capable of correction or remedy (and not merely by changing the representation made), then if it is not corrected or remedied to the satisfaction of the Majority Lenders, acting reasonably, within 20 Business Days after written notice thereof by the Administrative Agent to the Borrower;

 

 

 

(f)

Cross Default: if:

 

 

(i)

a "Default" (under and as defined in the SAF Credit Agreement) occurs and such "Default" is not waived or cured within any applicable cure or grace period or if an "Event of Default" occurs; or

 

 

 

(ii)

any Loan Party or the Person primarily liable or jointly and/or severally liable, in the case of any contingent or joint and/or several obligation of any Loan Party is in breach or default under any term or provision of any other document, instrument or agreement evidencing or securing any other Debt between itself and any Person (other than this Agreement) if such breach or default is in respect of an amount which, taken together with (A) any other such breaches or defaults in respect of such other Debt, and (B) any accelerated amounts in respect of such other Debt, exceeds $7,500,000 in aggregate,

 

 

and, in either case, such breach or default is not remedied within ten (10) Business Days (to the extent such breach or default is capable of being cured);

 

 

(g)

Cease to Carry on Business: if any Loan Party ceases or threatens to cease to carry on business except as permitted by Section 9.2(j);

 

 

 

(h)

Voluntary Insolvency: if any Loan Party shall:

 

 

(i)

apply for or consent to the appointment of a receiver, trustee or liquidator of itself or of all or substantially all of its assets or undertaking;

 

 

 

(ii)

make or threaten to make a general assignment for the benefit of creditors or make or threaten to make a bulk sale of its assets; or be unable, or admit in writing its inability or failure, to pay its debts generally as they become due;

 

 

 

(iii)

commence any case, proceeding or other action under any Debtor Relief Laws seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts or an arrangement with creditors or taking advantage of any Debtor Relief Law or proceeding for the relief of debtors, or file an answer admitting the material allegations of a petition filed against it in any bankruptcy, reorganization or insolvency proceeding;

 

 

 

(iv)

take corporate or partnership action for the purpose of effecting any of the foregoing; or

 

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(v)

commit or threaten to commit an act which, if committed by a corporation, would constitute bankruptcy under the Bankruptcy and Insolvency Act (Canada) or any statute passed in substitution therefor, as amended from time to time;

 

 

 

(i)

Involuntary Insolvency: if any case, proceeding or other action shall be instituted in any court  of competent jurisdiction against any Loan Party seeking in respect of it an adjudication in bankruptcy, reorganization, dissolution, winding-up, liquidation, a composition or arrangement with creditors, a readjustment of debts, the appointment of a trustee, receiver, liquidator or the like of such Loan Party or of all or substantially all of its assets, or any other like relief in respect of such Loan Party under any Debtor Relief Law and, if such case, proceeding or other action is being contested by the Borrower in good faith, the same shall continue undismissed or unstayed and in effect for any period of 30 consecutive days (or such longer period, not exceeding 60 days, as is required to dismiss or stay or render ineffective such case, proceeding or other action); provided that if an order, decree or judgment is granted (whether or not entered or subject to appeal) against a Loan Party thereunder or a trustee, receiver or liquidator is appointed in the interim and such order, decree, judgment or appointment is not stayed or discharged within ten

 

(10) Business Days of it being granted, such grace period shall cease to apply;

 

 

(j)

Disposition of Property: if any Loan Party shall pass an effective resolution or initiate steps or proceedings for the purpose of authorizing the disposition of all or substantially all of its Property (except for a Disposition in accordance with and as permitted by Sections 9.2(e) or 9.2(j));

 

 

 

(k)

Change in Ownership: if, at any time:

 

 

(i)

each Material Subsidiary is not wholly-owned, directly, by the Borrower or another Material Subsidiary unless any such Material Subsidiary ceases to exist pursuant to any one or more reorganization transactions made subject to and  in  accordance  with  Section 9.2(j) or such Material Subsidiary has been sold or disposed of pursuant to a Permitted Disposition; or

 

 

 

(ii)

a Change of Control occurs;

 

 

(l)

Judgments: if a final judgment or judgments for the payment of money shall be rendered against any Loan Party in an amount in excess of the Threshold Amount and the same shall remain undischarged for a period of twenty (20) Business Days during which such judgment or judgments shall not be on appeal or execution thereof shall not be effectively stayed;

 

 

 

(m)

Writs: if writs, executions, attachments or similar processes are issued or levied against any of the Property of any Loan Party in an aggregate amount which is in excess of the Threshold Amount and such writ, execution, attachment or similar process remains undischarged or unreleased for a period of twenty (20) Business Days;

 

 

 

(n)

Encumbrancers: if encumbrancers or lienors lawfully take possession of any Property of any Loan Party having a value in an aggregate amount which is in excess of the Threshold Amount and such possession continues for a period of twenty (20) Business Days;

 

 

 

(o)

Invalid Loan Documents: if any material provision of any Loan Document continues to be invalid or unenforceable in whole or in a material part, or any of the Security Interests in and to any material Collateral constituted by the Security fails to attach thereto or to have the priority intended thereby, and, in either case, the same is not cured to the satisfaction of the Majority

 

 

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Lenders, acting reasonably, within twenty (20) Business Days after notice thereof by the Administrative Agent to the Borrower;

 

 

(p)

Qualified Auditor Report: if the audited financial statements that are required to be delivered to the Administrative Agent pursuant to Section 9.1(v)(i) contain a qualification that is not acceptable to the Majority Lenders, acting reasonably, and, if unacceptable, such qualification is not rectified or otherwise dealt with to the satisfaction of the Majority Lenders within a period of twenty (20) Business Days after the delivery of such financial statements;

 

 

 

(q)

Material Agreements; Material Licenses: if any of the following shall have occurred: (i) any default under any term or provision of any Material Agreement or any other event entitling any counterparty under any Material Agreement to terminate or suspend such Material Agreement, or

 

(ii) any termination, suspension or other loss of any Material License;

 

 

(r)

Swaps: if a Termination Event shall occur under a Lender Swap, or if any Loan Party breaches  or is in default under any Lender Swap and such breach or default is not remedied or waived within any applicable cure period in the relevant agreement with respect thereto;

 

 

 

(s)

Cannabis Act: if the Cannabis Act is repealed and not replaced with similar legislation; or

 

 

(t)

Material Adverse Effect: if an event shall occur which, in the opinion of all the Lenders, would reasonably be expected to have a Material Adverse Effect and, if capable of remedy, such event shall not be remedied within a period of twenty (20) Business Days from the date of written notice by the Administrative Agent to the Borrower of such event.

 

 

 

10.2

Acceleration

 

Upon the occurrence of any Event of Default which has not been remedied or waived, the Administrative Agent on behalf of the Lenders, and with the approval of the Majority Lenders shall be entitled to, without limiting or restricting other remedies or rights under contract, at law or in equity, as the Administrative Agent and the Majority Lenders may in their sole and unfettered discretion determine:

 

 

(a)

Terminate Commitment: cease to make or continue any Borrowings hereunder,  notwithstanding any prior receipt by the Administrative Agent of a Borrowing Notice, Conversion Notice or a Rollover Notice or any other event and the Administrative Agent may, by written notice to the Borrower, declare the Total Commitment and the right of the Borrower to apply for further Accommodations to be terminated; and

 

 

 

(b)

Acceleration Notice: by written notice to the Borrower (an "Acceleration Notice"), declare all Borrowings (including the face amount of all Bankers' Acceptances and the undrawn amount of all outstanding Letters of Credit) and other liabilities and indebtedness (whether matured or unmatured) of the Borrower to the Administrative Agent, the Lenders and the Creditcard Lenders hereunder and under the other Loan Documents and the Bilateral Financial Services Agreements to be immediately due and payable (or to be due and payable at such later time as may be stated in such notice) without further demand, presentation, protest or other notice of any kind, all of which are expressly waived by the Borrower;

 

 

provided that upon the occurrence of an Event of Default specified in Section 10.1(h) or 10.1(i) the Commitment shall automatically terminate and all Borrowings (including the face amount of all Bankers' Acceptances and the undrawn amount of all outstanding Letters of Credit) and other indebtedness and liabilities hereunder and under the other Loan Documents and all Creditcard Obligations under the

 

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Bilateral Financial Services Agreements shall automatically become due and payable, in each case without any requirement that notice be given to the Borrower. Immediately upon the occurrence of an Event of Default specified in Section 10.1(h) or 10.1(i) or at the time stated in an Acceleration Notice, the Borrower shall pay to the Administrative Agent on behalf of the Secured Parties all amounts owing or payable in respect of all Borrowings (including the face amount of all Bankers' Acceptances and the undrawn amount of all outstanding Letters of Credit) and other indebtedness and liabilities hereunder and under the other Loan Documents and all Creditcard Obligations under the Bilateral Financial Services Agreements, failing which all rights and remedies of the Administrative Agent and the Lenders under the Loan Documents and all rights and remedies of the Creditcard Lenders under the Bilateral Financial Services Agreements shall thereupon become enforceable.

 

 

10.3

Demands for Payment

 

 

(a)

Lender Demands: If the Administrative Agent, on behalf of the Majority Lenders, delivers an Acceleration Notice, each Swap Lender may, within three Business Days, deliver (to the extent applicable to it) a Swap Demand for Payment.

 

 

 

(b)

Termination Event: If a Termination Event has occurred and all amounts secured by the Security are not thereafter due and payable, each Lender, each Swap Lender, each Cash Management Lender and each Creditcard Lender shall, within three Business Days, deliver such Demands for Payment or other notices as may be necessary to ensure that all amounts secured by the Security are thereafter due and payable under the Credit Documents.

 

 

 

(c)

Swap Demand: If any Swap Lender proposes to deliver a Swap Demand for Payment, such Lender shall notify the Administrative Agent of its determination, and the Administrative Agent, within a further five Business Days after receipt of the aforesaid notice, shall notify all Swap Lenders whether the Administrative Agent, on behalf of the Majority Lenders, proposes to deliver an Acceleration Notice hereunder. If the Administrative Agent does not so advise the Swap Lenders within such five Business Day period it shall be deemed to have advised that the Majority Lenders do not propose to deliver an Acceleration Notice. If the Administrative Agent does notify the Swap Lenders that the Majority Lenders propose to deliver an Acceleration Notice, all Demands for Payment and other notices shall be delivered concurrently by the Administrative Agent, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders. If the Administrative Agent does notify the Swap Lenders that the Majority Lenders do not propose, or the Administrative Agent is deemed to have advised that the Majority Lenders do not propose, to deliver an Acceleration Notice, the Swap Lender which delivered the notice to the Administrative Agent may at any time within 30 Business Days thereafter deliver the Swap Demand for Payment. If the Swap Lender delivering any such Swap Demand for Payment does not receive the amount so demanded on or prior to the time stated in such Swap Demand for Payment, such Swap Lender shall so notify the Administrative Agent and the Administrative Agent and each other Lender, Swap Lender, Cash Management Lender and Creditcard Lender shall forthwith concurrently deliver such Demands for Payment or other notices as may be necessary to ensure that all amounts secured by the Security are thereafter due and payable under the Credit Documents.

 

 

 

(d)

No Sharing: Any amounts which are lawfully received by any Swap Lender under a Swap or by a Cash Management Lender or Creditcard Lender under a Bilateral Financial Services Agreement prior to the earlier of the delivery by the Administrative Agent of a Demand for Payment or the occurrence of a Termination Event hereunder are not required to be shared pursuant to the provisions of Section 10.7.

 

 

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(e)

Lender Affiliates: If a Lender Swap or any Bilateral Financial Services Agreement is entered into with an Affiliate of a Lender, that Lender shall cause such Affiliate to deliver all Swap Demands for Payment or other notices as required by this Section 10.3 and such obligations shall survive such Lender (at any time after any such Lender Swap or Bilateral Financial Services Agreement was entered into) ceasing to be a Lender hereunder.

 

 

 

10.4

Borrower Cash Collateral Accounts

 

Upon the occurrence of:

 

 

(a)

a Termination Event or delivery of an Acceleration Notice; or

 

 

(b)

an event where the Borrower elects or is required in accordance with Section 4.3 or Section 4.5 to make payment to a Borrower Cash Collateral Account of the required amount;

 

 

the Borrower shall forthwith pay to the Administrative Agent, for deposit into a Borrower Cash Collateral Account, an amount equal to the Lender's maximum potential liability under then outstanding Bankers' Acceptances and Letters of Credit (collectively, the "Escrow Funds"). The Escrow Funds shall, in the case of (a) above, be held by the Administrative Agent for set-off against future indebtedness owing by the Borrower to the Lenders in respect of such Bankers' Acceptances and Letters of Credit or, in the case of (b) above, be applied as required by Section 4.3 or Section 4.5, as applicable.

 

 

10.5

Remedies on Default

 

After the occurrence and during the continuance of an Event of Default:

 

 

(a)

Majority Lenders Instructions: if the Majority Lenders do provide directions or instructions to the Administrative Agent, the Administrative Agent, on behalf of all Lenders, Swap Lenders, Cash Management Lenders and Creditcard Lenders shall take such actions and commence such proceedings as the Majority Lenders in their sole discretion may determine and may enforce or otherwise realize upon any Security, all without any obligation to marshal any Security Interests and without additional notice, presentation, demand or protest, all of which the Borrower hereby expressly waives (to the extent such rights may be waived under Applicable Law). If, from time to time, there are no Lenders other than Swap Lenders, Cash Management Lenders or Creditcard Lenders, the Majority Lenders for the purposes of this Agreement shall be calculated by revising paragraph (b) of the definition of Majority Lenders to change the references to "Borrowings" to "amounts secured by the Security" and deleting the words "under the Syndicated Facility and Operating Facility"; and

 

 

 

(b)

General Remedies: the rights and remedies of the Administrative Agent and each Lender, each Swap Lender, each Cash Management Lender and each Creditcard Lender under the Loan Documents, the Bilateral Financial Services Agreements and Lender Swaps are cumulative and are in addition to and not in substitution for any rights or remedies provided by law. The Administrative Agent may, on behalf of all Lenders, Creditcard Lenders, Swap Lenders and Cash Management Lenders, and shall, if so required by the Majority Lenders, to the extent permitted by Applicable Law, bring suit at law, in equity or otherwise for any available relief or purpose including but not limited to:

 

 

 

(i)

Specific Performance:the specific performance of any covenant or agreement contained in the Credit Documents;

 

 

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(ii)

Injunction: enjoining a violation of any of the terms of the Credit Documents;

 

 

(iii)

Assistance: aiding in the exercise of any power granted by the Credit Documents or by law; or

 

 

 

(iv)

Judgment: obtaining and recovering judgment for any and all amounts due in respect of the Borrowings or amounts otherwise due hereunder or under the Credit Documents.

 

 

 

10.6

Right of Set-Off

 

If an Event of Default shall have occurred and be continuing, each Lender and each of its respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by Applicable Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held, and other obligations (in whatever currency) at any time owing, by such Lender or any such Affiliate, to or for the credit or the account of the Borrower or any other Loan Party against any and all of the obligations of the Borrower or such Loan Party now or hereafter existing under this Agreement or any other Loan Document to such Lender or its respective Affiliates, irrespective of whether or not such Lender or Affiliate shall have made any demand under this Agreement or any other Loan Document and although such obligations of the Borrower or such Loan Party may be contingent or unmatured or are owed to a branch, office or Affiliate of such Lender different from the branch, office or Affiliate holding such deposit or obligated on such indebtedness; provided that in the event that any Defaulting Lender shall exercise any such right of setoff, (x) all amounts so set off shall be paid over immediately to the Administrative Agent for further application in accordance with the provisions of Section 14.2 and, pending such payment, shall be segregated by such Defaulting Lender from its other funds and deemed held in trust for the benefit of the Administrative Agent and the Lenders, and (y) the Defaulting Lender shall provide promptly to the Administrative Agent a statement describing in reasonable detail the amounts secured by the Security owing to such Defaulting Lender as to which it exercised such right of setoff. The rights of each Lender and its Affiliates under this Section 10.6 are in addition to other rights and remedies (including other rights of setoff) that such Lender or its Affiliates may have. Each Lender agrees to notify the Borrower and the Administrative Agent promptly after any such setoff and application; provided that the failure to give such notice shall not  affect the validity of such setoff and application. Notwithstanding the foregoing or the provisions of any Swap, the Lenders and Swap Lenders shall not effect or purport to effect any set-off of Swap Indebtedness that is not Permitted Swap Indebtedness against or on account of any Secured Obligations owed to it.

 

 

10.7

Application and Sharing of Payments Following Acceleration

 

Except as otherwise agreed to by all the Lenders in their sole discretion, all monies and Property received by the Lenders (in their capacity as Lenders and, if applicable, Swap Lenders, Cash Management Lenders or Creditcard Lenders) for application in respect of the Secured Obligations or any other Swap Indebtedness subsequent to the delivery of an Acceleration Notice or the occurrence of an Event of Default specified in Sections 10.1(h) or 10.1(i) (including monies received as a result of a realization upon the Security or the exercise of a right of set-off), shall be applied and distributed to the Lenders (in their capacity as Lenders and, if applicable, Swap Lenders, Cash Management Lenders and Creditcard Lenders) in the manner set forth below (but subject at all times to the terms of the Intercreditor Agreement), each such application to be made in the following order with any balance remaining after application in respect of each category to be applied to the next succeeding category:

 

 

(a)

firstly, in or towards payment of any fees or expenses then due and payable to the Administrative Agent hereunder or under any other Loan Document;

 

 

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(b)

secondly, pro rata among the Lenders in respect of amounts due and payable to such Lenders as and by way of recoverable expenses hereunder or under any of the Security;

 

 

 

(c)

thirdly, pro rata among the Lenders, the Creditcard Lenders and the Cash Management Lenders in respect of amounts due and payable to such  Lenders  by  way  of  interest  pursuant  to Sections 5.1, acceptance fees pursuant to Section 5.2, Letter  of  Credit  Fees  pursuant  to  Section 5.3, fees payable in respect of Creditcard Facilities or Cash Management Services, interest on overdue amounts pursuant to Section 5.4 and standby fees pursuant to Section 5.8;

 

 

 

(d)

fourthly, pro rata among the Lenders, the Cash Management Lenders and the Creditcard Lenders in respect of any other amount (other than Lender Outstandings) not hereinbefore referred to in this Section 10.7 which are then due and payable to any of them by the Borrower hereunder or under any other Loan Document or Bilateral Financial Services Agreements;

 

 

 

(e)

fifthly, Proportionately among the Lenders, the Cash Management Lenders, the Creditcard Lenders and the Swap Lenders in or towards repayment of the Lender Outstandings; and

 

 

 

(f)

sixthly, pro rata in or towards repayment to the Swap Lenders of all Swap Indebtedness in excess of the Permitted Swap Indebtedness.

 

 

To the extent that a Lender Swap or Bilateral Financial Services Agreement is entered into by an Affiliate of a Lender, that Lender shall cause such Affiliate to comply with the provisions of this Section 10.7 and such obligation shall survive such Lender (at any time after any such Lender Swap or Bilateral Financial Services Agreement was entered into) ceasing to be a Lender hereunder.

 

 

10.8

Adjustments

 

In the event that:

 

 

(a)

Contingent Liabilities: at the Adjustment Time, a portion of the Borrowings is outstanding as Letters of Credit and it is subsequently determined that the Operating Lender is not required to make payment under any one or more such instruments; or

 

 

 

(b)

Notice Periods: any of the Lenders are required by Applicable Law to continue to make  advances or other amounts available to or otherwise continue to contract with the Borrower subsequent to the Adjustment Time by reason of a requirement in Applicable Law to give the Borrower a reasonable period of notice prior to terminating such Lender's obligation to make  such advances or other amounts available to or to continue to contract with the Borrower;

 

 

then, whenever and so often as that occurs, the amount calculated to be due and payable shall be redetermined, where applicable, by excluding any payments not required to be made as a result of the occurrence of an event described in Section 10.8(a) and by including any amount required to be made available pursuant to Section 10.8(b), and the Lenders shall thereupon make all such payments and adjustments as may be necessary to ensure amounts outstanding to the Lenders are thereafter outstanding in accordance with the provisions of this Section and Section 10.7.

 

 

10.9

Calculations as at the Adjustment Time

 

For the purposes of this Agreement, if:

 

 

(a)

Swap Demand: a Swap Demand for Payment has been delivered; or

 

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(b)

Termination Event: a Termination Event has occurred under any Credit Document evidencing a Swap;

 

 

then, for the purposes of calculations to be made at the Adjustment Time, any Termination Amount which is payable by any Loan Party under such Swap in settlement of obligations arising thereunder as a result of the early termination of the Swap shall be deemed to have become payable at the time of delivery of such Swap Demand for Payment or the time of occurrence of such Termination Event as the case may be, notwithstanding that the amount payable by any Loan Party is to be subsequently calculated and notice thereof given to such Loan Party in accordance with such Swap. For the purposes of the foregoing, the Administrative Agent shall make all determinations of the applicable Termination Amounts in accordance with its usual practices, acting reasonably, and for such purposes each Lender shall provide details to the Administrative Agent of its own calculations of the applicable Termination Amounts.

 

 

10.10

Lender May Perform Covenants

 

If any Loan Party shall fail to perform any of its obligations under any covenant contained in any of the Loan Documents within the time permitted for the performance of any such covenant or for the cure of any default thereof, the Administrative Agent may, on behalf of the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders and with the approval of the Majority Lenders and with prior written notification to the Borrower, perform any such covenant capable of being performed by it and, if any such covenant requires the payment or expenditure of money, it may make such payment or expenditure with its own funds on behalf of the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders. If the Administrative Agent elects to effect such observance or performance, neither the Administrative Agent nor any Lender, Swap Lender, Cash Management Lender or Creditcard Lender shall be liable for any failure or deficiency in effecting such observance or performance, nor for the payment of any bills, invoices or accounts incurred or rendered in connection therewith, except to the extent the Administrative Agent or such Lender, Swap Lender, Cash Management Lender or Creditcard Lender is grossly negligent or acts with wilful misconduct. All amounts so paid by any Lender or the Administrative Agent hereunder shall be repaid by the Borrower on demand therefor, and shall bear interest at the rate set forth in Section 5.4 from and including the date paid by the Administrative Agent hereunder to but excluding the date such amounts are repaid in full by the Borrower and shall be secured by the Security.

 

 

10.11

Waiver of Default

 

Any single or partial exercise by any Lender, any Swap Lender, any Cash Management Lender, any Creditcard Lender, the Administrative Agent or by the Administrative Agent on behalf of any Lender, any Swap Lender, any Cash Management Lender or any Creditcard Lender of any right or remedy for a default or breach of any term, covenant, condition or agreement contained in the Loan Documents, the Bilateral Financial Services Agreements or Lender Swaps shall not be deemed to be a waiver of or to alter, affect or prejudice any other right or remedy to which the Administrative Agent or such Lender, Swap Lender, Cash Management Lender or Creditcard Lender may be lawfully entitled for the same default or breach, and any waiver by any Lender, any Swap Lender, any Cash Management Lender, any Creditcard Lender, the Administrative Agent or by the Administrative Agent on behalf of any Lender, any Swap Lender, any Cash Management Lender or any Creditcard Lender of the strict observance, performance or compliance with any term, covenant, condition or agreement contained in the Loan Documents, the Bilateral Financial Services Agreements or Lender Swaps, and any indulgence granted thereby, shall be deemed not to be a waiver of any subsequent default. To the extent permitted by Applicable Law, the Borrower hereby waives any rights now or hereafter conferred by statute or otherwise which are inconsistent with the Administrative Agent's or a Lender's, a Swap Lender's, a Cash

 

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Management Lender's or a Creditcard Lender's rights or remedies under the Loan Documents, the Bilateral Financial Services Agreements and Lender Swaps.

 

ARTICLE 11

INCREASED COST, TAXES, LENDER REPLACEMENT, ILLEGALITY, SUBSTITUTE BASIS OF BORROWING, FUNDING INDEMNITY

 

 

11.1

Increased Cost

 

 

(a)

Increased Costs Generally: If any Change in Law shall:

 

 

(i)

impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender;

 

 

 

(ii)

subject any Lender to any tax of any kind whatsoever with respect to this Agreement, or any Accommodation made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Indemnified Taxes or Other Taxes covered by Section 11.2 and the imposition of, or any change in the rate of, any Excluded Tax payable by such Lender); or

 

 

 

(iii)

impose on any Lender or the London interbank market any other condition, cost or expense affecting this Agreement or any Accommodation made by such Lender;

 

 

and the result of any of the foregoing shall be to increase the cost to such Lender of making, converting to, continuing or maintaining any Accommodation or of maintaining its obligation to make any such Accommodation, or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or any other amount) then, upon request of such Lender, the Borrower will pay to such Lender, as the case may be, such additional amount or amounts as will compensate such Lender, as the case may be, for such additional costs incurred or reduction suffered.

 

 

(b)

Capital Requirements: If any Lender determines that any Change in Law affecting such Lender or any lending office of such Lender or such Lender's holding company, if any, regarding capital requirements, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement, the Commitments of such Lender or the Accommodations made by such Lender, to a level below that which such Lender or such Lender's holding company could have achieved but for such Change in Law (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered.

 

 

 

(c)

Certificates for Reimbursement: A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section and delivered to the Borrower, shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.

 

 

 

(d)

Delay in Requests: Failure or delay on the part of any Lender to demand compensation pursuant to this Section 11.1 shall not constitute a waiver of such Lender's right to demand such

 

 

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compensation; provided that the Borrower shall not be required to compensate a Lender pursuant to this Section 11.1 for any increased costs incurred or reductions suffered more than nine months prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions, and of such Lender's intention to claim compensation therefor (except that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the nine-month period referred to above shall be extended to include the period of retroactive effect thereof).

 

 

11.2

Taxes

 

 

(a)

Payments Free of Taxes: Any and all payments by or on account of any obligation of the Borrower hereunder or under any other Loan Document shall be made free and clear of and without reduction or withholding for any Indemnified Taxes or Other Taxes, provided that if the Borrower shall be required by Applicable Law to deduct any Indemnified Taxes (including any Other Taxes) from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 11.2) the Administrative Agent or Lender, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall timely pay the full amount deducted to the relevant Governmental Authority in accordance with Applicable Law.

 

 

 

(b)

Payment of Other Taxes by the Borrower: Without limiting the provisions of paragraph (a) above, the Borrower shall timely pay any Other Taxes to the relevant Governmental Authority in accordance with Applicable Law.

 

 

 

(c)

Indemnification by the Borrower: The Borrower shall indemnify the Administrative Agent and each Lender, within 10 days after demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.

 

 

 

(d)

Evidence of Payments: As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.

 

 

 

(e)

Status of Lenders: Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is resident for tax purposes, or any treaty to which such jurisdiction is a party, with respect to payments hereunder or under any other Loan Document shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by Applicable Law or reasonably requested by the Borrower or the Administrative Agent, such properly completed and executed documentation prescribed by Applicable Law as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if requested by the Borrower or the Administrative Agent, shall deliver such other documentation prescribed by

 

 

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Applicable Law or reasonably requested by the Borrower or the Administrative Agent as will enable the Borrower or the Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements.

 

 

(f)

Treatment of Certain Refunds: If the Administrative Agent or a Lender determines, in its sole discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 11.2, it shall pay to the Borrower an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 11.2 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the Administrative Agent or such Lender, as the case may be, and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that the Borrower, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to repay such refund to such Governmental Authority. This paragraph shall not be construed to require the  Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes that it deems confidential) to the Borrower or any other Person.

 

 

 

11.3

Mitigation Obligations, Replacement of Lenders

 

 

(a)

Designation of a Different Lending Office: If any Lender requests compensation  under  Section 11.1 or requires the Borrower to pay additional amounts to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 11.2, then such Lender shall (at the request of the Borrower) use reasonable efforts to designate a different lending office for funding or booking Borrowings hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would  eliminate  or  reduce  amounts  payable  pursuant  to  Section 11.1 or 11.2, as the case may be, in the future, and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.

 

 

 

(b)

Replacement of Lenders: If any Lender requests compensation under Section 11.1 or if the Borrower is required to pay additional amounts to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 11.2 and, in each case, such Lender has declined or is unable to designate a different lending office in accordance with Section 11.3(a), or if any Lender is a Defaulting Lender or a Non-Consenting Lender (any such Lender being referred to as an "Affected Lender"), then the Borrower may, at its sole expense and effort, so long as no Default or Event of Default has occurred and is continuing:

 

 

 

(i)

upon notice to the Affected Lender and the Administrative Agent, require such Affected Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 13.1), all of its interests, rights and obligations under this Agreement and the related Loan Documents to an Eligible Assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that:

 

 

 

(A)

the Borrower shall have paid to the Administrative Agent the assignment fee (if any) specified in Section 13.1(b)(iv);

 

 

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(B)

such Affected Lender shall have received payment of an amount equal to the outstanding principal of its Accommodations, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any breakage costs and amounts required to be paid under this Agreement as a result of prepayment to a Lender) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts);

 

 

 

(C)

in the case of any such assignment resulting from a claim for compensation under Section 11.1 or payments required to be made pursuant to Section 11.2, such assignment will result in a reduction in such compensation or payments thereafter;

 

 

 

(D)

such assignment does not conflict with Applicable Law; and

 

 

(E)

in the case of any assignment resulting from a Lender becoming a Non- Consenting Lender, the applicable assignee shall have consented to the  applicable amendment, waiver or consent; or

 

 

 

(ii)

upon at least five (5) Business Days' prior written notice to the Affected Lender and the Administrative Agent, irrevocably cancel all but not part of the Affected Lender's Commitment if on or prior to the last day of such notice period such Affected Lender shall have received payment from the Borrower of an amount equal to the outstanding principal of its Accommodations, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any breakage costs and amounts required to be paid under this Agreement as a result of prepayment to a Lender).

 

 

An Affected Lender shall not be required to make any such assignment or delegation, or accept any such cancellation of Commitment and payment, if, prior thereto, as a result of a waiver by such Affected Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation, or cancellation and payment, as the case may be, cease to apply.

 

 

11.4

Illegality

 

If the introduction of or any change in Applicable Law, regulation, treaty, official directive or regulatory requirement now or hereafter in effect (whether or not having the force of law) or any change in the interpretation or application thereof by any court or by any judicial or governmental authority charged with the interpretation or administration thereof, makes it unlawful or prohibited for a Lender (in its sole opinion acting reasonably and in good faith) to make, fund or maintain the Borrowings or a portion of the Borrowings or to perform its obligations under this Agreement, such Lender may by written notice to the Borrower through the Administrative Agent terminate its obligations under this Agreement to make such Borrowings or perform such obligations and the Borrower shall either (i) prepay such Borrowings within 20 Business Days together with all accrued but unpaid interest and fees as may be applicable to the date of payment, or (ii) convert by notice to the Administrative Agent or the Operating Lender, as applicable, such Borrowings forthwith into another basis of Borrowing available under this Agreement.

 

 

11.5

Substitute Basis of Borrowing – Bankers Acceptances

 

If:

 

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(a)

the Administrative Agent (acting reasonably) makes a determination, which determination shall be conclusive and binding upon the Borrower, and notifies the Borrower, that there no longer exists an active market for bankers' acceptances accepted by the Syndicated Lenders; or

 

 

 

(b)

the Administrative Agent is advised by Lenders holding at least 25% of the Total Syndicated Facility Commitment by written notice (each, a "Lender BA Suspension Notice") that such Lenders have determined (acting reasonably) that the Discount Rate will not or does not accurately reflect the cost of funds of such Lenders or the discount rate which would be applicable to a sale of Bankers' Acceptances accepted by such Lenders in the market;

 

 

then:

 

 

(c)

the right of the Borrower to request Bankers' Acceptances or BA Equivalent Advances from any Lender shall be suspended until the Administrative Agent determines that the circumstances causing such suspension no longer exist, and so notifies the Borrower and the Lenders;

 

 

 

(d)

any outstanding Borrowing Notice requesting an Accommodation by way of Bankers' Acceptances or BA Equivalent Advances shall be deemed to be a Borrowing Notice requesting a Prime Loan in the amount specified in the original Borrowing Notice; and

 

 

 

(e)

any outstanding Rollover Notice requesting a Rollover of a Bankers' Acceptance or BA Equivalent Advance shall be deemed to be a Conversion Notice requesting a Conversion of such Bankers' Acceptances into a Prime Loan.

 

 

The Administrative Agent shall promptly notify the Borrower and the Lenders of any suspension of the Borrower's right to request Bankers' Acceptances or BA Equivalent Advances and of any termination of any such suspension. A Lender BA Suspension Notice shall be effective upon receipt of the same by the Administrative Agent if received prior to 12:00 noon (Calgary time) on a Business Day and if not, then on the next following Business Day, except in connection with a Borrowing Notice, Conversion Notice or Rollover Notice previously received by the Administrative Agent, in which case the applicable Lender BA Suspension Notice shall only be effective with respect to such previously received Borrowing Notice, Conversion Notice or Rollover Notice if received by the Administrative Agent prior to 12:00 p.m. (Calgary time) two Business Days prior to the proposed Drawdown Date, Conversion Date or Rollover Date (as applicable) applicable to such previously received Borrowing Notice, Conversion Notice or Rollover Notice, as applicable.

 

 

11.6

Funding Indemnity

 

If, for any reason whatsoever and whether or not required or permitted pursuant to the provisions of this Agreement, the Borrower fails for any reason to borrow, convert, rollover or otherwise act in accordance with a notice given hereunder pursuant to Schedule "B" or Schedule "C", the Borrower shall indemnify the Applicable Lender for any loss or expense incurred by such Lender as a direct result thereof including any loss of profit or expenses such Lender incurs by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to maintain such Borrowing or any increased interest or other charges payable to lenders of funds borrowed in order to maintain such Borrowing together with any other out-of-pocket charges, costs or expenses incurred by such Lender relative thereto. A certificate of such Lender (acting reasonably and prepared in good faith) submitted by such Lender setting out the basis for the determination of the amount necessary to indemnify such Lender shall be prima facie evidence thereof.

 

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ARTICLE 12

THE ADMINISTRATIVE AGENT AND THE LENDERS

 

 

12.1

Appointment and Authority

 

Each of the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders hereby irrevocably appoints ATB to act on its behalf as the Administrative Agent hereunder and under the other Credit Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. The provisions of this Article are solely for the benefit of the Administrative Agent, the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders, and the Borrower shall not have rights as a third-party beneficiary of any of such provisions except to the extent expressly provided  herein. It is understood and agreed that the use of the term "Administrative Agent" herein or in any other Loan Documents (or any other similar term) with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any Applicable Law. Instead such term is used as a matter of market custom, and is intended to create or reflect only an administrative relationship between contracting parties. The Administrative Agent is hereby authorized to enter into the Intercreditor Agreement on behalf of the Lenders and to perform its obligations thereunder on behalf of the Lenders.

 

 

12.2

Additional Rights

 

The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender, Swap Lender, Cash Management Lender or Creditcard Lender as any other Lender, Swap Lender, Cash Management Lender or Creditcard Lender and may exercise the same as though it were not the Administrative Agent, and the term "Lender" or "Lenders", "Swap Lender" or "Swap Lenders", "Cash Management Lender" or "Cash Management Lenders" or "Creditcard Lender" or "Creditcard Lenders", as applicable, shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, own securities of, act  as the financial advisor or in any other advisory capacity for, and generally engage in any kind of business with, the Borrower or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders, the Swap Lenders, the Cash Management Lenders or the Creditcard Lenders.

 

 

12.3

Exculpatory Provisions

 

 

(a)

The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents, and its duties hereunder shall be administrative in nature. Without limiting the generality of the foregoing, the Administrative Agent:

 

 

 

(i)

shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;

 

 

 

(ii)

shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent is required to exercise as directed in writing by the Majority Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents); provided that the Administrative Agent shall not be required to take any action that, in its opinion or the

 

 

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opinion of its counsel, may expose the Administrative Agent to liability or that  is contrary to any Loan Document or Applicable Law, including for the avoidance of doubt any action that may be in violation of the automatic stay under any Debtor Relief Law or that may effect a forfeiture, modification or termination of Property of a Defaulting Lender in violation of any Debtor Relief Law; and

 

 

(iii)

shall not, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity.

 

 

 

(b)

The Administrative Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Majority Lenders (or such other number or percentage of the Lenders as shall be necessary) or (ii) in the absence of its own gross negligence or wilful misconduct as determined by a court of competent jurisdiction by final and non-appealable judgment. The Administrative Agent shall be deemed not to have knowledge of any Default or Event of Default unless and until notice describing such Default or Event of Default is given to the Administrative Agent in writing by the Borrower or a Lender.

 

 

 

(c)

The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default or Event of Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article 8 or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.

 

 

 

12.4

Reliance by Administrative Agent

 

The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or  by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of an Accommodation that by its terms must be fulfilled to the satisfaction of a Lender, the Administrative Agent may presume that such condition is satisfactory to such Lender unless the Administrative Agent shall have received notice to the contrary from such Lender prior to the making of such Accommodation. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

 

 

12.5

Delegation of Duties

 

The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub- Administrative Agents appointed by the Administrative Agent. The Administrative Agent and any such

 

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sub-Administrative Agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Article shall apply to any  such sub-Administrative Agent and to the Related Parties of the Administrative Agent and any such sub- Administrative Agent, and shall apply to their respective activities in connection with the syndication of the Facilities as well as activities as Administrative Agent.

 

 

12.6

Resignation of Administrative Agent

 

 

(a)

The Administrative Agent may at any time give notice of its resignation to the Lenders and the Borrower. Upon receipt of any such notice of resignation, the Majority Lenders shall have the right, in consultation with the Borrower and, prior to the occurrence of an Event of Default which is continuing, with the consent of the Borrower, such consent not to be unreasonably withheld, to appoint a successor, which shall be a bank with an office in Calgary, Alberta or Toronto, Ontario, or an Affiliate of any such bank with an office in Calgary, Alberta or Toronto, Ontario. If no  such successor shall have been so appointed by the Majority Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation (or such earlier day as shall be agreed by the Majority Lenders) (the "Resignation Effective Date"), then the retiring Administrative Agent may (but shall not be obligated to), on behalf of the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders, appoint a successor Administrative Agent meeting the qualifications set forth above. Whether or not a successor has been appointed, such resignation shall become effective in accordance with such notice on the Resignation Effective Date.

 

 

 

(b)

If the Person serving as Administrative Agent is a Defaulting Lender pursuant to clause (c) of the definition thereof, the Majority Lenders may, to the extent permitted by Applicable Law, by notice in writing to the Borrower and such Person remove such Person as Administrative Agent and, in consultation with the Borrower and, prior to the occurrence of an Event of Default which is continuing, with the consent of the Borrower, such consent not to be unreasonably withheld, appoint a successor. If no such successor shall have been so appointed by the Majority Lenders and shall have accepted such appointment within 30 days (or such earlier day as shall be agreed by the Majority Lenders) (the "Removal Effective Date"), then such removal shall nonetheless become effective in accordance with such notice on the Removal Effective Date.

 

 

 

(c)

With effect from the Resignation Effective Date or the Removal Effective Date (as applicable) (1) the retiring or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents (except that in the case of any collateral security held by the Administrative Agent on behalf of the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders, under any of the Credit Documents,  the retiring or removed Administrative Agent shall continue to hold such collateral security until such time as a successor Administrative Agent is appointed) and (2) all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender, Swap Lender, Cash Management Lender or Creditcard Lender directly, until such time, if any, as the Majority Lenders appoint a successor Administrative  Agent as provided for above. Upon the acceptance of a successor's appointment  as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring or removed Administrative Agent, and the retiring or removed Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the retiring or removed Administrative Agent's resignation or removal hereunder and under the other Loan Documents,

 

 

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the provisions of this Article and Section 14.3 shall continue in effect for the benefit of such retiring or removed Administrative Agent, its sub-Administrative Agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring or removed Administrative Agent was acting as Administrative Agent.

 

 

12.7

Non-Reliance on Administrative Agent and Other Lenders

 

Each Lender, each Swap Lender, each Cash Management Lender and each Creditcard Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender, Swap Lender, Cash Management Lender or Creditcard Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender, each Swap Lender, each Cash Management Lender and each Creditcard Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender, Swap Lender, Cash Management Lender or Creditcard Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Credit Document or any related agreement or any document furnished hereunder or thereunder.

 

 

12.8

No Other Duties, etc.

 

Anything herein to the contrary notwithstanding, none of the Bookrunners, Arrangers or Syndication Agents listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents except in its capacity, as applicable, as the Administrative Agent, a Lender, a Swap Lender, a Cash Management Lender or a Creditcard Lender hereunder.

 

 

12.9

Administrative Agent May File Proofs of Claim

 

In case of the pendency of any proceeding under any Debtor Relief Law or any other judicial proceeding relative to any Loan Party, the Administrative Agent (irrespective of whether the principal of any Accommodation shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered (but not obligated) by intervention in such proceeding or otherwise:

 

 

(a)

to file and prove а claim for the whole amount of the principal and interest owing and unpaid in respect of the Borrowings and all other amounts secured by the Security that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective counsel and all other amounts due to the Lenders, the Swap Lenders, the Cash Management Lenders, the Creditcard Lenders and the Administrative Agent under Article 5 and Section 14.3) allowed in such judicial proceeding; and

 

 

 

(b)

to collect and receive any monies or other Property payable or deliverable on any such claims and to distribute the same;

 

 

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender, each Swap Lender, each Cash Management Lender and each Creditcard Lender to make such payments to the Administrative Agent and, in the event

 

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that the Administrative Agent shall consent to the making of such payments directly to the Lenders, the Swap Lenders, the Cash Management Lenders or the Creditcard Lenders to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Article 5 and Section 14.3.

 

 

12.10

Collateral and Guarantee Matters

 

 

(a)

In addition to the authority granted to the Administrative Agent in Section 6.10, the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders irrevocably authorize the Administrative Agent, at its option and in its discretion to release any:

 

 

 

(i)

Security Interest on any Property granted to or held by the Administrative Agent under the Loan Documents if unanimously approved, authorized or ratified in writing by the Lenders; and

 

 

 

(ii)

Subsidiary of the Borrower that is a party to the Loan Party Guarantee from its obligations thereunder if such Person ceases to be a Material Subsidiary.

 

 

Upon request by the Administrative Agent at any time, the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders will confirm in writing the Administrative Agent's authority to release its interest in particular types or items of Property, or to release any Guarantor from its obligations under the Loan Party Guarantee pursuant to this Section 12.10.

 

 

(b)

The Administrative Agent shall not be responsible for or have a duty to ascertain or inquire into any representation or warranty regarding the existence, value or collectability of the Collateral, the existence, priority or perfection of the Administrative Agent's Security Interest over such Collateral, or any certificate prepared by any Loan Party in connection therewith, nor shall the Administrative Agent be responsible or liable to the Lenders, the Swap Lenders, the Cash Management Lenders or the Creditcard Lenders for any failure to monitor or maintain any portion of the Collateral.

 

 

 

12.11

Rights and Obligations of Each Lender

 

The rights and obligations of each Lender under this Agreement are several, and no Lender shall be obligated to make Borrowings available to the Borrower in excess of the amount of such Lender's Commitment. The failure of a Lender, Swap Lender, Cash Management Lender or Creditcard Lender to perform its obligations under this Agreement or any other Credit Document shall neither:

 

 

(a)

result in any other Lender, Swap Lender, Cash Management Lender or Creditcard Lender incurring any liability whatsoever (except to the extent provided pursuant to Section 14.2(d)), provided that a Lender shall remain liable at all times for the performance of the obligations of its Affiliate that is a Swap Lender, Cash Management Lender or Creditcard Lender; nor

 

 

 

(b)

relieve any Loan Party or any other Lender, Swap Lender, Cash Management Lender or Creditcard Lender from its respective obligations under any Loan Document or Credit Document.

 

 

Nothing contained herein or in any other Loan Document or Credit Document nor any action taken pursuant hereto or thereto shall be deemed to constitute the Lenders, the Swap Lenders, the Cash Management Lenders or the Creditcard Lenders a partnership, joint venture or any other similar entity.

 

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Each of the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders hereby acknowledge that, to the extent permitted by Applicable Law, the remedies provided hereunder to the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders are for their benefit collectively and acting together and not severally, and further acknowledge that its rights hereunder are to be exercised not severally but collectively by the Administrative Agent upon the decision of the Majority Lenders regardless of whether an Acceleration Notice has been delivered or an Event of Default under Sections 10.1(h) or 10.1(i) has occurred. Notwithstanding any of the provisions contained herein each of the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders hereby covenants and agrees that it shall not be entitled to individually take any action with respect to the Loan Documents including taking (including in respect of its Commitment or any indebtedness or liability owed to it) any action contemplated in Sections 10.2 and 10.5, but that  any such action shall be taken only by the Administrative Agent with the prior written agreement or instructions of the Majority Lenders; provided that notwithstanding the foregoing, if the Administrative Agent, having been adequately indemnified against costs and expenses of doing so by the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders, shall fail to carry out any such instructions of the Majority Lenders, any Lender may do so on behalf of all Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders and shall, in so doing, be entitled to the benefit of all protection give the Administrative Agent hereunder or elsewhere.

 

 

12.12

Notice to Lenders and Swap Lenders

 

Unless otherwise specifically dealt with in this Agreement, in the event the Administrative Agent delivers a written notice to a Lender, a Swap Lender, a Cash Management Lender or a Creditcard Lender requesting advice from such Lender, Swap Lender, Cash Management Lender or Creditcard Lender as to whether it consents or objects to any matter in connection with the Loan Documents, then, except as otherwise expressly provided herein, if such Lender, Swap Lender, Cash Management Lender or Creditcard Lender does not deliver to the Administrative Agent its written consent or objection to such matter:

 

 

(a)

where a time period is specified hereunder for the Administrative Agent or the Majority Lenders to provide any response, notice or other communication prior to the end of such period; or

 

 

 

(b)

where no such time period is specified hereunder, then within 15 Business Days of the delivery of such written notice by the Administrative Agent to such Lender, Swap Lender, Cash Management Lender or Creditcard Lender;

 

 

such Lender, Swap Lender, Cash Management Lender or Creditcard Lender shall be deemed not to have consented thereto.

 

 

12.13

Notices between the Lenders, the Administrative Agent and the Borrower

 

All notices by the Lenders to the Administrative Agent shall be through the Administrative Agent's Branch of Account and all notices by the Administrative Agent to a Lender shall be through such Lender's Branch of Account. All notices or communications between the Borrower and the Lenders which are required or contemplated pursuant to the Loan Documents shall be given or made through the Administrative Agent at the Administrative Agent's Branch of Account.

 

 

12.14

Administrative Agent's Duty to Deliver Documents Obtained from the Borrower

 

The Administrative Agent shall promptly, and in any event within five Business Days of receipt thereof, deliver to each Lender, at its Branch of Account in hard copy or electronic form, such

 

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documents, papers, materials and other information as are furnished by the Borrower to the Administrative Agent on behalf of such Lender pursuant to this Agreement (provided that the Borrower shall be deemed to have fulfilled its obligation to deliver such documents, papers, materials and other information when delivered to the Administrative Agent), and the Borrower shall provide the Administrative Agent with sufficient copies of all such information for such purpose.

 

 

12.15

Arrangements for Borrowings

 

The Administrative Agent shall promptly give written notice to each Syndicated Lender at its Branch of Account upon receipt by the Administrative Agent of any notice given pursuant to  Article 3 or Section 4.3. The Administrative Agent shall advise each Syndicated Lender of the amount, date and details of each Syndicated Borrowing and of such Syndicated Lender's share in each Syndicated Borrowing. At or before 11:00 a.m. (Calgary time) on each Drawdown Date, Conversion Date or  Rollover Date:

 

 

(a)

Prime Loans: each Syndicated Lender will make available to the Borrower its share of Syndicated Borrowings by way of Prime Loans by forwarding to the Administrative Agent the amount of Prime Loans required to be made available by such Lender; and

 

 

 

(b)

Bankers' Acceptances: each Syndicated Lender will make available to the Borrower its share of Syndicated Borrowings by way of Bankers' Acceptances by forwarding to the Administrative Agent the amount of the Discount Proceeds in respect of such Bankers' Acceptances (less the amount of applicable BA Acceptance Fees payable by the Borrower to such Lender pursuant to Section 5.2).

 

 

 

12.16

Arrangements for Repayment of Borrowings

 

 

(a)

Prior to Demand or Acceleration: Prior to the delivery of an Acceleration Notice or the occurrence of an Event of Default specified in Section 10.1(h) or 10.1(i), upon receipt by the Administrative Agent of payments from the Borrower on account of principal, interest, fees or any other payment made to the Administrative Agent on behalf of the Syndicated Lenders, the Administrative Agent shall pay over to each Syndicated Lender at its Branch of Account the amount to which it is entitled under this Agreement and shall use its best efforts to make such payment to such Syndicated Lender on the same Business Day on which such payment is received by the Administrative Agent. If the Administrative Agent does not remit any such payment to a Lender on the same Business Day as such payment is received by the Administrative Agent, the Administrative Agent shall pay interest thereon to such Lender until the date of payment at a rate determined by the Administrative Agent (such rate to be conclusive and binding on such Lender) in accordance with the Administrative Agent's usual banking practice in respect of deposits of amounts comparable to the amount of such payment which are received by the Administrative Agent at a time similar to the time at which such payment is received by the Administrative Agent.

 

 

 

(b)

Subsequent to Acceleration: Following delivery of an Acceleration Notice or the occurrence of an Event of Default specified in Section 10.1(h) or 10.1(i), the Lenders, Swap Lenders, Cash Management Lenders and Creditcard Lenders shall share any payments subsequently received in accordance with Section 10.7.

 

 

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12.17

Repayments by Lenders to Agent

 

 

(a)

Payments by Borrower; Presumptions by Administrative Agent: Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Syndicated Lenders the amount due. In such event, if the Borrower has not in  fact made such payment, then each of the Syndicated Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender, with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the rate determined by the Administrative Agent (such rate to be conclusive and binding on such Lender) in accordance with banking industry rules on interbank compensation.

 

 

 

(b)

Funding by Lenders; Presumption by Administrative Agent: Unless the Administrative  Agent shall have received notice from a Syndicated Lender prior to a Drawdown Date, Conversion Date or Rollover Date that such Lender will not make available to the Administrative Agent the amount required to be made available by such Lender pursuant to this Agreement on such Drawdown Date, Conversion Date or Rollover Date, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with the provisions of this Agreement concerning funding and may, in reliance upon such assumption, make available to the Borrower а corresponding amount. In such event, if a Syndicated Lender has not in fact made its share of the applicable advance available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of а payment to be made by such Lender, at the rate determined by the Administrative Agent (such rate to be conclusive and binding on such Lender) in accordance with banking industry rules on interbank compensation, and (ii) in the case of a payment to be made by the Borrower, the interest rate applicable to the applicable Loan. If the Borrower and such Lender shall pay such interest to the Administrative Agent for the same or an overlapping period, the Administrative Agent shall promptly remit to the Borrower the amount of such interest paid by the Borrower for such period. If such Lender pays its share of the applicable advance to the Administrative Agent, then the amount so paid shall constitute such Lender's Loan included in such advance. Any payment by the Borrower shall be without prejudice to any claim the Borrower may have against a Syndicated Lender that shall have failed to make such payment to the Administrative Agent.

 

 

 

12.18

Adjustments Among Lenders

 

 

(a)

Adjustments to Outstanding Borrowings: If any Syndicated Lender shall, subsequent to the Adjustment Time, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of the Syndicated Borrowings resulting in such Lender receiving payment of a proportion of the aggregate amount of the Syndicated Borrowings and accrued interest thereon greater than its Applicable Percentage thereof as provided herein, then the Lender receiving such greater proportion shall (a) notify the Administrative Agent of such fact, and (b) purchase (for cash at face value) portions of the Syndicated Borrowings of the other Syndicated Lenders, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the Syndicated Lenders rateably in accordance

 

 

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with the aggregate amount of principal of and accrued interest on their respective Syndicated Borrowings, provided that:

 

 

(i)

if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest; and

 

 

 

(ii)

the provisions of this paragraph shall not be construed to apply to (х) any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement (including the application of funds arising from the existence of a Defaulting Lender), or (у) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Prime Loans to any assignee or participant, other than to the Borrower or any Subsidiary thereof (as to which the provisions of this paragraph shall apply).

 

 

 

(b)

Application of Payments: The Lenders, Swap Lenders, Cash Management Lenders and Creditcard Lenders agree that, after the Adjustment Time, the amount of any repayment made by the Borrower under, and the amount of any proceeds from the exercise of any rights or remedies of the Administrative Agent, the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders under the Loan Documents, the Bilateral Financial Services Agreements or any Permitted Swaps will, subject to Section 10.7, be applied Proportionately to the amount of Lender Outstandings of each Lender, Swap Lender, Cash Management Lender and Creditcard Lender which remain and, after repayment of all Syndicated Borrowings, Operating Borrowings, Permitted Swap Indebtedness, Cash Management Obligations and Creditcard Obligations, will be applied on account of any remaining Swap Indebtedness.

 

 

 

(c)

Receipt of Payments other than Borrowings: Notwithstanding anything contained in this Section 12.18, there shall not be taken into account for the purposes of computing any amount payable to a Lender, Swap Lender, Cash Management Lender or Creditcard Lender pursuant to this Section 12.18, any amount which such Lender, Swap Lender, Cash Management Lender or Creditcard Lender receives as a result of any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of any monies owing by a Loan  Party to such Lender, Swap Lender, Cash Management Lender or Creditcard Lender other than on account of Syndicated Borrowings, Operating Borrowings, Swap Indebtedness, Cash Management Obligations and Creditcard Obligations; provided that, if at any time a Lender, Swap Lender, Cash Management Lender or Creditcard Lender receives any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of monies owing or payable to it by a Loan Party in respect of liabilities of a Loan Party under Syndicated Borrowings, Operating Borrowings, Swap Indebtedness, Cash Management Obligations or Creditcard Obligations, such payments will be applied in  accordance  with  Section 10.7; provided further that the provisions of this Section 12.18(c) shall not apply to:

 

 

 

(i)

a Swap Lender which sets off amounts owing by a Loan Party to such Swap Lender under a Permitted Swap against amounts owing by such Swap Lender (including, for clarity, its Affiliates) to a Loan Party under any Permitted Swap entered into between such parties;

 

 

 

(ii)

a Swap Lender which sets off amounts owing by a Loan Party to such Swap Lender under a Lender Swap (other than a Permitted Swap) against amounts owing by such Swap Lender (including, for clarity, its Affiliates) to a Loan Party under any Lender Swap (other than a Permitted Swap) entered into between such parties; or

 

 

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(iii)

a Cash Management Lender which sets off amounts owing by a Loan Party to such Cash Management Lender in respect of Cash Management Services against amounts owing by such Cash Management Lender to such Loan Party or any other Loan Party by reason of the provision of such Cash Management Services and in accordance with the provisions of the Bilateral Financial Services Agreements related thereto.

 

 

To the extent that a Lender Swap, Cash Management Service or Creditcard Facility is entered into by an Affiliate of a Lender, that Lender shall cause such Affiliate to comply with the provisions of this Section 12.18, and such obligation shall survive such Lender (at any time after any such Lender Swap, Cash Management Service or Creditcard Facility was entered into) ceasing to be a Lender hereunder.

 

 

(d)

Borrower Consent: The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under Applicable Law, that any Lender, Swap Lender, Cash Management Lender or Creditcard Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower or another Loan Party rights of setoff and counterclaim with respect to such participation as fully as if such Lender, Swap Lender, Cash Management Lender or Creditcard Lender were a direct creditor of the Borrower in the amount of such participation. The Borrower agrees, at the request of the Lender, to do all things necessary or appropriate to give effect to any and all purchases and other adjustments made by and between the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders pursuant to this Section 12.18 but shall incur no increased indebtedness, in aggregate, by reason thereof.

 

 

 

(e)

Lender Consent: Each Lender, Swap Lender, Cash Management Lender and Creditcard Lender agrees that, after the Adjustment Time, it will at any time and from time to time upon the request of the Administrative Agent purchase portions of the amounts secured by the Security and make any other adjustments which may be necessary or appropriate in order that amounts which remain outstanding under the Credit Documents, as adjusted pursuant to this Section 12.18, are in accordance with the provisions of Section 10.7.

 

 

 

(f)

Adjustments after Acceleration: After all Borrowings and all other obligations and indebtedness of the Borrower under the Loan Documents and Bilateral Financial Services Agreements are declared by the Administrative Agent to be due and payable pursuant to Section 10.2, (i) each Lender agrees that it will at any time or from time to time thereafter at the request of the Administrative Agent as required by any Lender, purchase at par on a non-recourse basis a participation in Borrowings owing to each of the other Lenders and make any other adjustments as are necessary or appropriate, in order that Borrowings owing to each of the Lenders, as adjusted pursuant to this Section 12.18(f), will be in the same proportion as each Lender’s Commitment was to the Total Commitment immediately prior to the Event of Default resulting in such declaration, and (ii) the amount of any repayment made by or on behalf of the Loan Parties under the Loan Documents or any proceeds received by the Administrative Agent or the Lenders pursuant to Section 10.7(e) will be applied by the Administrative Agent in a manner such that to the extent possible the amount of Borrowings owing to each Lender after giving effect to such application will be in the same proportion as each Lender’s Commitment was to the Total Commitment immediately prior to the Event of Default resulting in such declaration.

 

 

 

12.19

Lenders' Consents to Waivers, Amendments, etc.

 

 

(a)

Unanimous Consent of Lenders: Any waiver of or any amendment to a provision of the Loan Documents which relates to:

 

 

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(i)

a change in the types of Accommodations or interest periods relating thereto;

 

 

(ii)

a decrease in interest rates, fees (other than standby fees) or the Applicable Margin (other than the Standby Fee Rate);

 

 

 

(iii)

a change in notice periods or the amount of any payments payable by the Borrower to any Lender under this Agreement, including any waiver of the time of payment thereof;

 

 

 

(iv)

an increase or decrease in the Commitment of any Lender other than as provided for herein;

 

 

 

(v)

a change in the definition of "CDOR Rate", "Discount Rate" or "Majority Lenders";

 

 

(vi)

the postponement of the Maturity Date, the Covenant Conversion Date or any Scheduled Repayment Date;

 

 

 

(vii)

the provisions of Section 12.18(f) or this Section 12.19;

 

 

(viii)

an Event of Default under Section 10.1(a) or 10.1(b);

 

 

(ix)

any release or modification of the Security, except as provided by Section 6.10, and except for modifications which are mechanical and administrative in nature; or

 

 

 

(x)

any matter which, pursuant to the Loan Documents, specifically requires the consent or agreement of all of the Lenders, rather than the consent or agreement of "the Lenders" or the "Majority Lenders" or "the Administrative Agent";

 

 

shall bind the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders only if such waiver or amendment is agreed to in writing by all of the Lenders.

 

 

(b)

Majority Lender Consent: Subject to Section 12.19(a) and except as otherwise provided in the Loan Documents, any waiver, consent to or any amendment to any provision of the Loan Documents and any action, consent or other determination in connection with the Loan Documents shall bind all of the Lenders, the Swap Lenders, the Cash Management Lenders and the Creditcard Lenders if such waiver, amendment, action, consent or other determination is agreed to in writing by the Majority Lenders.

 

 

 

(c)

Administrative Agent's Consent: Any waiver, consent to or any amendment to any provision  of the Loan Documents which relates to the rights or obligations of the Administrative Agent shall require the agreement of the Administrative Agent thereto.

 

 

 

(d)

Operating Lender's Consent: Any waiver, consent to or any amendment to any provision of the Loan Documents which relates to the rights or obligations of the Operating Lender, including, for greater certainty, a decrease in the standby fees or the Standby Fee Rate, shall only require the agreement of the Operating Lender thereto.

 

 

 

12.20

Reimbursement of Administrative Agent's Expenses or Lender's Costs

 

Each Lender agrees that it will indemnify the Administrative Agent for its Applicable Percentage of the Total Commitment of any and all costs, expenses and disbursements (including those costs and expenses referred to in Section 14.3) which may be incurred or made by the Administrative

 

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Agent in good faith in connection with the Loan Documents, and agrees that it will, on written demand detailing such costs, expenses and disbursements, reimburse the Administrative Agent for any such costs, expenses or disbursements for which the Administrative Agent is not promptly reimbursed at any time by the Borrower. The Administrative Agent may refrain from exercising any right, power or discretion or taking any action to protect or enforce the rights of any Lender under the Loan Documents until it has been so reimbursed.

 

Each Swap Lender, Cash Management Lender and Creditcard Lender that is not a Lender agrees that it will indemnify the Administrative Agent for any and all costs, expenses and disbursements which may be incurred or made by the Administrative Agent in good faith in connection with the enforcement of the Loan Documents or Security on behalf of such Swap Lender, Cash Management Lender or Creditcard Lender and agrees that it will, on written demand detailing such costs, expenses and disbursements, reimburse the Administrative Agent for any such costs, expenses or disbursements for which the Administrative Agent is not properly reimbursed at any time by the Borrower. The Administrative Agent may refrain from exercising any right, power or discretion or taking any action to protect or enforce the rights of any such Swap Lender, Cash Management Lender or Creditcard Lender under the Loan Documents or Security until it has been so reimbursed.

 

 

12.21

Indemnity of Administrative Agent

 

Each Lender hereby agrees to indemnify the Administrative Agent (to the extent not reimbursed by the Borrower) as to its Applicable Percentage of the Total Commitment from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Administrative Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by the Administrative Agent under or in respect of the Loan Documents; provided that the Lenders shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or wilful misconduct. Without limiting the generality of the foregoing, each Lender agrees to reimburse the Administrative Agent promptly upon demand for its Applicable Percentage of the Total Commitment of any out-of-pocket expenses (including counsel fees) incurred by the Administrative Agent in connection with the preservation of any rights of the Administrative Agent or the Lenders under, or the enforcement of, or legal advice in respect of rights or responsibilities under, the Loan Documents, but only to the extent that the Administrative Agent is not reimbursed for such expenses by the Borrower.

 

 

12.22

Sharing of Information

 

Subject to Section 13.4, the Borrower authorizes the Administrative Agent and each Lender, Swap Lender, Cash Management Lender and Creditcard Lender to share among each other, with any of their Affiliates, and with any successor, assignee or any potential assignee, any information possessed by it regarding a Loan Party or the Credit Documents.

 

 

12.23

Amendment to this Article 12

 

Save and except for the provisions of Sections 12.6 and 12.21, the provisions of this Article 12 may be amended or added to, from time to time, without the agreement of the Borrower provided such amendment or addition does not adversely affect the rights of the Borrower hereunder or increase, in the aggregate, the liabilities of the Borrower hereunder. A copy of the instrument evidencing such amendment or addition shall be forwarded by the Administrative Agent to the Borrower as soon as

 

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practicable following the execution thereof; provided that after an Event of Default a failure to do so by the Administrative Agent shall not render it liable in damages to the Borrower.

 

 

12.24

The Administrative Agent and Defaulting Lenders

 

 

(a)

Each Defaulting Lender shall be required to provide to the Administrative Agent cash in an amount, as shall be determined from time to time by the Administrative Agent, in its discretion, equal to all obligations of such Defaulting Lender to the Administrative Agent, that are owing or may become owing pursuant to this Agreement, including such Defaulting Lender's obligation to pay its Applicable Percentage of any indemnification, reimbursement or expense reimbursement amounts not paid by the Borrower. Such cash shall be held by the Administrative Agent in one or more cash collateral accounts, which accounts shall be in the name of the Administrative Agent and shall not be required to be interest bearing. The Administrative Agent shall be entitled to apply the foregoing cash in accordance with Section 12.21, in the case of amounts owing to the Administrative Agent.

 

 

 

(b)

In addition to the indemnity and reimbursement obligations noted in Section 12.21, the Lenders agree to indemnify the Administrative Agent (to the extent not reimbursed by the Borrower and without limiting the obligations of the Borrower hereunder) rateably according to their respective Applicable Percentages (and in calculating the Applicable Percentage of a Lender, ignoring the Commitments of Defaulting Lenders) any amount that a Defaulting Lender fails to pay the Administrative Agent and which is due and owing to the Administrative Agent pursuant to Section 12.21. Each Defaulting Lender agrees to indemnify each other Lender for any amounts paid by such Lender and which would otherwise be payable by the Defaulting Lender.

 

 

 

(c)

The Administrative Agent shall be entitled to set off any Defaulting Lender's Applicable Percentage of all payments received from the Borrower against such Defaulting Lender's obligations to make payments and fund Accommodations required to be made by it and to purchase participations required to be purchased by it in each case under this Agreement and the other Loan Documents. To the extent permitted by law, the Administrative Agent shall be  entitled to withhold and deposit in one or more non-interest bearing cash collateral accounts in  the name of the Administrative Agent all amounts (whether principal, interest, fees or otherwise) received by the Administrative Agent and due to a Defaulting Lender pursuant to this Agreement, for so long as such Lender is a Defaulting Lender, which amounts shall be used by the Administrative Agent:

 

 

 

(i)

first, to reimburse the Administrative Agent for any amounts owing to it, in its capacity as Administrative Agent, by such Defaulting Lender pursuant to any Loan Document;

 

 

 

(ii)

second, to repay on a pro rata basis the incremental portion of any Accommodations made by a Lender pursuant to Section 14.2 in order to fund a shortfall created by a Defaulting Lender and, upon receipt of such repayment, each such Lender shall be deemed to have assigned to the Defaulting Lender such incremental portion of such Accommodations;

 

 

 

(iii)

third, to cash collateralize all other obligations of such Defaulting Lender to the Administrative Agent owing pursuant to this Agreement in such amount as shall be determined from time to time by the Administrative Agent, in its discretion, including such Defaulting Lender's obligation to pay its Applicable Percentage of any indemnification, reimbursement or expense reimbursement amounts not paid by the Borrower; and

 

 

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(iv)

fourth, to fund from time to time the Defaulting Lender's Applicable Percentage of Lender Outstandings which are Borrowings.

 

 

 

(d)

For greater certainty and in addition to the foregoing, neither the Administrative Agent nor any of its Affiliates nor any of their respective shareholders, officers, directors, employees, agents or representatives shall be liable to any Lender (including a Defaulting Lender) for any action taken or omitted to be taken by it in connection with amounts payable by the Borrower to a Defaulting Lender and received and deposited by the Administrative Agent in a cash collateral account and applied in accordance with the provisions of this Agreement, save and except for the gross negligence or wilful misconduct of the Administrative Agent as determined by a final non- appealable judgement of a court of competent jurisdiction.

 

 

ARTICLE 13

SUCCESSORS AND ASSIGNS, JUDGMENT CURRENCY AND CONFIDENTIAL INFORMATION

 

 

13.1

Successors and Assigns

 

 

(a)

Successors and Assigns Generally: The provisions of this Agreement shall be binding upon and enure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower, except to the extent otherwise permitted hereunder, may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender, and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with Section 13.1(b), (ii) by way of participation in accordance with Section 13.1(d), or (iii) by way of pledge or assignment of a security interest subject to the restrictions of Section 13.1(f) (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in  this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in Section 13.1(d) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

 

 

 

(b)

Assignments by Lenders: Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including all or a portion of its Commitment and the Borrowings at the time owing to it); provided that (in each case with respect to any Facility) any such assignment shall be subject to the following conditions:

 

 

 

(i)

Minimum Amounts:

 

 

(A)

in the case of an assignment of the entire remaining amount of the assigning Lender's Commitment and/or the Borrowings at the time owing to it (in each case with respect to any Facility) or contemporaneous assignments to related Approved Funds that equal at least the amount specified in Section 13.1(b)(i)(B) in the aggregate or in the case of an assignment to a Lender, an Affiliate of а Lender or an Approved Fund, no minimum amount need be assigned; and

 

 

 

(B)

in any case not described in Section 13.1(b)(i)(A), the aggregate amount of the Commitment (which for this purpose includes Borrowings outstanding thereunder) or, if the applicable Commitment is not then in effect, the principal

 

 

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outstanding balance of the Borrowings of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if "Trade Date" is specified in the Assignment and Assumption, as of the Trade Date) shall not be less than $5,000,000, in the case of any assignment in respect of the Syndicated Facility, or in the case of any assignment in respect of the Operating Facility Commitment, all of such Commitment, unless each of the Administrative Agent and, so long as no Default or Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed).

 

 

(ii)

Proportionate Amounts: Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement with respect to the Borrowings or the Commitment assigned, except that this clause (ii) shall not prohibit any Lender from assigning all or a portion of its rights and obligations among separate Facilities on a non-pro rata basis.

 

 

 

(iii)

Required Consents: No consent shall be required for any assignment except to the extent required by Section 13.1(b)(i)(B) and, in addition:

 

 

 

(A)

the consent of the Borrower (such consent not to be unreasonably withheld or delayed) shall be required unless: (х) such assignment, to the extent it occurs before a Default or Event of Default has occurred and is continuing, is to a competitor of the Borrower in the cannabis sector, (y) a Default or Event of Default has occurred and is continuing at the time of such assignment, or (z) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund; and

 

 

 

(B)

the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required for assignments in respect of any Facility if such assignment is to a Person that is not а Lender with a Commitment in respect of such Facility, an Affiliate of such Lender or an Approved Fund with respect to such Lender.

 

 

 

(iv)

Assignment and Assumption: The parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500; provided that the Administrative Agent may, in its sole discretion, elect to waive such processing and recordation fee in the case of any assignment. The assignee, if it is not a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.

 

 

 

(v)

No Assignment to Certain Persons: No such assignment shall be made to (A) the Borrower or any of the Borrower's Affiliates or Subsidiaries or (B) any  Defaulting Lender or any of its Subsidiaries, or any Person who, upon becoming a Lender hereunder, would constitute any of the foregoing Persons described in this clause (B).

 

 

 

(vi)

No Assignment to Natural Persons: No such assignment shall be made to a natural Person.

 

 

 

(vii)

Certain Additional Payments: In connection with any assignment of rights and obligations of any Defaulting Lender hereunder, no such assignment shall be effective unless and until, in addition to the other conditions thereto set forth herein, the parties to

 

 

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the assignment shall make such additional payments to the Administrative Agent in an aggregate amount sufficient, upon distribution thereof as appropriate (which may be outright payment, purchases by the assignee of participations or subparticipations, or other compensating actions, including funding, with the consent of the Borrower and the Administrative Agent, the applicable pro rata share of Borrowings previously requested but not funded by the Defaulting Lender, to each of which the applicable assignee and assignor hereby irrevocably consent), to (х) pay and satisfy in full all payment liabilities then owed by such Defaulting Lender to the Administrative Agent and each Lender hereunder (and interest accrued thereon), and (у) acquire (and fund as appropriate) its full pro rata share of all Borrowings in accordance with its Applicable Percentage. Notwithstanding the foregoing, in the event that any assignment of rights and obligations of any Defaulting Lender hereunder shall become effective under Applicable Law without compliance with the provisions of this paragraph, then the assignee of such interest shall be deemed to be a Defaulting Lender for all purposes of this Agreement until such compliance occurs.

 

From and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Article 11 and Section 14.3 with respect to facts and circumstances occurring prior to the effective date of such assignment, provided, that (i) except  to the extent otherwise expressly agreed by the affected parties, no assignment by а Defaulting Lender will constitute а waiver or release of any claim of any party hereunder arising from that Lender's having been a Defaulting Lender and (ii) no assignment to an Affiliate of an assigning Lender or an Approved Fund of an assigning Lender without the consent of the Borrower (if there is no Default or Event of Default), the Administrative Agent shall release the assigning Lender of its obligations so assigned. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 13.1(d).

 

 

(c)

Register: The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at one of its offices in Calgary, Alberta a copy of each Assignment and Assumption delivered to it and а register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Borrowings owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive absent manifest error, and the Borrower, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as а Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

 

 

 

(d)

Participations: Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural Person or the Borrower or any of the Borrower's Affiliates or Subsidiaries) (each, a "Participant") in all or a portion of such Lender's rights and/or obligations under this Agreement (including all or а portion of its Commitment and/or the Borrowings owing to it); provided that (i) such Lender's obligations

 

 

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under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, and (iii) the Borrower, the Administrative Agent and Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. For the avoidance of doubt, each Lender shall be responsible for the indemnity under Section 12.21 with respect to any payments made by such Lender to its Participant(s).

 

Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in Section 12.19(a) that affects such Participant. The Borrower agrees that each Participant shall be entitled to  the benefits of Sections 11.1, 11.2 and 11.3 (subject to Section 13.1(e)) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 13.1(b); provided that such Participant agrees to be subject to the provisions of Section 11.3 as if it were an  assignee under Section 13.1(b). To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 10.6 as though it were a Lender; provided that such Participant agrees to be subject to Section 12.18 as though it were a Lender.

 

 

(e)

Limitations upon Participant Rights: A Participant shall not be entitled to receive any greater payment under Sections 11.1 and 11.2 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. А Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the  benefits  of  Section 11.2 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 11.2(e) as though it were a Lender.

 

 

 

(f)

Certain Pledges: Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

 

 

 

13.2

Judgment Currency

 

If for the purposes of obtaining judgment in any court in any jurisdiction with respect to this Agreement it becomes necessary to convert into the currency of such jurisdiction (herein called the "Judgment Currency") any amount due hereunder in any currency other than the Judgment Currency, then such conversion shall be made at the rate of exchange prevailing on the Business Day before the day on which judgment is given. For such purpose, "rate of exchange" means the spot rate at which the Administrative Agent or the Operating Lender, as applicable, on the relevant date at or about 10:00 o'clock a.m. (Calgary time), would be prepared to sell a similar amount of such currency in Calgary, Alberta against the Judgment Currency. In the event that there is a change in the rate of exchange prevailing between the Business Day before the day on which the judgment is given and the date of payment of the amount due, the Borrower shall, on the date of payment, pay such additional amounts (if any) as may be necessary to ensure that the amount paid on such date is the amount in the Judgment Currency which when converted at the rate of exchange prevailing on the date of payment is the amount then due under this Agreement in such other currency. Any additional amount due from the Borrower under this Section 13.2 shall be due as a separate debt and shall not be affected by judgment being obtained for any other sums due under or in respect of this Agreement.

 

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13.3

Swap Lender

 

If any Swap Lender (or its Affiliate, if such Swap Lender is not a Lender) for any reason ceases to be a Lender, such Swap Lender shall continue to be bound by and entitled to the benefit of the terms and conditions hereof in such capacity and entitled to the benefit of the Security until such time as it is no longer a party to the Swaps existing with any Loan Party at the time it (or such Affiliate, if applicable) ceases to be a Lender, with the exception of any indemnities of, or in favour of, such Swap Lender hereunder existing at that time and which shall survive such termination.

 

 

13.4

Certain Information; Confidentiality

 

Each of the Administrative Agent and the Lenders agree to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed:

 

 

(a)

to its Affiliates and to its Related Parties that are in each case required to have such Information disclosed to them (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential);

 

 

 

(b)

to the extent required or requested by any regulatory authority purporting to have jurisdiction over such Person or its Related Parties (including the Office of the Superintendent of Financial Institutions or similar body and any self-regulatory authority, such as the National Association of Insurance Commissioners);

 

 

 

(c)

to the extent required by Applicable Laws or regulations or by any subpoena or similar legal process;

 

 

 

(d)

to any other party hereto;

 

 

(e)

in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder;

 

 

 

(f)

subject to an agreement containing provisions substantially the same as those of this Section, to

(i)any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights and obligations under this Agreement, or (ii) any actual or prospective party (or its Related Parties) to any swap, derivative or other transaction under which payments are to be made by reference to the Borrower and its obligations, this Agreement or payments hereunder;

 

 

(g)

on a confidential basis to any rating agency in connection with rating the Borrower or its Subsidiaries or the Facilities;

 

 

 

(h)

with the consent of the Borrower; or

 

 

(i)

to the extent such Information (х) becomes publicly available other than as a result of a breach of this Section, or (у) becomes available to the Administrative Agent, any Lender or any of their respective Affiliates on a non-confidential basis from a source other than the Borrower.

 

 

For purposes of this Section, "Information" means all information received from the Borrower or any of its Subsidiaries relating to the Borrower or any of its Subsidiaries or any of their respective businesses, other than any such information that is available to the Administrative Agent or any

 

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Lender on a non-confidential basis prior to disclosure by the Borrower or any of its Subsidiaries; provided that, in the case of information received from the Borrower or any of its Subsidiaries after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

 

ARTICLE 14 MISCELLANEOUS

 

 

14.1

Severability

 

Any provision of this Agreement which is or becomes prohibited or unenforceable in any jurisdiction does not invalidate, affect or impair the remaining provisions hereof in such jurisdiction and any such prohibition or unenforceability in any jurisdiction does not invalidate or render unenforceable such provision in any other jurisdiction.

 

 

14.2

Defaulting Lenders

 

 

(a)

Termination of Defaulting Lender: The Borrower may terminate the unused amount of the Syndicated Facility Commitment of any Syndicated Lender that is a Defaulting Lender upon not less than 10 Business Days' prior notice to the Administrative Agent (which shall promptly notify the Lenders thereof), and in such event the provisions of Section 12.24 will apply to all amounts thereafter paid by the Borrower for the account of such Defaulting Lender under this Agreement (whether on account of principal, interest, fees, indemnity or other amounts); provided that (i) no Event of Default shall have occurred and be continuing, and (ii) such termination shall not be deemed to be a waiver or release of any claim the Borrower, the Administrative Agent or any Lender may have against such Defaulting Lender.

 

 

 

(b)

Defaulting Lender Adjustments: Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as such Lender is no longer a Defaulting Lender, to the extent permitted by Applicable Law:

 

 

 

(i)

Waivers and Amendments: Such Defaulting Lender's right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in the definition of Majority Lenders. A Defaulting Lender shall not be included in determining whether all Lenders have taken or may take any action hereunder (including any consent to any amendment or waiver pursuant to Section 12.19), provided that any waiver, amendment or modification requiring the consent of all Lenders or each affected Lender that (A) materially and adversely affects such Defaulting Lender differently than other affected Lenders, (B) increases the Syndicated Facility Commitment or extends the Maturity Date of such Defaulting Lender, or (C) relates to the matters set forth in Sections 12.19(a)(i), 12.19(a)(ii), 12.19(a)(iii), 12.19(a)(iv) (in so far as it relates to the Syndicated Facility Commitment of a Defaulting Lender), 12.19(a)(v), 12.19(a)(vi) and 12.19(a)(ix), shall require the consent of such Defaulting Lender. For the avoidance of doubt, the Borrower shall retain and reserve its other rights and remedies respecting each Defaulting Lender.

 

 

 

(ii)

Certain Fees: The standby fees (if any) payable pursuant to Section 5.8 shall cease to accrue on the unused portion of the Commitment of such Defaulting Lender.

 

 

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(c)

Defaulting Lender Cure: If the Borrower and the Administrative Agent agree in writing that а Syndicated Lender is no longer а Defaulting Lender, the Administrative Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein, that Syndicated Lender will, to the extent applicable, purchase at par that portion of outstanding Syndicated Borrowings of the other Syndicated Lenders or take such other actions as the Administrative Agent may determine to be necessary to cause the Syndicated Borrowings to be held pro rata by the Syndicated Lenders in accordance with the Syndicated Facility Commitments under the Syndicated Facility, whereupon such Syndicated Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the Borrower while that Syndicated Lender was a Defaulting Lender; and provided, further, that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Syndicated Lender will constitute a waiver or release of any claim of any party hereunder arising from that Syndicated Lender having been a Defaulting Lender.

 

 

 

(d)

Funding of Defaulting Lender's Share: If the Administrative Agent has actual knowledge that  a Lender is a Defaulting Lender at the time that the Administrative Agent receives (i) a Borrowing Notice or (ii) a Conversion Notice that will result in a currency conversion, then each other Syndicated Lender shall fund its Applicable Percentage of such affected Syndicated Accommodation (and, in calculating such Applicable Percentage, the Administrative Agent shall ignore the Syndicated Facility Commitments of each such Defaulting Lender); provided that, for certainty, no Lender shall be obligated by this Section 14.2(d) to make or provide Syndicated Accommodations in excess of its Syndicated Facility Commitment. If the Administrative Agent acquires actual knowledge that a Lender is a Defaulting Lender at any time after the Administrative Agent received (i) a Borrowing Notice or (ii) a Conversion Notice that will result in a currency conversion, then the Administrative Agent shall promptly notify the Borrower that such Lender is a Defaulting Lender (and such Lender shall be deemed to have consented to such disclosure). Each Defaulting Lender agrees to indemnify each other Lender for any amounts funded or paid by such Lender under this Section 14.2(d) and which would otherwise have been funded or paid by the Defaulting Lender if its Syndicated Commitment had been included in determining the Applicable Percentage of such affected Syndicated Accommodations.

 

 

 

14.3

Expenses, Indemnity, Damage Waiver

 

 

(a)

Borrower Deliverables: All statements, Appraisals, reports (including Environmental Reports), certificates, opinions and other documents or information (including evidence of insurance evidencing compliance with Section 9.1(g)) required to be furnished to the Administrative Agent or the Lenders or by any other Loan Party under this Agreement shall be supplied by the Borrower without cost to the Administrative Agent or any Lender.

 

 

 

(b)

Reimbursement: The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent (including the reasonable fees, charges and disbursements of legal counsel for the Administrative Agent on a solicitor and his own client basis, all fees and expenses of the Project Monitor or the Insurance Consultant, and any other expert or professional costs and fees incurred in relation to the Facilities), in connection with the syndication of the Facilities, the preparation, negotiation, execution, delivery and administration of this Agreement and the other Loan Documents, or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender (including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender), in connection with the enforcement or protection of its rights (A) in connection with this

 

 

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Agreement and the other Loan Documents, including its rights under this Section 14.3, or (B) in connection with the Accommodations hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Accommodations.

 

 

(c)

General Indemnity: The Borrower shall indemnify the Administrative Agent (and any sub- agent thereof) and each Lender, each Swap Lender, each Cash Management Lender, each Creditcard Lender and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses (including the fees, charges and disbursements of any counsel for any Indemnitee), incurred by any Indemnitee or asserted against any Indemnitee by any Person (including the Borrower or any other Loan Party) other than such Indemnitee and its Related Parties arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby, (ii) any Accommodation or the use or proposed use of the proceeds therefrom, or (iii) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by the Borrower or any other Loan Party, and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (x) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee or (у) result from a claim brought by the Borrower or any other Loan Party against an Indemnitee for breach in bad faith of such Indemnitee's obligations hereunder or under any other Loan Document, if the Borrower or such Loan Party has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction.

 

 

 

(d)

Reimbursement by Lenders: To the extent that the Borrower for any reason fails to  indefeasibly pay any amount required under paragraph (a) or (b) of this Section to be paid by it to the Administrative Agent (or any sub-agent thereof) or any Related Party of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent) or such Related Party, as the case may be, such Lender's pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought based on each Lender's Applicable Percentage of the Total Commitment at such time) of such unpaid amount (including any such unpaid amount in respect of a claim asserted by such Lender); provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent) or against any Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent), in connection with such capacity. The obligations of the Lenders under this paragraph (d) are subject to Section 12.11.

 

 

 

(e)

Waiver of Consequential Damages, Etc.: To the fullest extent permitted by Applicable Law,  the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Accommodation, or the use of the proceeds thereof. No Indemnitee referred to in paragraph (b) above shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through

 

 

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telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby.

 

 

(f)

Payments: All amounts due under this Section shall be payable promptly, and in any event within five (5) Business Days, after demand therefor.

 

 

 

(g)

Survival: Each party's obligations under this Section shall survive the termination of the Loan Documents and payment of the obligations hereunder.

 

 

 

14.4

Failure to Act

 

No failure, omission or delay on the part of the Administrative Agent, any Lender or any Swap Lender in exercising any right, power or privilege hereunder shall impair such right, power or privilege or operate as a waiver thereof nor shall any single or partial exercise of any right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege.

 

 

14.5

Waivers

 

No breach of any of the provisions of any of the Loan Documents may be waived or discharged verbally; any such waiver or discharge may only be made by way of an instrument in writing signed by either the Administrative Agent on behalf of the Lenders or the Majority Lenders, as applicable, and, if required by the Administrative Agent, the Loan Parties, and such waiver or discharge will then be effective only in the specific instance, for the specific purpose and for the specific length of time for which it is given. Any such waiver or discharge which affects the rights of the Administrative Agent may only be made by way of an instrument in writing signed by the Administrative Agent.

 

 

14.6

Amendments

 

No provision of the Loan Documents may be amended verbally and any such amendment may only be made by way of an instrument in writing signed (subject to Section 12.23) by the Borrower, the Administrative Agent and the Lenders required by Section 12.19.

 

 

14.7

Notice

 

 

(a)

Notices Generally: Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by email or facsimile as follows:

 

 

 

(i)

if to the Borrower, to it at 200, 919 – 11th Avenue S.W., Calgary, Alberta T2R 1P3, Attention: Jim Keough (Email: jkeough@sundialgrowers.com);

 

 

 

(ii)

if to the Administrative Agent, to ATB at 600, 585 - 8th Avenue S.W., Calgary, Alberta T2P 1G1, Attention of Manager - Syndications (Facsimile No.: (403) 663-3160) (Email: syndications.agency@atb.com); and

 

 

 

(iii)

if to а Lender, to it at its address (or facsimile number) set forth in Schedule "A" hereto.

 

Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by facsimile shall be deemed to have

 

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been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient). Notices delivered through electronic communications, to the extent provided in paragraph (b) below, shall be effective as provided in said paragraph (b).

 

 

(b)

Electronic Communications: Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communication (including email and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender if such Lender has notified the Administrative Agent that it is incapable of receiving notices by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.

 

 

Unless the Administrative Agent otherwise prescribes, notices and other communications sent to an email address shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return email or other written acknowledgement), and notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its email address as described in the foregoing clause (a) of notification that such notice or communication is available and identifying the website address therefor, provided that, if such notice, email or other communication is not sent within normal business hours of the recipient, such notice or other communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient.

 

 

(c)

Change of Address, etc.: Any party hereto may change its address or facsimile number for notices and other communications hereunder by notice to the other parties hereto.

 

 

 

(d)

Platform:

 

 

(i)

The Borrower agrees that the Administrative Agent may, but shall not be obligated to, make the Communications (as defined below) available to the Lenders by posting the Communications on Debt Domain, Intralinks, Syndtrak or a substantially similar electronic transmission system (the "Platform").

 

 

 

(ii)

The Platform is provided "as is" and "as available." The Administrative Agent Parties (as defined below) do not warrant the adequacy of the Platform and expressly disclaim liability for errors or omissions in the Communications. No warranty of any kind, express, implied or statutory, including any warranty of merchantability, fitness for a particular purpose, non-infringement of third-party rights or freedom from viruses or other code defects, is made by any Administrative Agent Party in connection with the Communications or the Platform. In no event shall the Administrative Agent or any of its Related Parties (collectively, the "Administrative Agent Parties") have any liability to the Borrower or the other Loan Parties, any Lender or any other Person or entity for damages of any kind, including direct or indirect, special, incidental or consequential damages, losses or expenses (whether in tort, contract or otherwise) arising out of the Borrower's, any Loan Party's or the Administrative Agent's transmission of communications through the Platform. "Communications" means, collectively, any notice, demand, communication, information, document or other material that the Borrower or any Loan Party provides to the Administrative Agent pursuant to any Loan Document   or   the   transactions   contemplated   therein   which   is   distributed   to the

 

 

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Administrative Agent or any Lender by means of electronic communications pursuant to this Section, including through the Platform.

 

 

14.8

Governing Law

 

The parties agree that this Agreement is conclusively deemed to be made under, and for all purposes to be governed by and construed in accordance with, the laws of the Province of Alberta and of Canada applicable therein. There shall be no application of any conflict of law or other rules which would result in any laws other than internal laws in force in the Province of Alberta applying to this Agreement. The parties hereto do hereby irrevocably submit and attorn to the non-exclusive jurisdiction of the courts of the Province of Alberta for all matters arising out of or relating to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or by any thereof, without prejudice to the rights of the Administrative Agent or any Lender to take proceedings in other jurisdictions.

 

 

14.9

Term of Agreement and Survival

 

This Agreement and all covenants, undertakings, agreements, representations and warranties shall continue and survive until the termination of all Loan Documents such that thereafter there is not nor can there be any Borrowings, Lender Outstandings or Swap Indebtedness arising under any Loan Document. Notwithstanding the foregoing, the indemnities in Sections 9.1(n) and 14.3(c) shall survive any such termination.

 

 

14.10

Time of Essence

 

Time shall be of the essence of this Agreement.

 

 

14.11

Anti-Money Laundering Legislation

 

 

(a)

The Borrower acknowledges that, pursuant to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada) and other applicable anti-money laundering, anti-terrorist financing, government sanction and "know your client" Applicable Laws, whether within Canada or elsewhere (collectively, including any guidelines or orders thereunder, "AML Legislation"), the Lenders and the Administrative Agent may be required to obtain, verify and record information regarding the Borrower, its directors, authorized signing officers, direct or indirect shareholders or other Persons in control of the Borrower, and the transactions contemplated hereby. The Borrower shall promptly: (i) provide all such information, including supporting documentation and other evidence, as may be reasonably requested by any Lender or the Administrative Agent, or any prospective assignee of a Lender or the Administrative Agent, in order to comply with any applicable AML Legislation, whether now or hereafter in existence; and (ii) notify the recipient of any such information of any changes thereto.

 

 

 

(b)

If, upon the written request of any Lender, the Administrative Agent has ascertained the identity of the Borrower or any other Loan Party or any authorized signatories of the Borrower or any other Loan Party for the purposes of applicable AML Legislation on such Lender's behalf, then the Administrative Agent:

 

 

 

(i)

shall be deemed to have done so as an agent for such Lender, and this Agreement shall constitute a "written agreement" in such regard between such Lender and the Administrative Agent within the meaning of applicable AML Legislation; and

 

 

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126

 

 

 

 

 

(ii)

shall provide to such Lender copies of all information obtained in such regard without any representation or warranty as to its accuracy or completeness.

 

 

Notwithstanding the preceding sentence, each of the Lenders agrees that the Administrative Agent has no obligation to ascertain the identity of the Borrower or any other Loan Party or any authorized signatories of the Borrower or any other Loan Party, on behalf of any Lender, or to confirm the completeness or accuracy of any information it obtains from the Borrower or any other Loan Party or any such authorized signatory in doing so.

 

 

14.12

Conflict with Other Documents

 

In the event there is a conflict or inconsistency:

 

 

(a)

as to any matter between the provisions hereof and the provisions of any other Loan Document (other than the Intercreditor Agreement), the provisions of this Agreement shall prevail to the extent of such conflict or inconsistency; and

 

 

 

(b)

as to any matter between the provisions hereof and the provisions of the Intercreditor Agreement, the provisions of the Intercreditor Agreement shall prevail to the extent of such conflict or inconsistency;

 

 

provided that for the purposes of this Section 14.12 there shall not be considered to be a conflict or inconsistency between any provision hereof and any provision of any other Loan Document merely because such Loan Document does, and this Agreement does not, deal with the particular matter.

 

 

14.13

Saskatchewan Legislation

 

The Land Contracts (Actions) Act of the Province of Saskatchewan shall have no application to any action, as defined in The Land Contracts (Actions) Act, with respect to this Agreement or the other Loan Documents and The Limitation of Civil Rights Act of the Province of Saskatchewan shall have no application to this Agreement or the other Loan Documents.

 

 

14.14

Acknowledgement and Consent to Bail-In of EEA Financial Institutions

 

Notwithstanding anything to the contrary in any Loan Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any EEA Financial Institution arising under any Loan Document, to the extent such liability is unsecured, may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:

 

 

(a)

the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an EEA Financial Institution; and

 

 

 

(b)

the effects of any Bail-In Action on any such liability, including, if applicable:

 

 

(i)

a reduction in full or in part or cancellation of any such liability;

 

 

(ii)

a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent entity undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or

 

 

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other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Loan Document; or

 

 

(iii)

the variation of the terms of such liability in connection with the exercise of the Write- down and Conversion Powers of any EEA Resolution Authority.

 

 

 

14.15

Counterparts; Integration, Effectiveness; Electronic Execution

 

 

(a)

Counterparts; Integration; Effectiveness: This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Loan Documents, the Bilateral Financial Services Agreements and Lender Swaps and any separate letter agreements with respect to fees payable to the Administrative Agent, constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 8.1, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or in electronic (i.e., "pdf" or "tif") format shall be effective as delivery of a manually executed counterpart of this Agreement.

 

 

 

(b)

Electronic Execution of Assignments: The words "execution," "signed," "signature," and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any Applicable Law.

 

 

[remainder of page intentionally left blank]

 

9617679.9

 

 


 

 

 

 

IN WITNESS WHEREOF the parties hereto have caused this Agreement to be duly executed on the date and year first above written.

 

::NDJALGJ;;C4

 

Name: Title:

Jim Keough

Chief Financial Officer

 

 

Per: Name:

Title:

 

Signa ture Page to Credit Agreement (Sundial Growers Inc.)

 

 


 

 

 

 

ATB FINANCIAL, as Administrative Agent

 

 

 

Per: Name: Title:

Antuane Azpur

Director, Loan Syndications ATB Financial, CFS

 

 

 

Signature Page to Credit Agreement (Sundial Growers Inc.)

 

 


 

Per:

Name:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Title:POl'lTFOLIO MANAGER

CORPORATE FlNANCIAL SERVICES

 

Signature Page to Credit Agreement (Sundial Growers Inc.)

 

 


 

 

 

 

 

 

5095998250182473329046545500BANK OF MONTREAL, as Lender Per:

V

 

Name:

 

Title:

Managing Director

 

 

 

Per: Name:

 

Title:

Jeff Cowan

Director

 

Signature Page to Credit Agreement (Sundial Growers Inc.)

 

 


Schedule "A" to the Credit Agreement dated August 29, 2019 among SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

 

COMMITMENTS AND ADDRESSES

 

 

 

Lender

Syndicated Facility

Commitment

Operating Facility Commitment

ATB Financial

600, 585 - 8th Avenue S.W. Calgary, Alberta T2P 1G1

 

Attention:Senior Director,

Diversified Industries Fax No.:(403) 974-5784

Cdn. $39,000,000

Cdn. $6,000,000

 

Bank of Montreal

100 King Street West, 4th Floor Toronto, Ontario M5X 1H3

 

Attention:Managing Director,

Corporate Banking

Fax No.:(416) 359-7796

 

Cdn. $45,000,000

 

Nil.

 

Total:

 

Cdn. $84,000,000

 

Cdn. $6,000,000

 

9617679.9

 

 


Schedule "B" to the Credit Agreement dated August 29, 2019 among SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

 

FORM OF BORROWING NOTICE

 

TO:ATB Financial ("ATB"), as Administrative Agent

 

RE: Credit Agreement (the "Credit Agreement") dated August 29, 2019 among Sundial Growers Inc. (the "Borrower"), ATB and those other financial institutions which are or hereafter become lenders thereunder (the "Lenders"), and ATB, as administrative agent for the Lenders (the "Administrative Agent")

 

DATE: , 20

 

 

 

1.

The Drawdown Date is , 20 .

 

 

2.

Pursuant to Section 3.5 of the Credit Agreement, the undersigned hereby irrevocably requests that the following Accommodations be made available under the applicable Facility:

 

 

 

Syndicated Facility:

 

 

TYPE OF ADVANCE

PRINCIPAL AMOUNT AND CURRENCY

TERM

Prime Loan

  

N/A

Bankers' Acceptances

 

 

 

 

 

Operating Facility:

 

 

TYPE OF ADVANCE

PRINCIPAL AMOUNT

TERM

Prime Loan

 

N/A

Letters of Credit

 

  

 

 

 

3.

As of the date of this Borrowing Notice, no Default or Event of Default has occurred and is continuing and each of the representations and warranties of the Borrower deemed to be made by the Borrower pursuant to Section 2.2 of the Credit Agreement (other than those made as of a specific date) are, as of the date of such request, and will be, as of the applicable Drawdown Date, true and correct.

 

 

 

4.

Capitalized terms used herein and not otherwise defined herein have the meanings given to them by the Credit Agreement.

 

 

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B-2

 

 

 

DATED at Calgary, Alberta effective the date and year first above written.

 

 

SUNDIAL GROWERS INC.

 

 

 

Per:

Name:

 

Title:

 

9617679.9

 

 


 

Schedule "C" to the Credit Agreement dated August 29, 2019 among SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

NOTICE OF ROLLOVER OR NOTICE OF CONVERSION OR NOTICE OF REPAYMENT

 

TO:ATB Financial ("ATB"), as Administrative Agent and Operating Lender

 

RE: Credit Agreement (the "Credit Agreement") dated August 29, 2019 among Sundial Growers Inc. (the "Borrower"), ATB and those other financial institutions which are or hereafter become lenders thereunder (the "Lenders"), and ATB, as administrative agent for the Lenders (the "Administrative Agent")

 

DATE: , 20

 

Capitalized terms used herein and not otherwise defined herein have the meanings given to them by the Credit Agreement.

 

 

1.

Pursuant to Section 3.9 (Repayment), 3.11 (Conversion) and 3.12 (Rollover) of the Credit Agreement, the undersigned hereby irrevocably notifies the Administrative Agent/Operating Lender that it will be:

 

 

 

(a)

rolling over part or all of the Accommodation described as:

 

Facility: Operating/Syndicated

 

Type of Accommodation:

 

*Principal Amount:

 

Date of Maturity:

 

into the same Accommodation described as:

 

Date of Maturity:

 

* if only part of maturing Accommodation is rolled over, please indicate.

 

or;

 

 

(b)

converting part or all of the Accommodation described as:

 

Facility: Operating/Syndicated

 

Type of Accommodation:

 

*Principal Amount if applicable:  

 

Date of Maturity:

 

9617679.9

 

 


 

C-2

 

 

 

into an Accommodation described as:

 

* if only part of maturing Accommodation is converted, please indicate.

 

Type of Accommodation:

 

*Principal Amount:

 

Date of Maturity:

 

 

(c)

Repaying part or all of the Accommodation described as:

 

Facility: Operating/Syndicated

 

Type of Accommodation:

 

*Principal Amount:

 

Date of Maturity or Repayment:

 

* if only part of maturing Accommodation is being repaid, please indicate the applicable amount being repaid including the details provided above in respect thereof and whether the balance will be rolled over or Converted.

 

 

2.

This Notice is irrevocable.

 

 

3.

No Default or Event of Default has occurred and is continuing.

 

DATED at Calgary, Alberta effective the date and year first above written.

 

SUNDIAL GROWERS INC.

 

 

 

Per:

Name:

 

Title:

 

9617679.9

 

 


 

Schedule "D" to the Credit Agreement dated August 29, 2019 among SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

FORM OF COMPLIANCE CERTIFICATE

 

TO:ATB FINANCIAL, as Administrative Agent

 

RE: Credit Agreement dated August 29, 2019 among Sundial Growers Inc., as borrower (the "Borrower"), ATB Financial, as Administrative Agent (the "Administrative Agent"), and the persons party thereto as lenders from time to time (collectively, the "Lenders") (such Credit Agreement, as it may be amended, supplemented, modified or restated from time to time, referred to as the "Credit Agreement").

 

I, , of the City of Calgary, in the Province of Alberta, hereby certify as follows:

 

 

1.

I am the [insert title of senior officer] of Sundial Growers Inc.;

 

 

2.

This Certificate applies to the [Fiscal Year/Fiscal Quarter] ending ;

 

 

3.

I am familiar with and have examined the provisions of the Credit Agreement and have made such reasonable investigations of corporate records and inquiries of other officers and senior personnel of the Borrower and its agents as I have deemed necessary for purposes of this Certificate;

 

 

 

4.

Except where the context otherwise requires, all capitalized terms used herein have the same meaning as in the Credit Agreement;

 

 

 

5.

No Default or Event of Default exists;

 

 

6.

Each of the representations and warranties of the Borrower made by the Borrower pursuant to Section 2.1 of the Credit Agreement (other than those made as of a specific date) are, as of the date hereof, true and correct;

 

 

 

7.

The Swap Indebtedness of the Loan Parties, in the aggregate, as at the last day of the [Fiscal Quarter/Year] most recently ended, is as follows:

 

 

Interest  Swaps  - Cdn. $ , and the notional amount swapped thereunder is Cdn. $ which represents % of the Total Commitment.

 

The foregoing amounts of Swap Indebtedness were calculated by the Borrower on a Mark-to- Market basis (separately for each Lender and then aggregating amounts so calculated) as at the end of the [Fiscal Quarter/Year] most recently ended;

 

 

8.

[As of the last day of the above referenced [Fiscal Quarter/Fiscal Year] the Interest Coverage Ratio was , and attached hereto are the detailed particulars of the manner in which the Interest Coverage Ratio was calculated;] [NTD: Required only for Fiscal Quarters ending September 30, 2019 and December 31, 2019, otherwise may be deleted.]

 

 

9617679.9

 

 


 

D-2

 

 

 

 

9.

As of the last day of the above referenced [Fiscal Quarter/Fiscal Year] the aggregate amount of Available  Cash was $ . As of the date hereof, the aggregate amount of Available Cash is $ ;

 

 

 

10.

[As of the last day of the above referenced [Fiscal Quarter/Fiscal Year] the Fixed Charge Coverage Ratio was , and attached hereto are the detailed particulars of the manner in which the Fixed Charge Coverage Ratio was calculated;] [NTD: Required as at the Covenant Conversion Date and as at the end of each Fiscal Quarter thereafter, otherwise may be deleted.]

 

 

 

11.

[As of the last day of the above referenced [Fiscal Quarter/Fiscal Year] the Senior Funded Debt to EBITDA Ratio was , and attached hereto are the detailed particulars of the manner in which the Senior Funded Debt to EBITDA Ratio was calculated;] [Required as at the Covenant Conversion Date and as at the end of each Fiscal Quarter thereafter, otherwise may be deleted.]

 

 

 

12.

This Certificate is given by the undersigned officer in his or her capacity as an officer of the Borrower and not in any personal capacity without any personal liability being assumed by the undersigned officer in respect of the giving of this Certificate.

 

 

DATED this day of , 20 .

 

SUNDIAL GROWERS INC.

 

 

 

Per:

Name:

 

Title:

 

9617679.9

 

 


 

Schedule "E" to the Credit Agreement dated August 29, 2019 among SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

ASSIGNMENT AND ASSUMPTION

 

This Assignment and Assumption (the "Assignment and Assumption") is dated as of the effective date set forth below (the "Effective Date") and is entered into by and between [the] [each]1 Assignor identified in item 1 below ([the] [each, an] "Assignor") and [the] [each]2 Assignee identified in item 2 below ([the] [each, an] "Assignee"). [It is understood and agreed that the rights and obligations of [the Assignors] [the Assignees]3 hereunder are several and not joint.]4 Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the "Credit Agreement"), receipt of a copy of which is hereby acknowledged by [the] [each] Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.

 

For an agreed consideration, [the] [each] Assignor hereby irrevocably sells and assigns to [the Assignee] [the respective Assignees], and [the] [each] Assignee hereby irrevocably purchases and assumes from [the Assignor][the respective Assignors], subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (i) all of [the Assignor's] [the respective Assignors'] rights and obligations in [its capacity as a Lender][their respective capacities as Lenders] under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of [the Assignor] [the respective Assignors] under the respective facilities identified below (including any letters of credit and guarantees included in such facilities), and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of [the Assignor (in its capacity as a Lender)] [the respective Assignors (in their respective capacities as Lenders)] against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned by [the] [any] Assignor to [the] [any] Assignee pursuant to clauses (i) and (ii) above being referred to herein collectively as [the] [an] "Assigned Interest"). Each such sale and assignment is without recourse to [the][any] Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by [the] [any] Assignor.

 

 

1.

Assignor[s]:

 

 

1 For bracketed language here and elsewhere in this form relating to the Assignor(s), if the assignment is from a single Assignor, choose the first bracketed language. If the assignment is from multiple Assignors, choose the second bracketed language.

2 For bracketed language here and elsewhere in this form relating to the Assignee(s), if the assignment is to a single Assignee, choose the first bracketed language. If the assignment is to multiple Assignees, choose the second bracketed language.

3 Select as appropriate.

4 Include bracketed language if there are either multiple Assignors or multiple Assignees.

 

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[Assignor [is] [is not] a Defaulting Lender]

 

 

2.

Assignee[s]:

 

 

[for each Assignee, indicate [Affiliate] [Approved Fund] of [identify Lender]

 

 

3.

Borrower(s):

 

 

4.

Administrative Agent: as the administrative agent under the

Credit Agreement

 

 

5.

Credit Agreement:The Credit Agreement dated August 29, 2019 among Sundial

Growers Inc., the Lenders party thereto, ATB Financial, as Administrative Agent, and the other parties thereto

 

 

6.

Assigned Interest[s]:

 

 

 

Assignor[s]5

 

 

Assignee[s]6

 

Facility Assigned7

Aggregate Amount of Commitment/ Borrowings for

all Lenders8

Amount of Commitment/ Borrowings Assigned

Percentage Assigned of Commitment/ Borrowings9

 

[CUSIP

Number]

 

 

 

$

$

$

 

 

 

 

$

$

$

 

 

 

 

$

$

$

 

 

 

 

[7.Trade Date:

]10

 

 

Effective Date: , 20 [TO BE INSERTED BY ADMINISTRATIVE AGENT]

 

 

 

 

 

 

 

 

 

5  List each Assignor, as appropriate.

6  List each Assignee, as appropriate.

7 Fill in the appropriate terminology for the types of facilities under the Credit Agreement that are being assigned under this Assignment (e.g., "Syndicated Facility Commitment," "Operating Facility Commitment," etc.)

8 Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date.

9 Set forth, to at least 9 decimals, as a percentage of the Commitment/ Prime Loans of all Lenders thereunder.

10 To be completed if the Assignor(s) and the Assignee(s) intend that the minimum assignment amount is to be determined as of the Trade Date.

 

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The terms set forth in this Assignment and Assumption are hereby agreed to:

 

 

ASSIGNOR[S]11

 

[NAME OF ASSIGNOR]

 

 

By:

Title:

 

 

[NAME OF ASSIGNOR]

 

 

By:

Title:

 

 

 

ASSIGNEE[S]12

 

[NAME OF ASSIGNEE]

 

By:

Title:

 

 

[NAME OF ASSIGNEE]

 

By:

Title:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11 Add additional signature blocks as needed. Include both fund and manager making the trade (if applicable).

12 Add additional signature blocks as needed. Include both fund and manager making the trade (if applicable).

 

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[Consented to and]13 Accepted:

ATB FINANCIAL, as Administrative Agent By:

Title:

 

[Consented to:]14

 

SUNDIAL GROWERS INC.

 

 

By:

Title:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 To be added only if the consent of the Administrative Agent is required by the terms of the Credit Agreement.

14 To be added only if the consent of the Borrower and/or other parties is required by the terms of the Credit Agreement.

 

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E-5

 

 

 

 

 

ANNEX 1

 

[ ]15

 

STANDARD TERMS AND CONDITIONS FOR ASSIGNMENT AND ASSUMPTION

 

 

1.

Representations and Warranties.

 

1.1Assignor[s]. [The][Each] Assignor (а) represents and warrants that (i) it is the legal and beneficial owner of [the] [the relevant] Assigned Interest, (ii) [the] [such] Assigned Interest is free and clear of any lien, encumbrance or other adverse claim, (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and (iv) it is [not] a Defaulting Lender; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document16, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document, or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.

 

1.2Assignee[s]. [The][Each] Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become а Lender under the Credit Agreement, (ii) it meets all the requirements to be an assignee under Section 13.1(b)(iii), (v) and (vi) of the Credit Agreement (subject to such consents, if any, as may be required under Section 13.1(b)(iii) of the Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of [the] [the relevant] Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it is sophisticated with respect to decisions to acquire assets of the type represented by the Assigned Interest and either it, or the Person exercising discretion in making its decision to acquire the Assigned Interest, is experienced in acquiring assets of such type, (v) it has received a copy of the Credit Agreement, and has received or has been accorded the opportunity to receive copies of the most recent financial statements delivered pursuant to Sections 9.1(v) and (w) thereof, as applicable, and such other documents and information as it deems appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase [the] [such] Assigned Interest, (vi) it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Assignment and Assumption and to purchase [the][such] Assigned Interest, and (vii) if it is a Foreign Lender17, attached to the Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by [the][such] Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, [the] [any] Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue  to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will

15 Describe Credit Agreement at option of Administrative Agent.

16 The term "Loan Document" should be conformed to that used in the Credit Agreement.

17 The concept of "Foreign. Lender" should be conformed to the section in the Credit Agreement governing withholding taxes and gross-up.

 

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perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.

 

 

2.

Payments.

 

From and after the Effective Date, the Administrative Agent shall make all payments in respect of [the] [each] Assigned Interest (including payments of principal, interest, fees and other amounts) to [the] [the relevant] Assignor for amounts which have accrued to but excluding the Effective Date and to [the] [the relevant] Assignee for amounts which have accrued from and after the Effective Date18. Notwithstanding the foregoing, the Administrative Agent shall make all payments of interest, fees or other amounts paid or payable in kind from and after the Effective Date to [the] [the relevant] Assignee.

 

 

3.

General Provisions.

 

This Assignment and Assumption shall be binding upon, and enure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the Province of Alberta and of Canada applicable therein.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18 The Administrative Agent should consider whether this method conforms to its systems. In some circumstances, the following alternative language may be appropriate:

 

"From and after the Effective Date, the Administrative Agent shall make all payments in respect of [the][each] Assigned Interest (including payments of principal, interest, fees and other amounts) to [the][the relevant] Assignee whether such amounts have accrued prior to, on or after the Effective Date. The Assignor[s] and the Assignee[s] shall make all appropriate adjustments in payments by the Administrative Agent for periods prior to the Effective Date or with respect to the making of this assignment directly between themselves."

 

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Schedule "F" to the Credit Agreement dated August 29, 2019 among SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

FORM OF POWER OF ATTORNEY TERMS - BANKERS' ACCEPTANCES

 

In order to facilitate the acceptance of Bankers' Acceptances pursuant to the terms of the Credit Agreement dated August 29, 2019 among Sundial Growers Inc., as borrower (the "Borrower"), ATB Financial, as Administrative Agent, and the Lenders named therein (as amended, supplemented and restated from time to time, the "Credit Agreement"), the Borrower hereby appoints each Lender (hereinafter individually called the "Bank"), acting by an authorized signing officer (the "Attorney") for the time being of the Bank's Branch of Account, the attorney of the Borrower:

 

 

(a)

to sign for and on behalf and in the name of the Borrower as drawer, drafts in the Bank's standard form which are "depository bills" under and as defined in the Depository Bills and Notes Act (Canada) (the "DBNA") ("Drafts") drawn on the Bank payable to a "clearing house" under the DBNA or its nominee for deposit by the Bank with the "clearing house" after acceptance thereof by the Bank; and

 

 

 

(b)

to fill in the amount, date and maturity date of such Drafts;

 

provided that such acts in each case are to be undertaken by the Bank in accordance with instructions given to the Bank by the Borrower as provided in this power of attorney.

 

Instructions to the Bank relating to the execution, completion, endorsement, discount, purchase and/or delivery by the Bank on behalf of the Borrower of Drafts which the Borrower wishes to submit to the Bank for acceptance by the Bank shall be communicated by the Administrative Agent in writing to the Attorney at the Bank's Branch of Account concurrently with delivery by the Borrower, pursuant to the provisions of: (i) Section 3.5 or 3.6 of the Credit Agreement, a Borrowing Notice by way of Bankers' Acceptances in the form of Schedule "B" to the Credit Agreement; or (ii) Section 3.11 of the Credit Agreement, a Conversion Notice in the form of Schedule "C" to the Credit Agreement. The instructions  to the Bank shall specify the following information:

 

 

(a)

a Canadian Dollar amount, which shall be the aggregate face amount of the Drafts to be accepted by the Bank in respect of a particular Borrowing, Conversion or Rollover; and

 

 

 

(b)

a specified period of time, as provided in the Credit Agreement, which shall be the number of months after the date of such Drafts that such Drafts are to be payable, and the dates of issue and maturity of such Drafts.

 

 

The communication in writing to the Bank of the instructions referred to above shall constitute (a) the authorization and instruction of the Borrower to the Bank to complete and endorse Drafts in accordance with such information as set out above and (b) the request of the Borrower to the Bank to accept such Drafts and deposit the same with the "clearing house" against payment as set out in the instructions. The Borrower acknowledges that the Bank shall not be obligated to accept any such Drafts except in accordance with the provisions of the Credit Agreement.

 

The Bank shall be and it is hereby authorized to act on behalf of the Borrower upon and in compliance with instructions communicated to the Bank as provided herein if the Bank reasonably believes them to be genuine.

 

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The Borrower hereby agrees to indemnify the Bank and its directors, officers, employees, affiliates and agents and to hold it and them harmless from and against any loss, liability, expense or claim of any kind or nature whatsoever incurred by any of them as a result of any action or inaction in any way relating to or arising out of this power of attorney or the acts contemplated hereby including the deposit of any Draft with the "clearing house"; provided that this indemnity shall not apply to any such loss, liability, expense or claim which results from the negligence or wilful misconduct of the Bank or any of its directors, officers, employees, affiliates or agents.

 

This power of attorney may be revoked at any time upon not less than fifteen (15) Business Days' written notice served in accordance with Section 14.7 of the Credit Agreement upon the Bank at its Branch of Account, provided that: (i) it may be replaced with another power of attorney forthwith on terms satisfactory to the Bank; and (ii) no such revocation shall reduce, limit or otherwise affect the obligations of the Borrower in respect of any Draft executed, completed, endorsed, discounted and/or delivered in accordance herewith prior to the time at which such revocation becomes effective. This power of attorney may be terminated by the Bank at any time upon not less than fifteen (15) Business Days written notice to the Borrower in accordance with Section 14.7 of the Credit Agreement. Any revocation or termination of this power of attorney shall not affect the rights of the Bank and the obligations of the Borrower with respect to the indemnities of the Borrower above stated with respect to all matters arising prior in time to any such revocation or termination.

 

This power of attorney is in addition to and not in substitution for any agreement to which the Bank and the Borrower are parties.

 

This power of attorney shall be governed in all respects by the laws of the Province of Alberta and the laws of Canada applicable therein and each of the Borrower and the Bank hereby irrevocably attorns to the non-exclusive jurisdiction of the courts of such jurisdiction in respect of all matters arising out of this power of attorney.

 

In the event of a conflict between the provisions of this Power of Attorney and the Credit Agreement, the Credit Agreement shall prevail. Capitalized terms used and not defined herein shall have the meanings given to them in the Credit Agreement.

 

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Schedule "G" to the Credit Agreement dated August 29, 2019  among SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

FORM OF POWER OF ATTORNEY TERMS - BA EQUIVALENT ADVANCES

 

In order to facilitate the making of BA Equivalent Advances pursuant to the terms of the Credit Agreement dated August 29, 2019 among Sundial Growers Inc., as borrower (the "Borrower"), ATB Financial, as Administrative Agent, and the Lenders named therein (as amended, supplemented and restated from time to time, the "Credit Agreement"), the Borrower hereby appoints each Lender (hereinafter individually called the "Bank"), acting by an authorized signing officer (the "Attorney") for the time being of the Bank's Branch of Account, the attorney of the Borrower:

 

 

(a)

to sign for and on behalf and in the name of the Borrower as drawer, promissory notes in the Bank's standard form for advances in the nature of BA Equivalent Advances ("Notes") payable to the Bank or its order evidencing BA Equivalent Advances made by the Bank to the Borrower pursuant to the Credit Agreement; and

 

 

 

(b)

to fill in the amount, date and maturity date of such Notes;

 

provided that such acts in each case are to be undertaken by the Bank in accordance with instructions given to the Bank by the Borrower as provided in this power of attorney.

 

Instructions to the Bank relating to the execution, completion, endorsement, discount, purchase and/or delivery by the Bank on behalf of the Borrower of Notes which the Borrower wishes to issue to the Bank shall be communicated by the Administrative Agent in writing to the Attorney at the Bank's Branch of Account concurrently with delivery by the Borrower, pursuant to the provisions of: (i) Section 3.5 or 3.6 of the Credit Agreement, a Borrowing Notice by way of Bankers' Acceptances in the form of Schedule "B" to the Credit Agreement; or (ii) Section 3.11 of the Credit Agreement, a Conversion Notice in the form of Schedule "C" to the Credit Agreement. The instructions to the Bank shall specify the following information:

 

 

(a)

a Canadian Dollar amount, which shall be the aggregate face amount of the Notes in respect of a particular Borrowing, Conversion or Rollover; and

 

 

 

(b)

a specified period of time, as provided in the Credit Agreement, which shall be the number of months after the date of such Notes that such Notes are to be payable, and the dates of issue and maturity of such Notes.

 

 

The communication in writing to the Bank of the instructions referred to above shall constitute the authorization and instruction of the Borrower to the Bank to complete and, if applicable, endorse Notes in accordance with such information as set out above. The Borrower acknowledges that  the Bank shall not be obligated to make any BA Equivalent Advance and thereafter complete and execute, and if applicable, endorse any such Notes except in accordance with the provisions of the Credit Agreement.

 

The Bank shall be and it is hereby authorized to act on behalf of the Borrower upon and in compliance with instructions communicated to the Bank as provided herein if the Bank reasonably believes them to be genuine.

 

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The Borrower agrees to indemnify the Bank and its directors, officers, employees, affiliates and agents and to hold it and them harmless from and against any loss, liability, expense or claim of any kind or nature whatsoever incurred by any of them as a result of any action or inaction in any way relating to or arising out of this power of attorney or the acts contemplated hereby; provided that this indemnity shall not apply to any such loss, liability, expense or claim which results from the negligence or wilful misconduct of the Bank or any of its directors, officers, employees, affiliates or agents.

 

This power of attorney may be revoked at any time upon not less than fifteen (15) Business Days' written notice served in accordance with Section 14.7 of the Credit Agreement upon the Bank at its Branch of Account, provided that: (i) it may be replaced with another power of attorney forthwith on terms satisfactory to the Bank; and (ii) no such revocation shall reduce, limit or otherwise affect the obligations of the Borrower in respect of any Notes executed, completed, endorsed, discounted and/or delivered in accordance herewith prior to the time at which such revocation becomes effective. This power of attorney may be terminated by the Bank at any time upon not less than fifteen (15) Business Days written notice to the Borrower in accordance with Section 14.7 of the Credit Agreement. Any revocation or termination of this power of attorney shall not affect the rights of the Bank and the obligations of the Borrower with respect to the indemnities of the Borrower above stated with respect to all matters arising prior in time to any such revocation or termination.

 

This power of attorney is in addition to and not in substitution for any agreement to which the Bank and the Borrower are parties.

 

This power of attorney shall be governed in all respects by the laws of the Province of Alberta and the laws of Canada applicable therein and each of the Borrower and the Bank hereby irrevocably attorns to the non-exclusive jurisdiction of the courts of such jurisdiction in respect of all matters arising out of this power of attorney.

 

In the event of a conflict between the provisions of this Power of Attorney and the Credit Agreement, the Credit Agreement shall prevail. Capitalized terms used and not defined herein shall have the meanings given to them in the Credit Agreement.

 

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Schedule "H" to the Credit Agreement dated August 29, 2019  among SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

FORM OF ENVIRONMENTAL CERTIFICATE

 

TO:ATB FINANCIAL, as Administrative Agent

 

RE: Credit Agreement dated August 29, 2019 among Sundial Growers Inc., as borrower (the "Borrower"), ATB Financial, as Administrative Agent (the "Administrative Agent"), and the persons party thereto as lenders from time to time (collectively, the "Lenders") (such Credit Agreement, as it may be amended, supplemented, modified or restated from time to time, referred to as the "Credit Agreement").

 

This Environmental Certificate is given pursuant to Section 8.1(f)(xii) of the Credit Agreement. Capitalized terms used herein and not otherwise defined herein have the meanings given to them by the Credit Agreement.

 

I am the duly appointed [●] of the Borrower and hereby make the following certifications in such capacity for and on behalf of the Borrower and not in my personal capacity and without assuming any personal liability whatsoever:

 

 

1.

The following certifications are made to the best of my knowledge after due enquiry. My due enquiry has been limited to discussions and correspondence with responsible officers and staff of the Borrower and the Material Subsidiaries to confirm that the internal environmental reporting and response procedures of the Borrower and the Material Subsidiaries have been followed in all material respects as they relate to the certifications made herein and that the matters herein set forth are true and correct and that matters reported on by such officers and staff are true and correct.

 

 

 

2.

The certifications in paragraphs 3 through 9 are qualified as to any breach of or failure to comply with any Environmental Laws, provided that the breach or failure to comply has not had, or would not reasonably be expected to have (whether on an individual or cumulative basis), a Material Adverse Effect.

 

 

 

3.

The Property of the Loan Parties is owned, leased, managed, controlled or operated, in compliance with Environmental Laws.

 

 

 

4.

There are no existing, pending or threatened (by written notice):

 

 

(a)

claims, complaints, notices or requests for information received from a Governmental Authority by any of the Loan Parties, or of which any of the Loan Parties are otherwise aware, with respect to any alleged violation of or alleged liability under any Environmental Laws by any of the Loan Parties; or

 

 

 

(b)

stop, cleanup or preventative orders, direction or action requests, notice of which has been received from an Governmental Authority by any of the Loan Parties or of which any of the Loan Parties are otherwise aware, relating to the environment which as a result thereof, requires any work, repair, remediation, cleanup, construction or capital

 

 

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expenditure with respect to any Property owned, leased, managed, controlled or operated by any of the Loan Parties.

 

 

5.

Except in compliance with Environmental Laws, no contaminant or other hazardous substance has been received, handled, used, stored, treated or shipped at or from, and there has been no discharge or Release of a contaminant or other hazardous substance at, on, from or under any Property owned, leased, managed, controlled or operated by any of the Loan Parties.

 

 

 

6.

None of the lands and facilities owned, leased, managed, controlled or operated by any of the Loan Parties have been used as a land fill site or, except in compliance with Environmental Laws, as a waste disposal site.

 

 

 

7.

No condition exists at, on or under any of the premises or facilities owned, leased, managed, controlled or operated by any of the Loan Parties, which with the passage of time, or the giving of notice or both, has given rise to or would reasonably be expected to give rise to a violation or liability under any Environmental Laws.

 

 

 

8.

The Loan Parties are not aware of any matter affecting the environment that has had or would reasonably be expected to have a Material Adverse Effect.

 

 

 

9.

The Loan Parties have obtained all permits, licenses and other authorizations which are required under Environmental Laws and are in compliance with all terms and conditions of all permits, licenses and other authorizations, and the Borrower hereby certifies that each of the permits, licenses and other authorizations is in full force and effect and unrevoked as of the date of this certificate.

 

 

DATED this day of , 20 .

 

SUNDIAL GROWERS INC.

 

 

 

Per:

Name:

 

Title:

 

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Schedule "I" to the Credit Agreement dated August 29, 2019 among SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

FORM OF OPERATING FACILITY BORROWING BASE CERTIFICATE

 

TO:ATB FINANCIAL, as Administrative Agent

 

RE: Credit Agreement dated August 29, 2019 among Sundial Growers Inc., as borrower (the "Borrower"), ATB Financial, as Administrative Agent (the "Administrative Agent"), and the persons party thereto as lenders from time to time (collectively, the "Lenders") (such Credit Agreement, as it may be amended, supplemented, modified or restated from time to time, referred to as the "Credit Agreement").

 

I, , of the City of Calgary, in the Province of Alberta, hereby certify as follows:

 

 

1.

I am the [insert title of senior officer] of Sundial Growers Inc.;

 

 

2.

This Certificate applies to the month ending ;

 

 

3.

I am familiar with and have examined the provisions of the Credit Agreement and have made such reasonable investigations of corporate records and inquiries of other officers and senior personnel of the Loan Parties as I have deemed necessary for purposes of this Certificate;

 

 

 

4.

Except where the context otherwise requires, all capitalized terms used herein have the same meaning as in the Credit Agreement;

 

 

 

5.

The Operating Facility Borrowing Base is $ , calculated as follows:

 

Total Accounts Receivable

 

$

Eligible Accounts Receivable

A

$

Marginable Eligible Accounts Receivable at 75% of A

B

$

Less:Priority Payables

C

$

Plus: Cash deposited in Borrower Cash Collateral Account in support of issued and outstanding Letters of Credit

 

D

 

$

Operating Facility Borrowing Base (B – C + D)

 

$

Less:Operating Borrowings (including issued and outstanding Letters of Credit)

 

$

Margin Surplus (Deficit)

 

$

 

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6.

Annexed hereto are the following reports in respect of the Loan Parties:

 

 

(a)

aged summary of all Accounts Receivable on an invoice dated basis, including the following information: country of domicile, intercompany accounts, doubtful accounts, accounts in dispute, contra accounts, holdbacks, and any deposits received from each account debtor which remain outstanding at the report date;

 

 

 

(b)

aged summary of all accounts payable; and

 

 

(c)

summary of all amounts which comprise Priority Payables.

 

 

7.

No Default or Event of Default exists;

 

 

8.

Each of the representations and warranties of the Borrower made by the Borrower pursuant to Section 2.1 of the Credit Agreement (other than those made as of a specific date) are, as of the date hereof, true and correct;

 

 

 

9.

This Certificate is given by the undersigned officer in his or her capacity as an officer of the Borrower without any personal liability.

 

 

DATED this day of , 20 .

 

SUNDIAL GROWERS INC.

 

 

 

Per:

Name:

 

Title:

 

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Schedule "J" to the Credit Agreement dated August 29, 2019 among

 

 

SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

INTELLECTUAL PROPERTY

 

 

I.

With respect to the Borrower:

 

Applicant

Application for

Application Jurisdiction

Application Serial No.

Application Date

Sundial Growers Inc.

Trademark - SUNDIAL

Canada

1882533

09 Feb 2018

Sundial Growers Inc.

Trademark – A MODERN NATURAL ALTERNATIVE

Canada

1882536

09 Feb 2018

Sundial Growers Inc.

Trademark – SUNDIAL & Design

Canada

1882535

09 Feb 2018

Sundial Growers Inc.

Trademarks – CALM EASE

FLOW LIFT SPARK & Circles Design

Canada

1882527

09 Feb 2018

Sundial Growers Inc.

Trademark – JAGAR OG

Canada

1928222

31 Oct 2018

 

JAGAR OG

 

1968502

10 Jun 2019

Sundial Growers Inc.

Trademark – SWEET JESUS

Canada

1928224

31 Oct 2018

Sundial Growers Inc.

Trademark – VOODOO CHILD

Canada

1928225

31 Oct 2018

Sundial Growers Inc.

HEAL HELP PLAY

Canada

1934113

4 Dec 2018

Sundial Growers Inc.

PathwaysRx

Canada

1946368

14 Feb 2019

Sundial Growers Inc.

PathwaysRx

Canada

1946405

14 Feb 2019

Sundial Growers Inc.

SundialRx

Canada

1946367

14 Feb 2019

Sundial Growers Inc.

SUNDIAL GROWERS

Canada

1715303

13 Feb 2015

Sundial Growers Inc.

WCB Crest

Canada

1789589

30 Jun 2016

Sundial Growers Inc.

STELLER J’s Flame logo

Canada

1789579

30 Jun 2016

Sundial Growers Inc.

TOP LEAF Mountain Logo

Canada

1789583

30 Jun 2016

Sundial Growers Inc.

STELLER J’S & DESIGN

Canada

1789581

30 Jun 2016

Sundial Growers Inc.

Trademark - STELLER J’S

Canada

1789580

30 Jun 2016

Sundial Growers Inc.

WEST COAST BUD & Design

Canada

1789590

30 Jun 2016

Sundial Growers Inc.

TOP LEAF SUPPLY CO *

Design

Canada

1789588

30 Jun 2016

Sundial Growers Inc.

CITRUS PUNCH

Canada

1979953

09 Jun 2019

 

 

 

II.

With respect to the other Loan Parties, excluding the Borrower: N/A

 

 

9617679.9

 

 


Schedule "K" to the Credit Agreement dated August 29, 2019

 

 

among SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

MATERIAL AGREEMENTS

 

 

1.

Standing Offer Contract Number 1514 between the Alberta Gaming, Liquor and Cannabis Commission and Sundial Growers Inc. dated August 30, 2018.

 

 

 

2.

Letter of Intent with British Columbia Liquor Distribution Branch dated October 1, 2018.

 

 

3.

Wholesale Cannabis Supply Agreement between Sundial Growers Inc., Aerocann Inc., and Aerocann Holdings Inc. dated May 31, 2018.

 

 

 

4.

Engagement Agreement #2 between Trimaven Capital Advisors and Sundial Growers Inc. dated January 1, 2019.

 

 

 

5.

Stipulated Price Contract between Sundial Growers Inc. and Modus Structures Inc. dated January 5, 2018.

 

 

 

6.

Service and Sale Agreement between Sundial Growers Inc. and Sun 8 Holdings Inc. dated May 1,2019.

 

 

 

7.

Royalty Agreement between Sundial Growers Inc. and Sun 8 Holdings Inc. dated May 1, 2019.

 

 

8.

Agreement for Climate and Environmental Control Equipment between Sundial Growers Inc. and Surna Inc. dated March 26, 2019.

 

 

 

9.

Engagement Agreement between Sundial Grower Inc. and BMO Nesbitt Burns, Inc. and Cowen and Company dated April 4, 2019.

 

 

 

10.

Sale and Purchase Agreement between Sundial UK Limited, as Buyer, Sundial Growers Inc., as Guarantor, and Northedge Capital Fund II LP, Northedge Capital Coinvestment II LP, David Ball, Andrew Higginson and others, as Sellers, dated February 22, 2019.

 

 

 

11.

Commitment Agreement between Fortis Alberta and Sundial Growers Inc. dated June 25, 2018

 

 

12.

Master Cannabis Supply Agreement between Ontario Cannabis Retail Corporation and Sundial Growers Inc. dated February 6, 2019.

 

 

 

13.

Unit Price Contract CCDC 4 between Modus Structures Inc. and Sundial Growers Inc. dated March 14, 2019.

 

 

 

14.

CCDC #5A Contract between Scott Builders Inc. and Sundial Growers Inc. re: Pod 4 dated March 5, 2019.

 

 

 

15.

CCDC #5A Contract between Scott Builders Inc. and Sundial Growers Inc. re: Pod 5 dated March 5, 2019.

 

 

 

16.

Share Purchase Agreement between Pathway Rx Inc. and Sundial Growers Inc. dated March 13, 2019.

 

 

9617679.9

 

 


 

K-2

 

 

 

 

17.

License Agreement between Pathway Rx Inc. and Sundial Growers Inc. and Igor Kovalchuk, Olga Kovalchuk and Darryl Hudson dated March 13, 2019.

 

 

 

18.

Credit Agreement among SGI Partnership, as borrower, the lenders party thereto from time to time, as lenders and SAF Jackson II LP, as administrative agent dated June 27, 2019.

 

 

 

19.

Engagement Agreement #3 between Trimaven Capital Advisors and Sundial Growers Inc. dated July 7, 2019.

 

 

9617679.9

 

 


Schedule "L" to the Credit Agreement dated August 29, 2019 among

 

 

SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

MATERIAL LICENSES

 

 

 

Licensed Issued By

License No. and Type

License Holder and License Site

Effective Date

Expiry Date

1.

Health Canada

LIC-K8399K3QIB- 2018-4

Standard Cultivation

Sundial Growers Inc. 6102 48th Avenue Olds, Alberta

T4H 1V1

June 21,

2019

September 14, 2021

2.

Health Canada

LIC-4QZ85KDBPT- 2018-1

Standard Cultivation Standard Processing Sale for Medical Purposes

Sundial Growers Inc. 273209 Range Road

20 M.D. Rocky View No 44 District

Airdrie, Alberta T4B 2A3

December 14, 2018

June 12,

2020

3.

Health Canada

IMP-0047-2019

Import Permit

Sundial Growers Inc. (LIC-4QZ85KDBPT- 2018)

Suite 200 - 919 11th Ave. SW Calgary, Alberta

T2R 1P3

May 3,

2019

October 29, 2019

 

9617679.9

 

 


Schedule "M" to the Credit Agreement dated August 29, 2019

 

 

among SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

ORGANIZATIONAL CHART

 

 

9617679.9

 

 


Schedule "N" to the Credit Agreement dated August 29, 2019 among

 

 

SUNDIAL GROWERS INC., as Borrower, and a syndicate of Lenders with ATB FINANCIAL, as Administrative Agent

 

SOURCES AND USES

 

 

Sources

Uses

Syndicated Facility Accommodations

$84,000,000

Available Cash (1)

$6,000,000

Operating Facility Accommodations

$6,000,000

Repayment of Debt under Existing ATB Commitment Letter

$49,000,000

Pod 4

$18,000,000

 

 

General corporate purposes

$17,000,000

TOTAL SOURCES

$90,000,000

TOTAL USES

$90,000,000

 

Note (1): Excludes the amount of $4,000,000 currently held by ATB under the Existing ATB Commitment

Letter.

9617679.9

 

 

 

Exhibit 8.1

 

Sundial Growers Inc.

Significant Subsidiaries of the Registrant

 

 

 

 

 

 

Name

Jurisdiction of Incorporation

Sprout Technologies Inc.

Alberta, Canada

KamCan Products Inc.

British Columbia, Canada

2011296 Alberta Inc.

Alberta, Canada

Sundial Deutschland GmbH

Germany

Sundial Portugal, Unipessoal LDA

Portugal

Pathway Rx Inc.

Alberta, Canada

2082033 Alberta Ltd.

Alberta, Canada

SGI Managing Partner Inc.

Alberta, Canada

SGI Partnership

Alberta, Canada

Sundial UK Limited

England and Wales

Project Seed Topco

England and Wales

Project Seed Bidco

England and Wales

Bridge Farm Nurseries Limited

England and Wales

Neame Lea Nursery Limited

England and Wales

Neame Lea Marketing Limited

England and Wales

Neame Lea Fresh Limited

England and Wales

Zyon UK Flowers and Plants Limited

England and Wales

 

 

 

 

 

 

 

Exhibit 12.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Zachary George, certify that:

 

1.

I have reviewed this annual report on Form 20-F of Sundial Growers Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

 

4.

The company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting 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 generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and

 

5.

The company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.

 

Date: March 30, 2020

 

By:

/s/ Zachary George

 

 

 

Zachary George

 

 

 

Chief Executive Officer

 

 

Exhibit 12.2

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James Keough, certify that:

 

1.

I have reviewed this annual report on Form 20-F of Sundial Growers Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

 

4.

The company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting 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 generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and

 

5.

The company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.

 

Date: March 30, 2020

 

By:

/s/ James Keough

 

 

 

James Keough

 

 

 

Chief Financial Officer

 

 

 

Exhibit 13.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with the Annual Report on Form 20-F for the year ended December 31, 2019 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

I, Zachary George, certify that:

 

1.

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: March 30, 2020

 

By:

/s/ Zachary George

 

 

 

Zachary George

 

 

 

Chief Executive Officer

 

 

 

 

Exhibit 13.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with the Annual Report on Form 20-F for the year ended December 31, 2019 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

I, James Keough, certify that:

 

1.

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: March 30, 2020

 

By:

/s/ James Keough

 

 

 

James Keough

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sundial Growers Inc.

Management’s Discussion and Analysis

For the year ended December 31, 2019 and

for the ten months ended December 31, 2018

(Expressed in thousands of Canadian dollars)

 

 

 

 

 


 

Management’s Discussion and Analysis

This Management’s Discussion and Analysis (“MD&A”) of the financial condition and performance of Sundial Growers Inc. (“Sundial” or the “Company”) for the year ended December 31, 2019 and the ten months ended December 31, 2018 is dated March 30, 2020. This MD&A should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2019 and the audited annual consolidated financial statements and notes thereto for the ten months ended December 31, 2018 (collectively, the “Audited Financial Statements”) and the risks identified under “Risk Factors” in the Company’s Annual Report on Form 20-F (the “Annual Report”) to which this MD&A is an exhibit. This MD&A has been prepared in accordance with National Instrument 51-102 - Continuous Disclosure Obligations as issued by the Canadian Securities Administrators and is presented in thousands of Canadian dollars, except where otherwise indicated.

MD&A – Table of Contents

COMPANY OVERVIEW2

RECENT DEVELOPMENTS2

STRATEGY & OUTLOOK4

OPERATIONAL AND FINANCIAL HIGHLIGHTS5

OPERATIONAL RESULTS – CANNABIS5

SEGMENTED FINANCIAL RESULTS – CANNABIS7

SEGMENTED FINANCIAL RESULTS – ORNAMENTAL FLOWERS11

CONSOLIDATED FINANCIAL RESULTS11

SELECTED QUARTERLY INFORMATION13

FOURTH QUARTER 201914

SELECTED ANNUAL INFORMATION16

LIQUIDITY AND CAPITAL RESOURCES17

CONTRACTUAL COMMITMENTS AND CONTINGENCIES27

NON-IFRS MEASURES27

RELATED PARTIES30

OFF BALANCE SHEET ARRANGEMENTS31

CRITICAL ACCOUNTING POLICIES AND ESTIMATES31

NEW ACCOUNTING PRONOUNCEMENTS31

RISK FACTORS32

DISCLOSURE CONTROLS AND PROCEDURES32

INTERNAL CONTROLS OVER FINANCIAL REPORTING32

ABBREVIATIONS33

ADVISORY33

ADDITIONAL INFORMATION34

 

 


 

1

 


 

COMPANY OVERVIEW

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

Sundial’s Canadian operations cultivate cannabis using an individualized “room” approach, in approximately 479,000 square feet of total space. In the United Kingdom, the Company grows traceable plants, including hemp, ornamental flowers and edible herbs in approximately 1.60 million square feet of environmentally friendly facilities.

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

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

In Canada, Sundial currently produces and markets cannabis products for the adult-use market. Sundial’s purpose-built indoor modular grow rooms create consistent, highly controlled cultivation environments and are the foundation of the Company’s production of high-quality, strain-specific cannabis products. The Company has established supply agreements with or has been approved to supply cannabis directly to retailers in nine Canadian provinces, with approval recently received from Quebec. Once the supply agreement with Quebec is finalized, Sundial’s distribution network will cover 98% of the national recreational industry.

The Company’s primary focus has been on producing and distributing premium inhalable products and brands (flower, pre-rolls and vapes). On October 24, 2019, the Company received a licence from Health Canada to sell cannabis oil products and began the sale and distribution of cannabis vape products in December 2019. The Company plans to expand to edibles, extracts, topicals and other products which became legally permitted in the fourth quarter of 2019. The Company is currently marketing its adult-use products under its Top Leaf (Premium), Sundial Cannabis (Premium Core), Palmetto (Core) and Grasslands (Value) brands and intends to introduce new products under these brands as it expands its brand portfolio.

The Company continues to enter into agreements to supply other licensed producers in Canada. Although in 2019 most of the Company’s sales were to other licensed producers, the Company expects these sales to decrease as a percentage of total sales going forward.

In July 2019, the Company acquired Bridge Farm (as defined below), a grower of ornamental plants and herbs, based in the United Kingdom, with the intention of converting Bridge Farm’s existing facilities to the cultivation, processing and distribution of cannabidiol (“CBD”) products. Bridge Farm provides the Company with several state-of-the-art, fully operational facilities, and established relationships with a number of large U.K. and multi-national retailers. Bridge Farm holds an Industrial Hemp Cultivation licence and a High-THC Research and Development (“R&D”) licence, which enables Sundial to conduct research and development for phenotyping exercises and to refine extraction methods to produce CBD extracts from the controlled parts of the cannabis plants. Upon receipt of a commercial controlled substances licence, Bridge Farm will have the ability to produce cannabis derived products at low cost, driven by Bridge Farm’s scale, automation and energy subsidies. As discussed below, in connection with the credit facilities amendments, the Company has agreed to engage a financial advisor to conduct a review of Bridge Farm and explore strategic alternatives for the asset.

To enhance and differentiate the Company’s medical cannabis offerings, Sundial is working to build industry-leading research capabilities, proprietary strains and novel extracts for the use of cannabis-based medical treatments. The Company has established partnerships with a number of private and public Canadian research institutions to facilitate a research-informed approach to identify and develop strain-specific treatments and novel extracts for targeted medicinal use. In addition, in 2019, the Company acquired a 50% interest in Pathway Rx Inc. (“Pathway Rx”), which uses advanced technology and an extensive library of cannabis strains to identify and customize targeted treatments for a wide range of medical conditions.

RECENT DEVELOPMENTS

Changes to executive team and board of directors

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

 

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

 

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

 

Edward Hellard stepped down as Executive Chairman, but remains on the board of directors, and as chair of the Mergers and Acquisitions Committee;

 

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

 

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

 

2

 


 

Operational updates

In February 2020, Health Canada issued the Company a licence to sell dried and fresh cannabis from its Olds facility. This licence enables the Company to increase production capacity for sales of branded products to provincial boards by leveraging the processing capabilities of both its Olds and Rocky View facilities. The Company also commenced oil extraction operations at its Olds facility in the first quarter of 2020.

Sales and marketing updates

In the fourth quarter of 2019, Sundial launched its Top Leaf brand with the release of Strawberry Cream whole flower with initial shipments to Alberta, British Columbia and Nova Scotia. Distribution of Top Leaf products continue to expand to other provincial jurisdictions in 2020 along with the release of several new Top Leaf products including Jager OG whole flower and Strawberry Cream and Jager OG vape cartridges.

Sundial continues to expand the distribution and product portfolio of the Sundial Cannabis brand in 2020 with the release of several new whole flower products and the Lemon Riot and Citrus Punch vape cartridges.

To maximize the value of its cultivation assets, Sundial developed and deployed the Grasslands brand during the fourth quarter of 2019. The Grasslands brand focuses on value-driven inhalable products and provides Sundial with increased flexibility in the Company’s production and distribution strategies and practices. The Grasslands brand has released multiple products to the British Columbia, Alberta, Saskatchewan and Manitoba markets and Sundial expects to continue to expand distribution of Grasslands branded products to other provincial jurisdictions in 2020.

During the fourth quarter of 2019, Sundial completed a significant expansion in the number of strains being cultivated and harvested. Prior to the fourth quarter of 2019, Sundial’s commercial cultivation and harvests were predominantly of a single strain. In contrast, Sundial cultivated and harvested 22 different strains in the fourth quarter of 2019. This accomplishment marks a key development in Sundial’s ongoing transition from bulk flower sales to branded cannabis product sales. In addition, in the first quarter of 2020, the Company began making sales of cannabis through its medical platform to a limited customer base.

Credit Facility Restructuring

At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement. As a result, as at December 31, 2019, the full principal amount of the Syndicated Credit Agreement and the Term Debt Facility were classified as current liabilities on the Company’s statement of financial position. Additionally, based on the Company’s most recent financial projections management is forecasting that it will be in violation of the Syndicated Credit Agreement debt covenants as at March 31, 2020, June 30, 2020 and September 30, 2020.

The Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for the corresponding breach and other administrative breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will enter into a definitive purchase agreement related to the sale of Bridge Farm and enter into a term sheet with the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.

In addition, the Company continues to have discussions with its lenders to provide certain amendments to the restrictive covenants and to defer principal payments for the remainder of 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar waivers in the past; however, there is no guarantee that we will be able to do so in the future. Any failure or delay in completing these amendments would have a significant negative impact on the Company’s liquidity and further impact the Company’s ability to operate as a going concern. In such a case, the Company would look to alternative sources of financing, delay capital expenditures and/or evaluate potential asset sales, and potentially could be forced to curtail or cease operations or seek relief under the applicable bankruptcy or insolvency laws.

The Company will require additional financing in the near term and has engaged financial advisors and is in advanced negotiations with potential capital providers including sources of debt and/or equity. These negotiations have been negatively impacted by the effects that the COVID-19 pandemic is having, and is expected to continue to have, on business and financial markets. The Company continues to advance these initiatives; however, there is no certainty as to their ultimate completion or the timing thereof.

Furthermore, the Company’s consolidated financial statements at December 31, 2019 have been prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company’s ability to continue as a going concern depends on Health Canada maintaining such licences, the continued support of its lenders, on the ability of the Company to achieve profitable operations and on raising additional financing to fund current and future operations.  These conditions, combined with the accumulated losses to date, indicate the existence

 

3

 


 

of a material uncertainty that casts significant doubt on the Company’s ability to continue as a going concern. As a result, the Company requires additional funding to meet its ongoing obligations and to fund anticipated operating losses. Any delay or failure to complete any additional financing would have a significant negative impact on the Company’s business, results of operations and financial condition, and the Company may be forced to curtail or cease operations or seek relief under the applicable bankruptcy or insolvency laws. See “Strategy & Outlook” below for more information.

STRATEGY & OUTLOOK

Sundial has made significant changes in early 2020 to position the Company for the next stage of its development. Sundial’s management team is focused on driving long-term profitable growth and has defined its primary objectives for 2020 as:

 

Deliver industry-leading, best-in-class products with a focus on inhalable products;

 

Optimize asset utilization and reduce costs; and

 

Improve working capital and overall liquidity.

The potential impact of the COVID-19 pandemic on Sundial’s operations, capital markets and the cannabis industry is currently unclear; however Sundial is fully committed to the safety of its workforce and focused on ensuring minimal disruption to its operations and cash flow.  Sundial’s operations have not been materially impacted to date but the Company has witnessed an increase in employee absenteeism.

Deliver industry-leading, best-in-class products with a focus on inhalable products

The majority of the Company’s harvests are now testing above 18% THC with several harvests testing well above 20%, proving that its ”craft-at-scale” modular growing approach is working.

Furthermore, the Company has seen the following improvements in its market results:

Top Leaf ranking amongst the highest pricing tiers across Canadian retail markets

Entire vape cartridge inventory of 19,200 cartridges sold on first day of Alberta vape sales

100% of vape inventory from first production run in December sold out

In Ontario, Sundial Cannabis’ Lemon Riot is a top 10 selling vape SKU and the fourth highest selling 510 vape cartridge, while Top Leaf’s Strawberry Cream is the second best-selling vape SKU within the “best” category

The recent Alberta Gaming, Liquor and Cannabis approval permitting cannabis vape sales in Alberta is expected to drive further growth.

Sundial launched a total of 105 SKUs in the adult-use market in the first quarter of 2020 to date, representing a 72% increase versus the fourth quarter of 2019.  New launches represent 74 flower SKU’s and 31 vape SKU’s under the Top Leaf, Sundial Cannabis, Palmetto and Grasslands brands. The Company plans to launch additional products in 2020 in Canada under its existing brand portfolio based on market conditions, customer feedback and data analytics. These are expected to include multiple tailored offerings of strains and product formats. While the Company’s product portfolio is expected to include edibles, sublingual oils and topical cannabis products, Sundial’s focus will be on premium inhalable products, including flower, pre-rolls and vape cartridges. The Company is currently scaling production of multiple new strains to commercial quantities and introducing new strains that will be marketed and sold under its brand portfolio.

Although Sundial’s primary sales growth is targeted to branded sales, the Company continues to enter into agreements to supply other licensed producers in Canada as part of its unbranded sales strategy. The Company has recently executed a wholesale agreement with one of the top five licensed Canadian producers, representing estimated net revenue of $9.3 million to be realized in the first half of 2020.

Optimize asset utilization and reduce costs

Following legalization, there was a shortfall in supply in the Canadian adult-use cannabis market leading to increased prices, increases in out-of-stock products and the consumers opting to buy cannabis on the illicit market. Sundial and other licensed producers responded by increasing capacity; however, in the fourth quarter of 2019, the increase in production combined with slower than expected retail store growth resulted in over-supply in the Canadian adult-use market. As a result, the Company and other licensed producers experienced pricing pressure and lower margins. The Company’s primary near term strategy is to optimize the use of its production capacity to match demand for its cannabis products.

In 2020, the Company commenced and continues to implement several streamlining and efficiency initiatives to align its cost structure and labor force costs with current market conditions. These initiatives include enhancement of facility workflows and processes, realignment of product lines and product formats to areas of stronger demand, workforce optimization and a heightened discipline in cost management. The efficiency improvements and cost saving initiatives are expected to result in annualized cost savings of approximately $10 to $15 million for fiscal 2020.

 

4

 


 

In light of current market conditions, the Company has temporarily suspended construction of its Merritt facility in British Columbia and is evaluating all options to maximize the value of its entire asset base. In January 2020, the Company entered into an agreement to sell its Kamloops, British Columbia, property for $2.1 million. The transaction closed on March 27, 2020. Sundial plans to limit capital expenditures to essential expenditures required to complete its Olds facility subject to available capital resources and liquidity.

Improve working capital and overall liquidity

The Company has retained financial advisors to assist in evaluating its available financial alternatives and engaged with its lenders to obtain amendments and further relief from the covenants in its indebtedness. The Company’s financing options include, without limitation:

Amending or waiving the covenants or other provisions of its debt

Deferring scheduled repayments on its credit facilities

Raising new capital in private or public debt and/or equity markets

Taking other actions to address its balance sheet either through a structured process or through mutual agreement with creditors.

Sundial is also considering other ways of monetizing its assets to increase liquidity, including selling cannabis inventory at below cost and entering into long-term supply agreements with other licensed producers.

As the legal cannabis market continues to evolve, Sundial has positioned its operations to adapt quickly. The Company’s craft-at-scale cultivation and modular growing approach allow for flexibility, while providing the high-quality products its customers have come to expect. Sundial believes the underlying fundamental drivers for long-term, sustainable growth in the cannabis industry remain strong.

As part of supporting these objectives, Sundial is undertaking a disciplined review of its portfolio of initiatives. Sundial will evaluate all assets, product lines and potential opportunities to ensure they fit with Sundial’s strategic direction and are expected to create value for shareholders.

OPERATIONAL AND FINANCIAL HIGHLIGHTS

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

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s, except as indicated)

 

2019

 

 

2018

 

Financial

 

 

 

 

 

 

 

 

Gross revenue

 

 

79,225

 

 

 

 

Net revenue

 

 

75,860

 

 

 

 

Gross margin before fair value adjustments

 

 

19,713

 

 

 

 

Loss from operations

 

 

(159,221

)

 

 

(27,695

)

Net loss

 

 

(271,629

)

 

 

(56,526

)

Per share, basic and diluted

 

$

(3.17

)

 

$

(0.82

)

Consolidated adjusted EBITDA (1)

 

 

(33,609

)

 

 

(17,562

)

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

45,337

 

 

 

14,121

 

Biological assets

 

 

14,309

 

 

 

876

 

Inventory

 

 

59,942

 

 

 

1,234

 

Property, plant and equipment

 

 

281,984

 

 

 

88,491

 

Total assets

 

 

510,036

 

 

 

110,200

 

 

 

 

 

 

 

 

 

 

Operational – Cannabis operations

 

 

 

 

 

 

 

 

Kilogram equivalents sold

 

 

17,293

 

 

 

 

Average gross selling price per gram (2)

 

$

3.87

 

 

$

 

Average net selling price per gram (3)

 

$

3.68

 

 

$

 

Kilograms harvested

 

 

34,012

 

 

 

337

 

 

5

 


 

(1)

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

(2)

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

(3)

Gross selling price net of excise tax.

OPERATIONAL RESULTS – CANNABIS OPERATIONS

Kilograms harvested

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

 

 

2019

 

 

2018

 

Kilograms harvested

 

 

34,012

 

 

 

337

 

For the year ended December 31, 2019, the Company harvested 34,012 kilograms of cannabis compared to 337 kilograms for the ten months ended December 31, 2018. The increase in kilograms harvested during the year ended December 31, 2019 was due to the production capacity added to the Olds facility with Pods 1, 2 and 3. Pod 1 contributed harvests for the entire year, while the first harvest from Pod 2 was in April and the first harvest from Pod 3 was in May. The kilograms harvested in 2018 represent the Company’s first harvests at its Rocky View facility and Olds facility, H Block.

Kilogram equivalents sold

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

 

 

2019

 

 

2018

 

Provincial boards

 

 

2,146

 

 

 

 

Medical

 

 

4

 

 

 

 

Licensed producers

 

 

15,143

 

 

 

 

Total kilogram equivalents sold

 

 

17,293

 

 

 

 

For the year ended December 31, 2019, the Company sold 17,293 kilogram equivalents of cannabis. No sales were made during the comparable period of 2018. The increase in kilograms sold is due to the Company commencing production in the third quarter of 2018 with sales beginning in the first quarter of 2019, as well as the ramp up in production with the licensing of 60 rooms (Pods 1 – 3) during the first quarter of 2019 and licensing of 14 rooms (H Block extension) in the second quarter of 2019.

Selling price

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($/gram equivalent)

 

2019

 

 

2018

 

Provincial boards

 

$

6.24

 

 

$

 

Medical

 

$

6.00

 

 

$

 

Licensed producers

 

$

3.53

 

 

$

 

Average gross selling price

 

$

3.87

 

 

$

 

Excise taxes

 

$

(0.19

)

 

$

 

Average net selling price

 

$

3.68

 

 

$

 

For the year ended December 31, 2019 the average net selling price was $3.68 per gram equivalent. There was no average net selling price for the comparable period of 2018 as the Company began production in the third quarter of 2018 with sales commencing in the first quarter of 2019.

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

Excise taxes are the federal excise duties and additional provincial or territorial duties payable on adult-use cannabis products. Excise taxes for the year ended December 31, 2019 are only calculated based on adult-use cannabis sales to provincial boards.

 

6

 


 

Cash cost to produce

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s, except as indicated)

 

2019

 

 

2018

 

Cost of sales

 

 

46,721

 

 

 

 

Adjustments

 

 

 

 

 

 

 

 

Depreciation

 

 

2,693

 

 

 

 

Cash cost of sales

 

 

44,028

 

 

 

 

Packaging costs

 

 

1,576

 

 

 

 

Cash cost to produce (1)

 

 

42,452

 

 

 

 

Cash cost to produce per gram

 

$

2.45

 

 

$

 

(1)

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

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

For the year ended December 31, 2019 the cash cost to produce was $42.5 million. There was no cash cost to produce or cost of sales for the comparable periods of 2018 as the Company began production in the third quarter of 2018 with sales commencing in the first quarter of 2019.

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

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

C&P costs added to:

 

 

 

 

 

 

 

 

Biological assets

 

 

46,848

 

 

 

2,683

 

Inventory

 

 

14,431

 

 

 

 

Total C&P costs (1)

 

 

61,279

 

 

 

2,683

 

(1)

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

C&P costs are defined as the costs related to growing, harvesting, processing and selling cannabis. Management believes that C&P costs are the most complete measure of operational performance at the facilities. C&P costs are comprised of labour, power, nutrients, growing supplies, supplies and tools, transportation, maintenance and consumables. C&P costs are initially added to biological assets and inventory and are only reflected on the statements of loss and comprehensive loss within cost of sales as sales of cannabis are recognized.

For the year ended December 31, 2019, C&P costs were $61.3 million. The most significant components of C&P costs for the year ended December 31, 2019 were labour and power. C&P costs during the ten months ended December 31, 2018 were minor as the Company began production in the third quarter of 2018.

CONSOLIDATED FINANCIAL RESULTS

The Company’s reportable segments are organized by product type are and comprised of two reportable operating segments: cannabis operations and ornamental flower operations. Cannabis operations include the cultivation, distribution and sale of cannabis for the adult-use and medical markets in Canada. Ornamental flower operations include producing and marketing edible herb and ornamental flowers in the United Kingdom through Bridge Farm. Certain overhead expenses not directly attributable to either the cannabis operations segment or ornamental flower operations segment are reported in a third segment referred to as “Corporate.

 

7

 


 

The following table summarizes consolidated financial results for the year ended December 31, 2019.

As at December 31, 2019

Cannabis

 

Ornamental

Flowers

 

Corporate

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

375,849

 

 

134,187

 

 

 

 

510,036

 

Total liabilities

 

227,024

 

 

61,814

 

 

 

 

288,838

 

Capital expenditures

 

110,271

 

 

27,864

 

 

 

 

138,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

63,562

 

 

12,298

 

 

 

 

75,860

 

Cost of sales

 

46,721

 

 

9,426

 

 

 

 

56,147

 

Gross margin before fair value adjustments

 

16,841

 

 

2,872

 

 

 

 

19,713

 

Change in fair value of biological assets

 

30,340

 

 

386

 

 

 

 

30,726

 

Change in fair value of biological assets realized through inventory sold

 

(10,685

)

 

 

 

 

 

(10,685

)

Gross margin

 

36,496

 

 

3,258

 

 

 

 

39,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

35,639

 

 

5,515

 

 

3,295

 

 

44,449

 

Other expenses

 

11,417

 

 

(959

)

 

 

 

10,458

 

Depreciation and amortization

 

595

 

 

3,482

 

 

 

 

4,077

 

Share-based compensation

 

15,809

 

 

 

 

23,715

 

 

39,524

 

Asset impairment

 

162

 

 

 

 

 

 

162

 

Goodwill impairment

 

 

 

100,305

 

 

 

 

100,305

 

Loss from operations

 

(27,126

)

 

(105,085

)

 

(27,010

)

 

(159,221

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction costs

 

 

 

 

 

(10,069

)

 

(10,069

)

Finance costs

 

(27,781

)

 

(417

)

 

 

 

(28,198

)

Loss on financial obligation

 

(60,308

)

 

 

 

 

 

(60,308

)

Other

 

8

 

 

(18,467

)

 

 

 

(18,459

)

Loss before tax

 

(115,207

)

 

(123,969

)

 

(37,079

)

 

(276,255

)

 

SEGMENTED FINANCIAL RESULTS – CANNABIS OPERATIONS

Revenue

Revenue by form

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Revenue from dried flower

 

 

58,246

 

 

 

 

Revenue from vapes

 

 

504

 

 

 

 

Revenue from oil

 

 

8,177

 

 

 

 

Gross revenue

 

 

66,927

 

 

 

 

 

8

 


 

Revenue by channel

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s, except as indicated)

 

2019

 

 

2018

 

Provincial boards

 

 

13,386

 

 

 

 

Medical

 

 

24

 

 

 

 

Licensed producers

 

 

53,517

 

 

 

 

Gross revenue

 

 

66,927

 

 

 

 

Excise taxes

 

 

(3,365

)

 

 

 

Net revenue

 

 

63,562

 

 

 

 

Gross revenue per gram sold

 

$

3.87

 

 

$

 

Net revenue per gram sold

 

$

3.68

 

 

$

 

The Company’s revenue comprises bulk and packaged sales under the Cannabis Act pursuant to its supply agreements with Canadian provincial regulatory authorities and to other licensed producers (“LPs”). Although most of the Company’s sales in the year ended December 31, 2019 were to other LPs, the Company expects these sales to decrease as a percentage of total sales going forward.

Gross revenue for the year ended December 31, 2019 was $66.9 million. No revenue was generated in the comparable periods of 2018. Revenues for 2019 generated from provincial boards and LPs were derived from adult-use (Play) cannabis sales. The Company did not make any material sales of medical cannabis (Heal) in the year ended December 31, 2019. The increase in gross revenue for the year ended December 31, 2019 compared to the ten months ended December 31, 2018 is due to the Company commencing production in the third quarter of 2018 with sales beginning in January 2019, as well as the ramp up in production with the expansion completed of the Olds facility.

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

Excise taxes for the year ended December 31, 2019 were $3.4 million. There were no excise taxes in the comparable periods of 2018. The increase in excise taxes is due to the Company commencing sales of adult-use cannabis in the first quarter of 2019.

Cost of sales

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s, except as indicated)

 

2019

 

 

2018

 

Cost of sales

 

 

46,721

 

 

 

 

Cost of sales per gram sold

 

$

2.70

 

 

$

 

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

Cost of sales for the year ended December 31, 2019 were $46.7 million. There was no cost of sales in the comparable periods of 2018. The increase in cost of sales is associated with sales of adult-use cannabis commencing in the first quarter of 2019.

 

9

 


 

Gross margin

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Net revenue

 

 

63,562

 

 

 

 

Cost of sales

 

 

46,721

 

 

 

 

Gross margin before fair value adjustments (1)

 

 

16,841

 

 

 

 

Change in fair value of biological assets

 

 

30,340

 

 

 

(1,280

)

Change in fair value of biological assets realized through inventory sold

 

 

(10,685

)

 

 

 

Gross margin

 

 

36,496

 

 

 

(1,280

)

(1)

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

Gross margin before fair value adjustments

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

Gross margin before fair value adjustments for the year ended December 31, 2019 was $16.8 million. There was no gross margin before value adjustments in the comparable periods of 2018.

Change in fair value of biological assets

Change in fair value of biological assets for the year ended December 31, 2019 was an increase of $30.3 million compared to a decrease of $1.3 million for the ten months ended December 31, 2018. The increase in fair value was due to an increase in the number of plants, an increase in the weighted average maturity of the stage of growth and an increase in the expected selling price less costs to sell per gram.

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

Change in fair value of biological assets realized through inventory sold

The change in fair value of biological assets realized through inventory sold for the year ended December 31, 2019 was loss of $10.7 million. There was no change in fair value of biological assets realized through inventory sold in the comparable periods of 2018 as there were no sales in 2018.

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

General and administrative

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Salaries and wages

 

 

15,262

 

 

 

3,850

 

Consulting fees

 

 

6,896

 

 

 

1,647

 

Office and general

 

 

9,533

 

 

 

1,735

 

Professional fees

 

 

3,559

 

 

 

877

 

Director compensation

 

 

188

 

 

 

30

 

Other

 

 

3,496

 

 

 

170

 

 

 

 

38,934

 

 

 

8,309

 

General and administrative expenses consist of salaries and wages, consulting fees, office and general expenses, professional fees, director compensation, rent and certain other expenses.

General and administrative expenses for the year ended December 31, 2019 were $38.9 million compared to $8.3 million for the ten months ended December 31, 2018. The increase of $30.6 million is due to a significant increase in management, support and administrative staff, professional fees relating to accounting and audit, investor relation costs and other office services and overhead. These increases in general and administrative expenses were to support growth and expansion initiatives and as a result of becoming a public company.

 

10

 


 

Sales and marketing

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Sales and marketing

 

 

8,068

 

 

 

2,380

 

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

Sales and marketing expenses for the year ended December 31, 2019 were $8.1 million compared to $2.4 million for the ten months ended December 31, 2018. The increase of $5.7 million is due to expenses related to branding, promotion, trade shows, marketing design and public relations associated with the introduction of new product lines and the ramp up of cannabis production and sales.

Research and development

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Research and development

 

 

2,410

 

 

 

275

 

Research and development expenses for the year ended December 31, 2019 were $2.4 million compared to $0.3 million for the ten months ended December 31, 2018. The increase of $2.1 million is due to new product research in connection with the acquisition by the Company of Pathway Rx and of the world-wide proprietary rights, including copyrights and trademarks, to a portfolio of brand names, designs, domain names and other intellectual property associated with the Top Leaf, BC Weed Co. and certain other brands pursuant to the Sun 8 Agreement. See Other Significant Transactions – Acquisition of Brands in the “LIQUIDITY AND CAPITAL RESOURCES” section of this MD&A.

Pre-production expenses

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Pre-production expenses

 

 

 

 

 

6,457

 

The Company’s operations were in a pre-commercial phase until the first quarter of 2019, following the effectiveness of Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts (the “Cannabis Act”) on October 17, 2018. As a result, all costs related to cannabis production during such pre-commercial phase were expensed as pre-production expenses. Cultivation and production costs are now capitalized directly to biological assets and inventory. Prior to the first quarter of 2019, all costs related to cannabis production during the pre-commercial phase were expensed.

Loss on financial obligation

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Loss on financial obligation

 

 

60,308

 

 

 

27,017

 

In connection with the termination of the Investment and Royalty Agreement, the Company recognized a loss on financial obligation of $59.6 million for the year ended December 31, 2019, for consideration valued in excess of the carrying amount of the related financial obligation (see Other significant transactions – Investment and Royalty Agreement - in the “LIQUIDITY AND CAPITAL RESOURCES” section of this MD&A). Additional losses of $0.7 million during the year ended December 31, 2019 were due to fair value adjustments recognized during the period prior to terminating the Investment and Royalty Agreement. Loss on financial obligation of $27.0 million for the ten months ended December 31, 2018 was due to fair value adjustments of $8.5 million and an $18.5 million finance charge representing the present value of the royalty payments.

Income tax recovery

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Income tax recovery

 

 

3,609

 

 

 

 

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

 

11

 


 

Income tax recovery for the year ended December 31, 2019 was $3.6 million compared to nil for the ten months ended December 31, 2018. The increase in income tax recovery is due to the Company’s acquisition of a 50% interest in Pathway Rx. Upon acquisition of the Company’s 50% interest in Pathway Rx, $3.6 million of the purchase price was allocated to a deferred tax liability. This liability was subsequently adjusted to nil, with a corresponding adjustment of $3.6 million recorded to income tax recovery, on the basis that the Company and Pathway Rx are subject to income tax under the same taxation authority.

Net loss from cannabis operations

Net loss from cannabis operations for the year ended December 31, 2019 was $147.1 million compared to a net loss of $56.5 million for the ten months ended December 31, 2018. The increased loss was due to increases in general and administrative expense, sales and marketing expense, research and development expense, share-based compensation expense, transaction costs, finance costs and loss on financial obligation partially offset by a higher gross margin and nil pre-production expenses.

Adjusted EBITDA from Cannabis Operations

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

Adjusted EBITDA from cannabis operations was a loss of $26.9 million for the year ended December 31, 2019 compared to a loss of $17.6 million for the ten months ended December 31, 2018. The increase loss was due to the following:

 

Increase in cost of sales due to the Company commencing sales of adult-use cannabis in the first quarter of 2019;

 

Increase in general and administrative expenses due to a significant increase in support and administrative staff and larger management team, increased professional fees relating to accounting and audit and other services and overhead; and

 

Increase in sales and marketing expense due to branding, promotion, trade shows, marketing design and public relations associated with the introduction of new product lines and the ramp up of production.

In addition, the loss was partially offset by the following:

 

Increase in net revenue due to the Company commencing sales of adult-use cannabis in the first quarter of 2019; and

 

Nil pre-production expenses in 2019 due to the fact that the Company commenced commercial production in the first quarter of 2019.

SEGMENTED FINANCIAL RESULTS – ORNAMENTAL FLOWER OPERATIONS

The Company’s ornamental flower operations segment is comprised of the operations of Bridge Farm and includes the post acquisition results.

During the period July 2, 2019 to December 31, 2019, the Company recorded revenues of $12.3 million and a net loss of $124.5 million, which includes an impairment to goodwill of $100.3 million.

 

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

Adjusted EBITDA from ornamental flower operations was a loss of $3.5 million for the year ended December 31, 2019 and was generated from Bridge Farm’s legacy business of producing and marketing edible herb and ornamental flowers to customers in the United Kingdom. The Company expects to retain a portion of Bridge Farm’s existing ornamental flower and edible herbs business and cultivation operations in compliance with debt covenants and until such time as the Company decides to transition more space to hemp cultivation and CBD extraction in order to meet demand for its CBD products, subject to certain regulatory, licensing and other restrictions related to such transition and its review of strategic alternatives for the Bridge Farm business (see Acquisition of Bridge Farm in the “LIQUIDITY AND CAPITAL RESOURCES” section of this MD&A).

 

12

 


 

OTHER FINANCIAL RESULTS – CONSOLIDATED

Share-based compensation

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Simple warrants

 

 

24,741

 

 

 

5,029

 

Performance warrants

 

 

11,023

 

 

 

1,860

 

Stock options

 

 

101

 

 

 

 

Restricted share units

 

 

220

 

 

 

 

Deferred share units

 

 

1,119

 

 

 

 

Shares issued for services

 

 

2,320

 

 

 

521

 

 

 

 

39,524

 

 

 

7,410

 

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

Fair value pre-IPO

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

Fair value post-IPO

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

Share-based compensation expense for the year ended December 31, 2019 was $39.5 million compared to $7.4 million for the ten months ended December 31, 2018. The increase of $32.1 million is due to the accelerated vesting of share-based compensation awards upon the completion of the IPO, increase in the value of the share-based compensation awards granted and an increase in the number of awards granted. Share-based compensation expense for the year ended December 31, 2019 included the issuance of 4,795,200 simple warrants at an average exercise price of $6.32, 723,200 performance warrants at an average exercise price of $12.23, 623,850 stock options at an average exercise price of $4.33, 378,080 DSUs and 107,543 RSUs. Share-based compensation expense for the ten months ended December 31, 2018 included the issuance of 3,535,200 simple warrants at an average exercise price of $2.61 and 2,188,800 performance warrants at an average exercise price of $2.48.

Transaction costs

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Transaction costs

 

 

10,069

 

 

 

 

Transaction costs of $10.1 million for the year ended December 31, 2019 include costs related to acquiring Bridge Farm and costs related to the IPO.

 

13

 


 

 

Finance costs

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Cash finance expense

 

 

 

 

 

 

 

 

Interest on Syndicated Credit Agreement

 

 

1,746

 

 

 

437

 

Interest on Credit Facilities

 

 

1,818

 

 

 

 

Interest on Term Debt Facility

 

 

5,714

 

 

 

 

Interest on Senior Convertible Notes

 

 

375

 

 

 

 

Interest on Convertible Notes

 

 

2,574

 

 

 

421

 

Interest on other debt

 

 

1,651

 

 

 

1,659

 

Other finance costs

 

 

2,659

 

 

 

399

 

 

 

 

16,537

 

 

 

2,916

 

Non-cash finance expense

 

 

 

 

 

 

 

 

Accretion

 

 

6,696

 

 

 

594

 

Amortization of debt issue costs

 

 

1,730

 

 

 

172

 

Interest on Senior Convertible Notes

 

 

1,903

 

 

 

 

Loss on derivative liabilities

 

 

1,649

 

 

 

 

Loss on extinguishment of debt issue costs

 

 

488

 

 

 

 

Other

 

 

475

 

 

 

151

 

 

 

 

12,941

 

 

 

917

 

Less: interest capitalized relating to construction in progress

 

 

(1,280

)

 

 

(2,036

)

 

 

 

28,198

 

 

 

1,797

 

Finance costs include accretion expense associated with the Company’s Senior Convertible Notes, Convertible Notes, interest on the Company’s indebtedness and certain other expenses, net of capitalized interest related to construction in progress.

Finance costs for the year ended December 31, 2019 were $28.2 million compared to $1.8 million for the ten months ended December 31, 2018. The increase of $26.4 million is due to interest on the Company’s debt instruments, accretion on long-term debt and Senior Convertible Notes and Convertible Notes, amortization of debt issue costs and other expenses relating to outstanding debt instruments and facilities. The Company’s Credit Facilities were used for the construction of the production facilities and the related interest costs are now being expensed as the related production facilities are fully licensed for operational activities. In the prior period, the production facilities were under construction and the related interest cost was capitalized to construction in progress.

SELECTED QUARTERLY INFORMATION

The following table summarizes selected consolidated operating and financial information of the Company for the preceding eight quarters.

 

 

2019

 

 

2018

 

($000s, except as indicated)

 

Q4

 

 

Q3

 

 

Q2

 

 

Q1

 

 

Q4

 

 

Q3

 

 

Q2

 

 

Q1

 

Gross revenue

 

 

23,069

 

 

 

34,181

 

 

 

20,284

 

 

 

1,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(145,086

)

 

 

(97,491

)

 

 

(12,350

)

 

 

(16,702

)

 

 

(35,951

)

 

 

(13,155

)

 

 

(5,827

)

 

 

(7,148

)

Per share, basic and diluted

 

$

(1.36

)

 

$

(1.06

)

 

$

(0.17

)

 

$

(0.24

)

 

$

(0.49

)

 

$

(0.18

)

 

$

(0.09

)

 

$

(0.12

)

During the eight most recent quarters the following items have had a significant impact on the Company’s results:

commencing production of cannabis in the third quarter of 2018 with sales beginning in the first quarter of 2019;

significantly increasing production capacity with the expansions to the Olds facility;

increasing the number of cannabis plants and weighted average maturity of their stage of growth;

increasing staffing to support growth and expansion initiatives;

increasing marketing, promotion and branding activities relating to the commencement of adult-use cannabis;

acquisition of Bridge Farm;

terminating the Investment and Royalty Agreement; and

non-cash impairment charge of goodwill relating to Bridge Farm’s CBD cash generating unit.

 

14

 


 

FOURTH QUARTER 2019

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

 

Three months ended

December 31

 

Three months ended September 30

 

Three months ended

December 31

 

 

2019

 

2019

 

2018

 

 

 

 

 

 

 

 

 

 

 

Operational - Cannabis

 

 

 

 

 

 

 

 

 

Kilograms harvested

 

10,897

 

 

11,668

 

 

316

 

Total kilogram equivalents sold

 

4,285

 

 

7,944

 

 

 

Cash cost to produce (1)

 

13,279

 

 

18,850

 

 

 

Total C&P costs (2)

 

23,223

 

 

16,282

 

 

2,683

 

 

 

 

 

 

 

 

 

 

 

Financial - Cannabis

 

 

 

 

 

 

 

 

 

Gross revenue

 

16,262

 

 

28,690

 

 

 

Cost of sales

 

15,259

 

 

20,250

 

 

 

Gross margin before fair value adjustments (3)

 

(516

)

 

7,771

 

 

 

General and administrative

 

15,074

 

 

12,415

 

 

4,357

 

Sales and marketing

 

3,267

 

 

2,056

 

 

910

 

Net loss

 

(30,342

)

 

(87,695

)

 

(35,951

)

Adjusted EBITDA from cannabis operations (4)

 

(17,100

)

 

(6,243

)

 

(9,048

)

 

 

 

 

 

 

 

 

 

 

Financial - Consolidated

 

 

 

 

 

 

 

 

 

Share-based compensation

 

4,972

 

 

8,398

 

 

2,423

 

Transaction costs

 

2,318

 

 

7,751

 

 

 

Finance costs

 

5,497

 

 

11,951

 

 

572

 

Capital expenditures

 

25,777

 

 

48,321

 

 

21,951

 

(1)

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

(2)

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

(3)

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

(4)

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

Fourth quarter 2019 compared to third quarter 2019

For the three months ended December 31, 2019, the Company harvested 10,897 kilograms of cannabis compared to 11,668 kilograms of cannabis for the three months ended September 30, 2019. The decrease in kilograms harvested was due to newer strains having slightly lower yields per square foot.

For the three months ended December 31, 2019, the Company sold 4,285 kilogram equivalents of cannabis compared to 7,944 kilogram equivalents for the three months ended September 30, 2019. The decrease in kilogram equivalents sold was due to lower bulk flower sales to other LPs due to lower demand in the Canadian adult-use market, partially offset by sales of branded products to provincial boards, which doubled in comparison to the prior quarter.

Cash cost to produce for the three months ended December 31, 2019 was $13.3 million compared to $18.9 million for the three months ended September 30, 2019. The decrease in cash cost to produce from the prior quarter was primarily related to the decrease in total kilogram equivalents sold.

For the three months ended December 31, 2019, C&P costs were $23.2 million compared to $16.3 million for the three months ended September 30, 2019. The increase in C&P costs from the prior quarter was primarily due to higher direct labour and power costs.

Gross revenue for the three months ended December 31, 2019 was $16.3 million compared to $28.7 million for the three months ended September 30, 2019. While cannabis gross revenue from sales of branded product to the provincial boards increased over the prior quarter, such increase was more than offset by less gross revenue due to fewer unbranded sales to other LPs.

Cost of sales for the three months ended December 31, 2019 was $15.3 million and gross margin before fair value adjustments was $(0.5) million, compared to $20.3 million and $7.8 million, respectively, for the three months ended September 30, 2019. Cost of sales decreased from the prior quarter due to the decrease in gross revenue in the period. Gross margin before fair value adjustments was negatively impacted by additional costs related to replacing product-in-kind and a provision for inventory

 

15

 


 

obsolescence. These additional costs resulted in negative gross margin before fair value adjustments in the fourth quarter of 2019.

General and administrative expenses for the three months ended December 31, 2019 were $15.1 million compared to $12.4 million for the three months ended September 30, 2019. The increase from the prior quarter was due to employee compensation costs, royalties on Top Leaf products, and a provision for expected credit losses.

Sales and marketing expenses for the three months ended December 31, 2019 were $3.3 million compared to $2.1 million for the three months ended September 30, 2019. The increase from the prior quarter was due to increased marketing, events and media expenses.

Net loss from cannabis operations for the three months ended December 31, 2019 was $30.3 million compared to a net loss of $87.7 million for the three months ended September 30, 2019. The decrease in net loss was due to decreases in share-based compensation, transaction costs, finance costs and loss on financial obligation partially offset by lower a gross margin and higher general and administrative expenses. Gross margin decreased due to lower revenues (partially offset by lower cost of sales) in the fourth quarter and general and administrative expenses increased due to employee compensation costs, royalties on Top Leaf products and a provision for expected credit losses.

Adjusted EBITDA from cannabis operations was a loss of $17.1 million for the three months ended December 31, 2019 compared to a loss of $6.2 million for the three months ended September 30, 2019. The increased loss was due to a decrease in net revenue, increases in cost of sales, general and administrative expenses and sales and marketing expenses, and for other reasons noted above.

Share-based compensation expense for the three months ended December 31, 2019 was $5.0 million compared to $8.4 million for the three months ended September 30, 2019. The decrease from the prior quarter was due to a decrease in the number of awards granted and the accelerated vesting of share-based compensation awards that occurred in the prior quarter upon completion of the IPO. Share-based compensation expense for the three months ended December 31, 2019 included the issuance of 623,850 stock options at an average exercise price of $4.33, 378,080 DSUs and 107,543 RSUs. Share-based compensation expense for the three months ended September 30, 2019 included the issuance of 1,232,000 simple warrants at an average exercise price of $6.45 and 155,200 performance warrants at an average exercise price of $8.33.

Transaction costs for the three months ended December 31, 2019 were $2.3 million compared to $7.8 million for the three months ended September 30, 2019 and include costs related to the acquisition of Bridge Farm and the IPO.

Finance costs for the three months ended December 31, 2019 were $5.5 million compared to $12.0 million for the three months ended September 30, 2019. The decrease in finance costs was primarily attributable to the Convertible Notes maturing and the Senior Convertible Notes being converted into common shares in the prior quarter as well as the incurrence of interest expense and accretion relating to the Convertible Notes and Senior Convertible Notes in the prior quarter, which was minimal in the three months ended December 31, 2019.

During the three months ended December 31, 2019, the Company incurred capital expenditures of $25.8 million compared to $48.3 million for the three months ended September 30, 2019. Capital expenditures in the fourth quarter included approximately $13.5 million related to the construction and build-out of Pods 4 and 5 and the extraction and processing facility at Olds (as compared to approximately $27.7 million in the prior quarter), approximately $5.4 million related to the development of the Merritt facility (as compared to nil in the prior quarter) and approximately $5.2 million related to the development of Clay Lake Phase 2 (as compared to approximately $20.7 million in the prior quarter).

Fourth quarter 2019 compared to fourth quarter 2018

Increases in kilograms harvested, kilogram equivalents sold, cash costs to produce, C&P costs, gross revenue and cost of sales for the three months ended December 31, 2019 compared to the three months ended December 31, 2018 are due to the Company beginning production in the third quarter of 2018 with sales commencing in the first quarter of 2019, and the ramp up in cannabis production throughout 2019 with the expansion of the Olds facility.

General and administrative expenses for the three months ended December 31, 2019 were $15.1 million compared to $4.4 million for the three months ended December 31, 2018. The increase of $10.7 million was due to a significant increase in management, support and administrative staff, professional fees relating to accounting and audit, investor relations costs and other office services and overhead.

Sales and marketing expenses for the three months ended December 31, 2019 were $3.3 million compared to $0.9 million for the three months ended December 31, 2018. The increase of $2.4 million was due to expenses related to branding, promotion and public relations associated with the introduction of new product lines.

Finance costs for the three months ended December 31, 2019 were $5.5 million compared to $0.6 million for the three months ended December 31, 2018. The increase of $4.9 million was due to interest expense on the Company’s Syndicated Credit Agreement, interest expense on the Term Debt Facility and other expenses relating to outstanding debt instruments and facilities.

 

16

 


 

There was no loss on financial obligation during the three months ended December 31, 2019 compared to a loss of $21.5 million for the three months ended December 31, 2018. The loss in the prior year period was due to fair value adjustments and a finance charge representing the present value of the royalty payments under the Investment and Royalty Agreement.

Net loss from cannabis operations for the three months ended December 31, 2019 was $30.3 million compared to a net loss of $35.9 million for the three months ended December 31, 2018. The decreased loss was due to increases in gross margin, nil pre-production expenses, and nil loss on financial obligation partially offset by increases in general and administrative expense, sales and marketing expense, share-based compensation expense, transaction costs and finance costs. Gross margin increased due to the Company commencing sales in the first quarter of 2019. Increases in general and administrative expense and sales and marketing expense were due to increased staffing costs to support growth and expansion initiatives and increased expenses related to branding, promotion and public relations associated with the introduction of new product lines. Share-based compensation expense increased due to an increase in the value of share-based compensation awards granted and an increase in the number of awards granted. Transaction costs related to the acquisition of Bridge Farm and the IPO and there were no transaction costs in 2018. Finance costs increased due to interest expense on the Company’s Syndicated Credit Agreement, interest expense on the Term Debt Facility and other expenses relating to outstanding debt instruments and facilities.

Adjusted EBITDA from cannabis operations was a loss of $17.1 million for the three months ended December 31, 2019 compared to a loss of $9.0 million for the three months ended December 31, 2018. The increase in loss was due to the following:

 

Increase in cost of sales due to the Company commencing sales of adult-use cannabis in the first quarter of 2019;

 

Increase in general and administrative expenses due to a significant increase in support and administrative staff and larger management team, increased professional fees relating to accounting and audit and other services and overhead; and

 

Increase in sales and marketing expense due to branding, promotion, trade shows, marketing design and public relations associated with the introduction of new product lines and the ramp up of production.

Loss was partially offset by the following:

 

Increase in net revenue due to the Company commencing sales of adult-use cannabis in the first quarter of 2019; and

 

Nil pre-production expenses in 2019 due to the fact that the Company commenced commercial production in the first quarter of 2019.

Share-based compensation expense for the three months ended December 31, 2019 was $5.0 million compared to $2.4 million for the three months ended December 31, 2018. The increase of $2.6 million is due to the increase in the value of the share-based compensation awards granted and an increase in the number of awards granted. Share-based compensation expense for the three months ended December 31, 2019 included the issuance of 623,850 stock options at an average exercise price of $4.33, 378,080 DSUs and 107,543 RSUs. Share-based compensation expense for the three months ended December 31, 2018 included the issuance of 1,031,200 simple warrants at an average exercise price of $6.68 and 244,000 performance warrants at an average exercise price of $5.54.

SELECTED ANNUAL INFORMATION

The following table summarizes selected operation and financial information of the Company for the preceding three financial years.

 

 

Ten months

ended Dec 31

 

 

Twelve months ended Feb 28

 

 

Twelve months ended Feb 28

 

($000s, except as indicated)

 

2018

 

 

2018

 

 

2017

 

Gross revenue

 

 

 

 

 

 

 

 

 

Net loss

 

 

(56,526

)

 

 

(12,995

)

 

 

(1,545

)

Per share, basic and diluted

 

$

(0.82

)

 

$

(0.23

)

 

$

(0.04

)

Total assets

 

 

110,200

 

 

 

25,754

 

 

 

12,666

 

Total non-current liabilities

 

 

48,450

 

 

 

116

 

 

 

17

 

Net loss

During the ten months ended December 31, 2018, net loss increased by $43.5 million due to higher finance expenses, general and administrative expenses, pre-production costs, share-based compensation and a decrease in the fair value of biological assets. The increase in finance expenses related to costs associated with the Investment and Royalty Agreement between the Company and its former Executive Chairman. The increase in general and administrative expenses and share-based compensation related to increased staffing to support growth and expansion initiatives and increased share-based compensation awards granted to employees. The increase in pre-production costs related to the preparation for the commencement of adult-use cannabis sales in the fourth quarter of 2018 following the effectiveness of the Cannabis Act on October 17, 2018.

During the year ended February 28, 2018, net loss increased by $11.5 million due to higher share-based compensation expense, general and administrative expenses, pre-production expenses and selling and marketing expenses. The increase in share-

 

17

 


 

based compensation was due to the initial share-based compensation awards granted during the year as no awards were granted during the prior year. The increase in general and administrative expenses was due to increased staffing in advance of the Cannabis Act. The increase in pre-production costs related to costs in preparation for the commencement of adult-use cannabis. The increase in sales and marketing expenses related to brand development and promotional expenses in advance of the Cannabis Act.

Total assets

During the ten months ended December 31, 2018, total assets increased by $84.4 million. The increase was due to increases in cash and property, plant and equipment. Cash increased due to proceeds from the Credit Facilities, issuing the Convertible Notes, and issuing common shares for cash. Property, plant and equipment increased due to construction of the Olds facility and related equipment.

During the year ended February 28, 2018, total assets increased by $13.1 million. The increase was due to increases in cash and property, plant and equipment. Cash increased due to entering into and drawing on the Note Agreement, issuing common shares for cash and issuing common shares under the related party credit agreement. Property, plant and equipment increased due to construction of the Olds facility and related equipment.

Total non-current liabilities

During the ten months ended December 31, 2018, total non-current liabilities increased by $48.3 million. The increase was due to the Company entering into the Credit Facilities and drawing $32.8 million under Facility 1 and Facility 4 of the Commitment Letter and entering into the Investment and Royalty Agreement.

During the year ended February 28, 2018, total non-current liabilities increased by $99 thousand. The increase was due to the non-current portion of additional equipment under finance leases.

LIQUIDITY AND CAPITAL RESOURCES

($000s)

 

December 31, 2019

 

 

December 31, 2018

 

Cash and cash equivalents

 

 

45,337

 

 

 

14,121

 

 

 

 

 

 

 

 

 

 

Syndicated Credit Agreement (a)

 

 

82,910

 

 

 

 

Facility 1, 3 & 4 (b)

 

 

 

 

 

32,159

 

Facility 5 & 7 (b)

 

 

 

 

 

 

Term Debt Facility (c)

 

 

95,003

 

 

 

 

Credit Agreement (d)

 

 

 

 

 

 

Loan Agreement (e)

 

 

 

 

 

7,000

 

Note Agreement (f)

 

 

 

 

 

8,546

 

Promissory Note (g)

 

 

 

 

 

6,931

 

Convertible Notes (h)

 

 

 

 

 

25,449

 

Senior Convertible Notes (h)

 

 

 

 

 

 

 

 

 

177,913

 

 

 

80,085

 

Capital resources are financing resources available to the Company and are defined as the Company’s debt and equity. The Company manages its capital resources with the objective of maximizing shareholder value and sustaining future development of the business. The Company manages its capital structure and adjusts it, based on the funds available to the Company, in order to support the Company’s activities. The Company may adjust capital spending, issue new shares, issue new debt or repay existing debt.

The Company’s primary need for liquidity is to fund capital expenditures, working capital requirements, debt service requirements and for general corporate purposes. The Company’s primary source of liquidity historically has been from funds received from the proceeds of common share issuances and debt financing. The Company’s ability to fund operations, make planned capital expenditures and meet debt service requirements depends on future operating performance and cash flows, as well as the availability of future financing – all of which is subject to prevailing economic conditions and financial, business and other factors.

At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement, which caused a cross-acceleration under its Term Debt Facility. As a result, as at December 31, 2019, the full principal amount of the Syndicated Credit Agreement and the Term Debt Facility was classified as a current liability on the Company’s statement of financial position.

Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for the corresponding breach and other administrative breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of

 

18

 


 

the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.

In addition, we anticipate that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar waivers in the past; however, there is no guarantee that we will be able to do so in the future.

The audited consolidated financial statements for the year ended December 31, 2019 contain a going concern qualification. The Company is an early-stage company and has accumulated significant losses to date. Furthermore, the Company and certain of its subsidiaries have a limited operating history and a history of negative cash flow from operating activities. These conditions, combined with the Company’s dependence on third party financing in the near term to fund its business plan, indicate the existence of a material uncertainty that casts significant doubt on the Company’s ability to continue as a going concern.

Management believes its current capital resources and its ability to manage cash flow and working capital levels will require the Company to seek future additional financing to allow it to meet its obligations, to make debt service requirements, and to fund the other needs of its business. However, no assurance can be given that future sources of capital will be available. The ability of the Company to continue as a going concern is dependent on raising capital to fund its business plan and ultimately to attain profitable operations. Any delay or failure to complete any additional financing would have a material adverse effect on the Company’s business, results of operations and financial condition, and the Company may be forced to reduce or cease its operations or seek relief under applicable bankruptcy law.

Debt

As at December 31, 2019, the Company’s available debt facilities, as detailed below, were fully drawn.

a)

Syndicated Credit Agreement

On August 29, 2019, the Company entered into a Syndicated Credit Agreement initially providing for $90.0 million of secured debt facilities comprised of a $84.0 million senior secured term credit facility and a $6.0 million senior secured revolving operating facility (“Syndicated Credit Agreement”). Under the terms of the agreement, the Company has the right to obtain an additional facility, on a project by project basis, from existing or additional lenders, up to a maximum of $50.0 million subject to the consent of the lenders and satisfaction of certain other conditions.

Principal will be repaid in quarterly payments, beginning at the end of the Company’s first fiscal quarter following the covenant conversion date of March 31, 2020, amortized over a 10-year period, with the balance of all borrowings outstanding being due and payable in full on August 27, 2021. Interest will be incurred at either (i) prime plus a margin between 1.25% to 2.5% or (ii) the one-month bankers acceptance rate plus 1%, plus a margin between 2.75% to 4.00%. The margin level is determined based on the Company’s senior funded debt to EBITDA ratio. Interest on prime loans accrues daily and is payable monthly on the last business day of each month. The Syndicated Credit Agreement is secured by a general security agreement over all present and after acquired personal property in Alberta, British Columbia and other Canadian jurisdictions, subject to permitted encumbrances. As at December 31, 2019, the Company was required to maintain a cash balance of $10.0 million in accordance with the financial covenants contained in the Syndicated Credit Agreement, which has been classified as restricted cash on the statement of financial position.

The Syndicated Credit Agreement contained an interest coverage ratio to be maintained as at the end of the quarter ended September 30, 2019, which was subsequently removed from the agreement.

At December 31, 2019, the Syndicated Credit Agreement, as written, contained certain financial covenants to maintain:

 

(i)

An available cash balance to March 31, 2020;

 

(ii)

A certain interest coverage ratio as at December 31, 2019;

 

(iii)

A certain senior funded debt to EBITDA ratio as at March 31, 2020 and as at the end of every fiscal quarter thereafter; and

 

(iv)

A fixed charge coverage ratio at March 31, 2020 and as at the end of every fiscal quarter thereafter.

At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement, which caused a cross-acceleration under its Term Debt Facility. As a result, as at December 31, 2019, the full principal amount of the Syndicated Credit Agreement and the Term Debt Facility was classified as a current liability on the Company’s statement of financial position.

 

Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for the corresponding breach and other administrative breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or

 

19

 


 

before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.

 

In addition, we anticipate that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar waivers in the past; however, there is no guarantee that we will be able to do so in the future.

b)

Credit Facilities

The Credit Facilities were extended to the Company under the amended and restated commitment letter (the “Commitment Letter”), dated December 19, 2018.

As at December 31, 2018, the Credit Facilities were comprised of Facilities 1, 3 and 4:

 

Facility 1 - $29.5 million non-revolving development loan facility. Interest payable monthly at prime plus 2.75%. At December 31, 2018, Facility 1 was fully drawn.

 

Facility 3 - $5.0 million building development facility. Interest payable monthly at prime plus 2.75%. At December 31, 2018, no amount had been drawn from Facility 3.

 

Facility 4 - $14.0 million non-revolving development facility. Interest payable monthly at prime plus 2.75%. At December 31, 2018, $2.7 million had been drawn from Facility 4.

Effective June 1, 2019, Facilities 1 and 4 were refinanced through Facilities 5 and 7. The Credit Facilities can be summarized as follows:

 

Facility 3 - $5.0 million term out facility. Interest payable monthly at prime plus 2.75%.

 

Facility 5 - $29.5 million non-revolving development term out facility, to be used solely for the repurpose of refinancing Facility 1.

 

Facility 7 - $14.0 million term out facility, to be used solely for the purpose of refinancing Facility 4.

On August 29, 2019, the Credit Facilities of $49.0 million plus accrued interest were repaid in full using a portion of the proceeds from the Syndicated Credit Agreement described in section (a) above and are no longer available to the Company.

c)

Term Debt Facility

On June 27, 2019, the Company entered into a secured credit agreement (the “Term Debt Facility”) through SGI Partnership, a newly formed wholly owned subsidiary of the Company. The Term Debt Facility is secured on a second-priority basis over all assets of the Company except for the acquired Bridge Farm assets (note 5a), which are secured on a first priority basis. The Term Debt Facility consists of two tranches totalling $159.6 million, less (i) a 6% original issue discount and (ii) upfront fees totalling up to approximately $2.4 million. The first tranche of $115.0 million, less the original issue discount and upfront fees, was advanced on June 27, 2019 to fund the acquisition of Bridge Farm described in note 5(a). The second tranche was not advanced, and the deadline to advance it has passed. Amounts advanced under the Term Debt Facility bear interest at a rate of 9.75% per annum. Principal will be repaid in quarterly payments beginning June 30, 2020 with the first instalment based on 5% of the principal outstanding and subsequent quarters based on 1.25% of principal outstanding, with the balance of all borrowings outstanding being due and payable in full on July 27, 2023.

In connection with each tranche advanced, the lender is entitled to receive warrants exercisable upon the earlier of (i) the completion of an initial public offering, (ii) December 31, 2020, or (iii) a default or event of default under the Term Debt Facility or certain other specified events. The number of warrants issuable and the exercise price of such warrants issued was indexed to the Company’s share price determined at the date of the completion of an initial public offering. Prior to the completion of the initial public offering, the warrants were classified as a derivative liability measured at FVTPL. The fair value of the warrants was estimated based on the Black-Scholes option pricing model. The measurements for the warrants were categorized as Level 3 fair values based on the inputs to the valuation technique used.

In August 2019, upon completion of the initial public offering, 957,225 warrants with an exercise price of $21.63 and 1,495,665 warrants with an exercise price of $20.76 were issued. The Company recorded a fair value adjustment of $2.2 million to finance expense upon reclassification from a derivative liability to equity.

 

20

 


 

The Company is subject to three financial covenants under this facility, so long as the principal amount owing under the Term Debt Facility is greater than $75 million, as follows:

 

(i)

The Company must maintain, at all times, 60% of the square footage of the existing facilities in the United Kingdom dedicated to plant production and inventory and shall achieve a minimum 20% gross margin for both the quarter ending December 31, 2019 and the March 31, 2020 on said plant business;

 

(ii)

The Company’s UK leverage ratio is defined as the ratio of outstanding amounts under the Term Debt Facility to annualized bank EBITDA related to its United Kingdom operations. The UK leverage ratio shall not exceed:

 

11.0 to 1.0, calculated at the end of each financial quarter for the four financial quarters then ended, commencing for the financial quarter ending June 30, 2020 and each financial quarter thereafter until and including March 31, 2021; and

 

9.0 to 1.0, calculated at the end of each financial quarter for the four financial quarters then ended, commencing for the financial quarter ending June 30, 2021 and each financial quarter thereafter.

 

(iii)

The Company’s consolidated leverage ratio is defined as the ratio of outstanding amounts under the Term Debt Facility to annualized bank EBITDA related to its consolidated operations. The consolidated leverage ratio shall not exceed:

 

6.0 to 1.00, calculated at the end of each financial quarter for the four financial quarters then ended, commencing for the financial quarter ending June 30, 2020 and each financial quarter thereafter until and including March 31, 2021; and

 

4.5 to 1:0, calculated at the end of each financial quarter for the four financial quarters then ended, commencing for the financial quarter ending June 30, 2021 and each financial quarter thereafter.

 

As at December 31, 2019, the Company was in compliance with all financial covenants under the Term Debt Facility. However, because, at December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement, the full principal amount of the Syndicated Credit Agreement and the Term Debt Facility, which was cross-accelerated, was classified as a current liability on the Company’s statement of financial position.

Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for the corresponding breach and other administrative breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.

d)

Credit Agreement

On February 22, 2019, the Company entered into a credit agreement with a Canadian financial institution to provide a $30.0 million non-revolving term loan facility (the “Credit Agreement”). The purpose of the Credit Agreement was to provide interim financing related to the acquisition of Bridge Farm (see Acquisition of Bridge Farm in the “OPERATIONAL AND FINANCIAL HIGHLIGHTS” section of this MD&A), to repay in full the Note Agreement described in section (f) below and for general working capital purposes. Interest was accrued at 9.0% with principal and interest repayable on or before May 15, 2019. The Credit Agreement was secured by a second priority general security agreement over all present and after acquired personal property and a floating charge on all lands, subject to permitted encumbrances, as well as a first priority assignment of all net proceeds from certain future equity or debt offerings.

In May 2019, the repayment date was extended to May 22, 2019. During this time, the Company closed a private placement of 8% Convertible Promissory Notes described in section (h) below for gross proceeds of $92.6 million, of which $30 million plus accrued interest was applied to repay the Credit Agreement in full on the amended repayment date. The Credit Agreement is no longer available to the Company.

e)

Loan Agreement

As at December 31, 2018, the Company had a $7.0 million loan agreement with a financial institution bearing interest at the lenders variable mortgage rate plus 5.0% per annum (the “Loan Agreement”). The loan was secured by (i) a third priority charge against the Company’s Rocky View production facility, (ii) a third priority charge against the Company’s Olds facility, (iii) a third priority charge against the present and after acquired personal property of the Company and the lender’s guarantors, and (iv) a first priority charge in the warrant subscriptions and the proceeds thereof, issued in the private placement of units completed in the fiscal period ended December 31, 2018. The Loan Agreement was to mature on May 31, 2019 and bore interest at the rate of the lender’s variable mortgage rate plus 5.0%, which amounted to 8.95% per annum as of April 10, 2019. The agreement was amended and restated on April 10, 2019. Under the amended and restated agreement, the principal was increased by $3.0 million to $10.0 million and the maturity date of the existing credit facility was extended to September 30, 2019 and bearing interest at the lender’s variable mortgage rate plus 4.55%, which, as of

 

21

 


 

April 10, 2019, amounted to 9.50% per annum. The Loan Agreement was repaid on June 27, 2019 and is no longer available to the Company.

f)

Note Agreement

As at December 31, 2018, the Company had an $8.5 million note agreement outstanding (the “Note Agreement”). The Note Agreement was secured by a first-ranking security interest in respect of present and future property and assets and by the lender entering into a subordination agreement in favour of a Canadian financial institution up to maximum of $30.0 million.

On February 22, 2019, the Note Agreement was repaid in full using the proceeds from the Credit Agreement described in section (d). The repayment consisted of $7.0 million in principal plus accumulated interest and an extension fee of $1.9 million. The Note Agreement is no longer available to the Company.

g)

Promissory Note

During 2018, the Company entered into an agreement with a former officer of the Company to repurchase a total of 9,815,701 common shares at a weighted average price of $1.69 per common share for total consideration of $16.6 million. A balance of $6.9 million remained unpaid under the agreement and was converted to an unsecured subordinated promissory note (the “Promissory Note”). The Promissory Note had a stated maturity of March 25, 2019 but was extended in accordance with the terms of the agreement. The Promissory Note accrued interest at a rate of 1% per month from the date of extension. The Promissory Note was repaid on June 5, 2019 and is no longer available to the Company.

h)

Convertible Notes

During 2018, the Company privately placed an aggregate principal amount of $28.9 million of 12% convertible notes (the “Convertible Notes”), consisting of (i) $22.2 million privately placed to accredited investors in Canada (the “Canadian Offering”), and (ii) $6.8 million privately placed to accredited investors in the United States (the “U.S. Offering”). $7 million of the convertible notes were issued to directors and officers. The Convertible Notes mature on a date one year after their issuance. Up to 100% of the principal amount of the Convertible Notes is convertible, at the option of the holder at any time prior to a date that is 15 days prior to the maturity date of the note, into units comprising one common share in the Company and one half of one warrant, at a price of US$3.13 per unit with respect to the Convertible Notes issued in the U.S. offering, and $3.91 per unit with respect to the Convertible Notes issued in the Canadian Offering. The warrants vest immediately. Each full warrant is exercisable for 12 months following the date of its issuance into one common share in the Company, at an exercise price of US$3.75 with respect to the Convertible Notes issued in the U.S. Offering, and at an exercise price of $4.38 with respect to the Convertible Notes issued in the Canadian offering.

In connection with the IPO, the Company issued an additional 559,327 warrants representing 559,327 common shares to holders of the Convertible Notes as an incentive to enter into a lock-up agreement covering the Convertible Notes, the warrants and the underlying common shares issued or issuable upon conversion or exercise of such notes or warrants.

During the year ended December 31, 2019, following the IPO, holders representing $21.2 million in aggregate principal amount of the Convertible Notes issued in the Canadian Offering and USD$2.5 million in aggregate principal amount of the Convertible Notes issued in the U.S. Offering converted their notes into 6.2 million common shares and 3.6 million warrants. Principal of $1.0 million Convertible Notes and USD$2.4 million Convertible Notes were not converted into equity units and were repaid in cash upon maturity.

i)

Senior Convertible Notes

In May 2019, the Company closed a private placement offering of 8% convertible notes (the “Senior Convertible Notes”), to accredited investors in Canada, the United States and elsewhere in aggregate principal amount of $92.6 million. $0.1 million of the senior convertible notes were issued to a director of the Company. In July 2019, the Company issued a further $0.6 million Senior Convertible Notes as consideration for past services rendered. Interest accrued on the Senior Convertible Notes at a rate of 8% per annum, compounded monthly, and was payable on the earlier of the maturity date, redemption or conversion. The stated maturity of the Senior Convertible Notes was May 10, 2024 and principal was repayable in cash or with shares of the Company.

On August 14, 2019, the Company received conversion notices from all holders of the Senior Convertible Notes. Based on the IPO price of US$13.00 ($17.23) per share, all principal and accrued interest was converted into 6.9 million common shares at a conversion price of $13.84.

The proceeds from the offering of the Senior Convertible Notes were used, in part, to repay the Credit Agreement described in section (d) above and otherwise applied to the purchase price for the acquisition of Bridge Farm (see Acquisition of Bridge Farm in the “OPERATIONAL AND FINANCIAL HIGHLIGHTS” section of this MD&A).

 

22

 


 

Other Significant Transactions

 

a)

Acquisition of Bridge Farm

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

The acquisition consideration was comprised of:

 

(i)

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

 

(ii)

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

 

(iii)

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

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

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

 

July 2, 2019

 

Adjustments

 

December 31, 2019

 

Cash

 

77,023

 

 

 

 

77,023

 

Issuance of common shares

 

37,248

 

 

 

 

37,248

 

Contingent consideration

 

15,630

 

 

361

 

 

15,991

 

 

 

129,901

 

 

361

 

 

130,262

 

The preliminary purchase price was allocated as follows:

 

July 2, 2019

 

Adjustments

 

December 31, 2019

 

Accounts receivable

 

7,403

 

 

 

 

7,403

 

Inventory

 

469

 

 

1

 

 

470

 

Biological assets

 

1,233

 

 

55

 

 

1,288

 

Property, plant and equipment

 

57,717

 

 

651

 

 

58,368

 

Intangible assets

 

25,636

 

 

(165

)

 

25,471

 

Accounts payable

 

(14,293

)

 

 

 

(14,293

)

Long term debt

 

(33,618

)

 

 

 

(33,618

)

Lease obligations

 

(15,567

)

 

388

 

 

(15,179

)

Deferred income tax liability

 

(3,038

)

 

(1,317

)

 

(4,355

)

Goodwill

 

103,959

 

 

748

 

 

104,707

 

 

 

129,901

 

 

361

 

 

130,262

 

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

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

At December 31, 2019, the Company determined that there were indicators of impairment in Bridge Farm’s ability to generate revenue from the cultivation, processing and distribution of CBD products based on significant delays and uncertainties in the licensing and regulatory requirements in the United Kingdom. As a result, the Company recorded a goodwill impairment of $100.3 million at and for the year ended December 31, 2019.

 

b)

Investment and Royalty Agreement

In 2018, the Company entered into an amended and restated investment and royalty agreement (the “Investment and Royalty Agreement”), with an entity (the “Purchaser”) controlled by one of the Company’s directors and former Executive Chairman, Edward Hellard, to receive a loan of up to a total of $11.0 million in multiple instalments, and to remove its first fixed charge security position over the Company’s assets in consideration for the issuance of a total of up to 7.2 million common shares, valued at $1.53 per common share, and a series of quarterly royalty payments, calculated on the basis of its revenue generated from certain portions of the Olds facility for the prior quarter multiplied by 6.5%, beginning on October 1, 2019 and ending on September 30, 2028.

 

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On July 17, 2019, the Company issued 50,963 common shares to Mr. Hellard in consideration for advancing the remaining funds available to be advanced under the financial obligation. In addition, the Company agreed to indirectly acquire the Investment and Royalty Agreement through an agreement whereby the Company would purchase all of the outstanding shares of the Purchaser from Mr. Hellard for aggregate consideration of 3,680,000 common shares, 480,000 share purchase warrants (each exercisable for one common share at an exercise price of $15.94 for a period of three years from the date of issue) and a cash payment of $9.5 million. Upon completion of the Company’s initial public offering on August 6, 2019, the purchase was completed resulting in a loss on a financial obligation of $59.6 million based on the Company’s initial public offering price of US$13.00 per share. The cash payment of $9.5 million was made on September 19, 2019

 

c)

Acquisition of Brands

On May 1, 2019, the Company entered into the Sun 8 Agreement to acquire the world-wide proprietary rights, including copyrights and trademarks, to a portfolio of brand names, designs, domain names and other intellectual property associated with Top Leaf, BC Weed Co. and certain other brands (the “Acquired Brands”). The consideration paid for the Acquired Brands pursuant to the Sun 8 Agreement consisted of 480,000 common shares at a price of $11.03. The agreement includes future consideration in the form of warrants contingent upon future revenues from the Acquired Brands and payment of royalties indexed to merchandise sales and each gram of cannabis produced or sold that is derived from the Acquired Brands.

The Company also incurred $1.5 million of research and development costs to Sun 8 Holdings Inc. which included (i) assisting the Company in sourcing cultivars to sell under the Acquired Brands, (ii) the identification, interview and hiring of cultivation staff, and (iii) the assessment and optimization of the Company’s growing and production methods and techniques.

Equity

(000s)

 

December 31, 2019

 

 

December 31, 2018

 

Common shares

 

 

107,180

 

 

 

68,649

 

Common share purchase warrants (1)

 

 

6,165

 

 

 

4,212

 

Simple warrants (2)

 

 

9,815

 

 

 

6,130

 

Performance warrants (3)

 

 

5,799

 

 

 

7,095

 

Stock options

 

 

624

 

 

 

 

Restricted share units

 

 

49

 

 

 

 

Deferred share units

 

 

368

 

 

 

 

(1)

6.2 million warrants were exercisable as at December 31, 2019.

(2)

5.1 million simple warrants were exercisable as at December 31, 2019.

(3)

4.5 million performance warrants were exercisable as at December 31, 2019.

As at December 31, 2019, the Company had 107.2 million shares outstanding (December 31, 2018 - 68.6 million shares).

On August 6, 2019, the Company completed its IPO of 11.0 million common shares at a price to the public of US$13.00 per share, for gross proceeds of $189.5 million (US$143.0 million). The Company’s shares were listed for trading on the NASDAQ on August 1, 2019 under the ticker symbol “SNDL”.

In addition to the IPO, additional common shares were issued during 2019 in connection with the following transactions:

 

Conversions of the Senior Convertible Notes for 6.9 million shares;

 

Conversions of the Convertible Notes for 6.2 million shares;

 

The issuance of 2.4 million shares relating to the acquisition of Bridge Farm;

 

The issuance of 3.7 million shares relating to the acquisition of the Investment and Royalty Agreement;

 

The exercise of 4.2 million share purchase warrants for net proceeds of 16.5 million;

 

The exercise of 2.0 million employee warrants for net proceeds of $1.4 million; and

 

Additional shares issued during the year ended December 31, 2019 were in exchange for intellectual property acquired from the Pathway and Sun 8 Holdings Inc. transactions.

Subsequent to December 31, 2019, additional common shares were issued in connection with the following:

 

The issuance of 158.0 thousand shares relating to Bridge Farm earn out payments.

As at March 30, 2020 a total of 107,351,145 common shares were outstanding.

 

24

 


 

Capital Expenditures

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Canada

 

 

 

 

 

 

 

 

Olds facility

 

 

98,777

 

 

 

72,819

 

Rocky View facility

 

 

655

 

 

 

1,139

 

Merritt facility

 

 

9,879

 

 

 

 

Other

 

 

960

 

 

 

2,363

 

Total Canada

 

 

110,271

 

 

 

76,321

 

United Kingdom

 

 

 

 

 

 

 

 

Clay Lake

 

 

25,921

 

 

 

 

Other

 

 

1,943

 

 

 

 

Total United Kingdom

 

 

27,864

 

 

 

 

Total

 

 

138,135

 

 

 

76,321

 

Facilities

 

Olds facility

Rocky View facility

Merritt facility

Bridge Farm facility

Location

Olds, Alberta, Canada

Rocky View, Alberta, Canada

Merritt, British Columbia, Canada

Spalding, Lincolnshire,

U.K.

Format

Indoor modular

Indoor

Indoor modular

Greenhouses

Primary purpose

Cultivation and extraction

Research and development

Cultivation and extraction

Cultivation and extraction

Total current facility size

(sq. ft.)

428,000

31,000

1,596,000(3)

Additional planned facility size

(sq. ft.)

20,000(1)

35,000(2)

1,991,000(3)

Total projected facility size

(sq. ft.)

448,000

31,000

35,000

3,587,000

(1)

Subject to construction and licensing of an extraction and processing building (20,000 sq. ft.) and availability of capital resources and liquidity.

(2)

Construction has been deferred. Future construction, if any, will be subject to available capital resources, liquidity and licensing.

(3)

Bridge Farm has received an industrial licence to grow hemp from the U.K. government at its Homestead facility and currently cultivates hemp in a portion of this facility. The Company has deferred plans to convert a further portion of the Homestead facility and certain other of Bridge Farm’s existing and planned facilities to hemp and High-THC cannabis cultivation operations. Future construction, if any, will be subject to licensing as well as available capital resources and liquidity and may be restricted by the terms of the Company’s indebtedness.

Capital expenditures will be limited to essential expenditures required to complete the extraction and processing facility at the Olds facility (approximately $5 to $10 million) and to complete the Clay Lake Phase 2 facility (approximately $10 million) and will be subject to the availability of capital resources and liquidity.

Capital expenditures relating to the construction of the Company’s Merritt facility (approximately $15 to $30 million), construction and transition to hemp cultivation of certain of the Bridge Farm facilities (approximately $75 million) and funding research performed by Pathway Rx (approximately $1 million) have been temporarily deferred in order to improve liquidity and align capital expenditures with market demand.

Expenditures required to maintain production capacity are not expected to be significant in the next twelve months since the majority of the Company’s facilities are newly constructed or under construction. The Company expects approximately $1.5 million per quarter of maintenance capital beginning in January 2020 to maintain current capacity.

Olds facility

The Olds facility is the Company’s flagship facility whose primary purpose is to grow cannabis for the Canadian market. The Olds facility is complete and fully licensed for cannabis cultivation, processing and sale by Health Canada. The Company has received a licence from Health Canada for approximately 428,000 square feet with 126 cultivation rooms comprised of H Block (approximately 32,000 square feet with 12 cloning and vegetation rooms), H Block extension (approximately 46,000 square feet with 14 flowering rooms) and Pods 1 through 5 (each approximately 70,000 square feet with 20 flowering rooms). Furthermore, the Company has commenced construction of an extraction and processing facility at Olds, estimated to be approximately 20,000 square feet, to support a fully operational Olds facility. The full build out of the Olds facility is expected to cost approximately $190 million, of which approximately $5 to $10 million remains to be invested relating to the extraction and processing facility.

 

25

 


 

Merritt facility

Construction of the Merritt facility has been temporarily deferred pending increases in market demand. The Merritt facility, if fully constructed and licensed will serve as the primary production facility of the Company’s BC Weed Co. brand.

The amount of remaining capital expenditures at the Merritt facility will vary depending on the scale of the facility that will be constructed. A mini-pod is expected to cost $15 million to construct, while a larger facility with extraction capabilities is expected to cost up to $30 million to complete. The Company began construction of the Merritt facility in March 2019 and has invested approximately $10.0 million. The Company has submitted its initial licence application to Health Canada. However, Health Canada will not substantively review the licence application until the Merritt facility is fully constructed and is accepted by Health Canada as compliant with the requirements of the Cannabis Regulations (SOR/2018-144).

Bridge Farm

At December 31, 2019, the Company determined that there were indicators of impairment in Bridge Farm’s ability to generate revenue from the cultivation, processing and distribution of CBD products based on significant delays and uncertainties in the licensing and regulatory requirements in the United Kingdom. As a result, the Company recorded a goodwill impairment of $100.3 million at and for the year ended December 31, 2019. In addition, the Company is conducting a strategic review of Bridge Farm and its assets.

Bridge Farm comprises three facilities, Homestead, Horseshoe and Clay Lake. The Homestead facility is approximately 218,000 square feet with approximately 110,000 square feet of grow space. The Horseshoe facility is 484,000 square feet with approximately 286,000 square feet of grow space. The Clay Lake facility is an 893,000 square foot facility (Clay Lake Phase 1) that was completed in March 2019. Prior to the acquisition, Bridge Farm had completed planning for Clay Lake Phase 2 (approximately 807,000 square feet) and Clay Lake Phase 3 (approximately 1.2 million square feet).

Bridge Farm has received an industrial licence to grow hemp from the U.K. government at its Homestead facility and currently cultivates hemp in a portion of this facility. The Company has deferred plans to convert a further portion of the Homestead facility and certain other of Bridge Farm’s existing and planned facilities to hemp and High-THC cannabis cultivation operations. Future construction, if any, will be subject to licensing as well as available capital resources and liquidity and may be restricted by the terms of the Company’s indebtedness.

Pathway Rx

The Company owns a 50% interest in Pathway Rx, a company that uses advanced technologies, including machine learning approaches, to screen an extensive library of cannabis strains to identify and customize treatments for a wide range of medical applications. The Company expects minimal capital expenditures of approximately $1 million to fund research performed by Pathway Rx.

Cash Flow Summary

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

 

(112,736

)

 

 

(25,757

)

Investing activities

 

 

(213,144

)

 

 

(66,039

)

Financing activities

 

 

358,267

 

 

 

98,239

 

Effect of exchange rate changes

 

 

(1,171

)

 

 

 

Change in cash and cash equivalents

 

 

31,216

 

 

 

6,443

 

Cash Flow – Operating Activities

Net cash used in operating activities was $112.7 million for the year ended December 31, 2019 compared to $25.8 million for the ten months ended December 31, 2018. The increase of $86.9 million is due to an increase in net loss adjusted for non-cash items and an increase in non-cash working capital. The increase in non-cash working capital reflects significant growth in the scale and operations of the Company following the commencement of adult-use cannabis sales and is comprised of fair value changes in inventory, accounts receivable, prepaid expenses and deposits and accounts payable.

Cash Flow – Investing Activities

Net cash used in investing activities was $213.1 million for the year ended December 31, 2019 compared to $66.0 million for the ten months ended December 31, 2018. The increase of $147.1 million is due to the acquisition of Bridge Farm as well as expenditures relating to the construction of the Olds facility, particularly relating to Pod 4, Pod 5 and the H Block extension, and expenditures relating to Clay Lake Phase 2.

 

26

 


 

Cash Flow – Financing Activities

Net cash provided by financing activities was $358.3 million for the year ended December 31, 2019 compared to $98.2 million for the ten months ended December 31, 2018. The increase of $260.1 million is due to proceeds from the Syndicated Credit Agreement, proceeds from the Term Debt Facility, net of costs, proceeds from the Senior Convertible Notes, proceeds from the issuance of common shares in the IPO, net of costs, proceeds from the exercise of warrants, partially offset by repayment of the Credit Facilities and other debt instruments, repayment of existing Bridge Farm debt, settlement of all of the Convertible Notes, an increase in restricted cash, and the settlement of the financial obligation. The increase in restricted cash represents the minimum balance required in accordance with the Syndicated Credit Agreement for interest coverage and money held in trust in support of letters of credit.

Liquidity risks associated with financial instruments

Interest rate risk

The Company is exposed to interest rate risk in that changes in market interest rates will cause fluctuations in the fair value of future cash flows. The Company is exposed to interest rate risk through its Syndicated Credit Agreement which has a variable interest rate. The Company was exposed to interest rate risk through its Credit Facilities which had a variable interest rate and were repaid in full during 2019. For the year ended December 31, 2019, a 1% increase in the prime interest rate would result in additional interest expense of $0.6 million (2018 - $47 thousand).

Credit risk

Credit risk is the risk of financial loss if the counterparty to a financial transaction fails to meet its obligations. The Company manages risk over its accounts receivable by issuing credit only to credit worthy counterparties. The Company considers financial instruments to have low credit risk when its credit risk rating is equivalent to investment grade. The Company assumes that the credit risk on a financial asset has increased significantly if it is outstanding past the contractual payment terms. The Company considers a financial asset to be in default when the debtor is unlikely to pay its credit obligations to the Company.

The Company applies the simplified approach under IFRS 9 and has calculated expected credit losses based on lifetime expected credit losses, taking into consideration historical credit loss experience and financial factors specific to the debtors and general economic conditions.

The maximum amount of the Company’s credit risk exposure is the carrying amounts of cash and cash equivalents and accounts receivable. The Company attempts to mitigate such exposure to its cash and cash equivalents by investing only in financial institutions with investment grade credit ratings. The Company manages risk over its accounts receivable by issuing credit only to credit worthy counterparties.

Foreign currency risk

The Company is exposed to risks arising from fluctuations in currency exchange rates between the Canadian dollar, Pound Sterling and United States dollar. At December 31, 2019, the Company’s primary currency exposure related to the Pound Sterling (“GBP”) and United States dollar (“USD”) balances. The following table summarizes the Company’s foreign currency exchange risk for each of the currencies indicated:

As at December 31, 2019

GBP

 

USD

 

Cash and cash equivalents

 

1,418

 

 

22,088

 

Accounts receivable

 

3,071

 

 

 

Accounts payable and accrued liabilities

 

(6,254

)

 

(2,150

)

Net foreign exchange exposure

 

(1,765

)

 

19,938

 

Translation to CAD

 

1.7174

 

 

1.2988

 

CAD equivalent at period end exchange rate

 

(3,031

)

 

25,895

 

 

 

 

 

 

 

 

As at December 31, 2018

GBP

 

USD

 

Cash and cash equivalents

 

 

 

3,148

 

Accounts receivable

 

 

 

 

Accounts payable and accrued liabilities

 

 

 

 

Net foreign exchange exposure

 

 

 

3,148

 

Translation to CAD

 

1.7439

 

 

1.3642

 

CAD equivalent at period end exchange rate

 

 

 

4,295

 

Based on the net foreign exchange exposure at the end of the year, if these currencies had strengthened or weakened by 10% compared to the Canadian dollar and all other variables were held constant, the after-tax earnings would have decreased or increased by approximately the following amounts:

 

27

 


 

 

Year ended

December 31

 

Ten months ended

December 31

 

Pound sterling (GBP)

 

(303

)

 

 

United States dollar (USD)

 

2,590

 

 

429

 

Impact on profit (loss)

 

2,287

 

 

429

 

 

Liquidity risk

Liquidity risk is the risk that the Company cannot meet its financial obligations when due. The Company manages liquidity risk by monitoring operating and growth requirements. The Company prepares forecasts to ensure sufficient liquidity to fulfil obligations and operating plans.

The audited consolidated financial statements for the year ended December 31, 2019 contain a going concern qualification. Management believes its current capital resources and its ability to manage cash flow and working capital levels will require the Company to seek future additional financing to allow it to meet its obligations, to make debt service requirements, and to fund the other needs of its business. However, no assurance can be given that future sources of capital will be available. The ability of the Company to continue as a going concern is dependent on raising capital to fund its business plan and ultimately to attain profitable operations. Any delay or failure to complete any additional financing would have a material adverse effect on the Company’s business, results of operations and financial condition, and the Company may be forced to reduce or cease its operations.

CONTRACTUAL COMMITMENTS AND CONTINGENCIES

a)

Commitments

The information presented in the table below reflects management’s estimate of the contractual maturities of the Company’s obligations as at December 31, 2019. These maturities may differ significantly from the actual maturities of these obligations.

($000s)

Less than

one year

 

One to three

years

 

Three to five

years

 

Thereafter

 

Total

 

Syndicated Credit Agreement (1)

 

84,000

 

 

 

 

 

 

 

 

84,000

 

Term Debt Facility (1)

 

115,000

 

 

 

 

 

 

 

 

115,000

 

Lease obligations

 

722

 

 

1,902

 

 

683

 

 

13,642

 

 

16,949

 

Balance, end of period

 

199,722

 

 

1,902

 

 

683

 

 

13,642

 

 

215,949

 

 

(1)

At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement. As a result, as at December 31, 2019, the full principal amount of each of the Syndicated Credit Agreement and the Term Debt Facility was classified as a current liability on the Company’s statement of financial position. Subsequent to December 31, 2019, the Company obtained a waiver for the December 31, 2019 covenant breach.

The Company has entered into certain supply agreements to provide dried cannabis flower and cannabis products to third parties. The contracts require the provision of various amounts of dried cannabis flower on or before certain dates. Should the Company not deliver the product in the agreed timeframe, financial penalties apply which may be paid either in product in-kind or cash. Under these agreements, the Company has accrued financial penalties payable as at December 31, 2019 of $1.5 million (December 31, 2018 - $3.3 million).

In addition, under employment agreements with certain management personnel, the Company has commitments for severance payments in the event of termination of employment.

b)

Contingencies

For a detailed discussion regarding the Company’s legal proceedings, refer to Item 8.A “Financial Information – Consolidated Statements and Other Financial Information – Legal Proceedings” in the Annual Report to which this MD&A is an exhibit.

NON-IFRS MEASURES

Certain financial measures in this MD&A including consolidated adjusted EBITDA, adjusted EBITDA from cannabis operations, adjusted EBITDA from ornamental flower operations, cash costs to produce, cultivation and production costs and gross margin before fair value adjustments are non-IFRS measures. These terms are not defined by IFRS and, therefore, may not be comparable to similar measures provided by other companies. These non-IFRS financial measures should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS.

 

28

 


 

Adjusted EBITDA

Each of consolidated adjusted EBITDA, adjusted EBITDA from cannabis operations and adjusted EBITDA from ornamental flower operations is a non-IFRS measure which the Company uses to evaluate its operating performance. Generally, adjusted EBITDA is defined as net income (loss) before finance costs, depreciation and amortization, accretion expense, income tax recovery and excluding change in fair value of biological assets, change in fair value of biological assets realized through inventory sold, unrealized foreign exchange gains or losses, share-based compensation expense, asset impairment, gain or loss on disposal of property, plant and equipment and certain one-time non-operating expenses, as determined by management.

The following tables reconcile consolidated adjusted EBITDA to net loss for the periods noted.

 

Year ended December 31, 2019

 

($000s)

Cannabis

 

Ornamental Flowers

 

Corporate

 

Consolidated

 

Net loss

 

(111,598

)

 

(122,952

)

 

(37,079

)

 

(271,629

)

Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

Finance costs

 

27,781

 

 

417

 

 

 

 

28,198

 

Loss on financial obligation

 

60,308

 

 

 

 

 

 

60,308

 

Depreciation and amortization

 

595

 

 

3,482

 

 

 

 

4,077

 

Income tax recovery

 

(3,609

)

 

(1,017

)

 

 

 

(4,626

)

Change in fair value of biological assets

 

(30,340

)

 

(386

)

 

 

 

(30,726

)

Change in fair value of biological assets realized through inventory sold

 

10,685

 

 

 

 

 

 

10,685

 

Unrealized foreign exchange (gain) loss

 

671

 

 

(1,779

)

 

 

 

(1,108

)

Share-based compensation

 

15,809

 

 

 

 

23,715

 

 

39,524

 

Goodwill impairment

 

 

 

100,305

 

 

 

 

100,305

 

Asset impairment

 

162

 

 

 

 

 

 

162

 

Loss on disposition of PP&E

 

(8

)

 

(13

)

 

 

 

(21

)

Cost of sales non-cash component (1)

 

2,693

 

 

 

 

 

 

2,693

 

Loss on contingent consideration

 

 

 

18,645

 

 

 

 

18,645

 

Gain on investment

 

 

 

(165

)

 

 

 

(165

)

Transaction costs (2)

 

 

 

 

 

10,069

 

 

10,069

 

Adjusted EBITDA

 

(26,851

)

 

(3,463

)

 

(3,295

)

 

(33,609

)

(1)

Cost of sales non-cash component is comprised of depreciation expense.

(2)

Transaction costs are non-recurring costs related to the IPO and the acquisition of Bridge Farm.

 

Ten months ended

December 31, 2018

 

($000s)

Consolidated (1)

 

Net loss

 

(56,526

)

Adjustments

 

 

 

Finance costs

 

1,797

 

Loss on financial obligation

 

27,017

 

Depreciation and amortization

 

920

 

Change in fair value of biological assets

 

1,280

 

Share-based compensation

 

7,410

 

Asset impairment

 

523

 

Loss on disposition of PP&E

 

17

 

Adjusted EBITDA

 

(17,562

)

(1)

For the ten months ended December 31, 2018, there was only one segment.

 

 

29

 


 

 

Three months ended December 31, 2019

 

($000s)

Cannabis

 

Ornamental Flowers

 

Corporate

 

Consolidated

 

Net loss

 

(25,532

)

 

(114,592

)

 

(4,962

)

 

(145,086

)

Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

Finance costs

 

5,687

 

 

(190

)

 

 

 

5,497

 

Loss on financial obligation

 

 

 

 

 

 

 

 

Depreciation and amortization

 

184

 

 

2,347

 

 

 

 

2,531

 

Income tax recovery

 

 

 

(505

)

 

 

 

(505

)

Change in fair value of biological assets

 

(5,799

)

 

(205

)

 

 

 

(6,004

)

Change in fair value of biological assets realized through inventory sold

 

3,121

 

 

 

 

 

 

3,121

 

Unrealized foreign exchange (gain) loss

 

478

 

 

(1,779

)

 

 

 

(1,301

)

Share-based compensation

 

3,152

 

 

 

 

1,820

 

 

4,972

 

Goodwill impairment

 

 

 

100,305

 

 

 

 

100,305

 

Loss on disposition of PP&E

 

(12

)

 

 

 

 

 

(12

)

Cost of sales non-cash component (1)

 

1,621

 

 

 

 

 

 

1,621

 

Loss on contingent consideration

 

 

 

12,810

 

 

 

 

12,810

 

Transaction costs (2)

 

 

 

 

 

2,318

 

 

2,318

 

Adjusted EBITDA

 

(17,100

)

 

(1,809

)

 

(824

)

 

(19,733

)

(1)

Cost of sales non-cash component is comprised of depreciation expense.

(2)

Transaction costs are non-recurring costs related to the IPO and the acquisition of Bridge Farm.

 

Three months ended

December 31, 2018

 

($000s)

Consolidated (1)

 

Net loss

 

(35,951

)

Adjustments

 

 

 

Finance costs

 

572

 

Loss on financial obligation

 

21,485

 

Depreciation and amortization

 

539

 

Change in fair value of biological assets

 

1,345

 

Share-based compensation

 

2,423

 

Asset impairment

 

522

 

Loss on disposition of PP&E

 

17

 

Adjusted EBITDA

 

(9,048

)

(1)

For the three months ended December 31, 2018, there was only one segment.

Cash costs to produce

Cash costs to produce is a non-IFRS measure which the Company uses to evaluate its operating performance. Cash costs to produce provides information to investors, analysts and others in understanding and evaluating the Company’s operating results as it removes non-cash and post-production expenses associated with growing costs. Cash costs to produce is defined as cost of sales less depreciation and packaging costs. Cash costs to produce are reconciled to cost of sales in the “OPERATIONAL RESULTS” section of this MD&A.

Cash cultivation and production costs

Cash cultivation and production costs (“C&P costs”) are a non-IFRS measure which the Company uses to evaluate its operating performance. C&P costs are defined as the costs related to growing, harvesting, processing and selling cannabis. Management believes that C&P costs are the most complete measure of operational performance at the facilities. C&P costs are comprised of labour, power, nutrients, growing supplies, supplies and tools, transportation, maintenance and consumables. C&P costs are initially added to biological assets and inventory and are only reflected on the statements of loss and comprehensive loss within cost of sales as sales of cannabis are recognized.

The following table reconciles C&P costs to biological assets and inventory.

 

30

 


 

 

 

Year ended

December 31

 

 

Ten months ended December 31

 

($000s)

 

2019

 

 

2018

 

Biological assets

 

 

14,309

 

 

 

876

 

Adjustments

 

 

 

 

 

 

 

 

Beginning balance

 

 

(876

)

 

 

 

Unrealized change in fair value

 

 

(30,668

)

 

 

1,295

 

Transfers to inventory

 

 

75,448

 

 

 

517

 

Depreciation and G&A

 

 

(10,273

)

 

 

 

Other costs

 

 

1,329

 

 

 

(5

)

UK biological assets

 

 

(2,421

)

 

 

 

Total C&P costs added to biological assets

 

 

46,848

 

 

 

2,683

 

 

 

 

 

 

 

 

 

 

Inventory

 

 

59,942

 

 

 

1,234

 

Adjustments

 

 

 

 

 

 

 

 

Beginning balance

 

 

(1,234

)

 

 

(799

)

Transfers from biological assets

 

 

(75,448

)

 

 

(517

)

Depreciation and G&A

 

 

(1,979

)

 

 

92

 

Transfer to cost of goods sold

 

 

49,240

 

 

 

 

Other costs

 

 

(15,359

)

 

 

(10

)

UK inventory

 

 

(731

)

 

 

 

Total C&P costs added to inventory

 

 

14,431

 

 

 

 

Total C&P costs

 

 

61,279

 

 

 

2,683

 

Gross margin before fair value adjustments

Gross margin before fair value adjustments is a non-IFRS measure which the Company uses to evaluate its operating performance. Gross margin before fair value adjustments provides useful information to investors, analysts and others in understanding and evaluating the Company’s operating results as it removes non-cash fair value metrics. Gross margin before fair value adjustments is defined as gross margin less the non-cash changes in the fair value adjustments on the sale of inventory and the growth of biological assets. Gross margin before fair value adjustments is comprised of net revenue less cost of sales

RELATED PARTIES

The Company has outstanding amounts receivable from and payable to related parties, including employees, directors and corporations related to those individuals. As at December 31, 2019, the Company was owed $0.2 million (December 31, 2018 - $0.5 million) from related parties and owed $1.0 million (December 31, 2018 - $0.8 million) to related parties.

The amounts owing from related parties are both interest bearing and non-interest bearing and have various repayment terms.

Loan Receivable Agreements

On April 6, 2018, the Company issued 40,000 common shares to an officer of the Company at a fair value of $2.97, in accordance with an employment agreement. On April 6, 2018, the Company and this officer also entered into a shareholder loan agreement that provides a loan facility of up to $510 thousand to the officer. The loan bore interest at a rate of 2.5% per annum, had a term of three years, and was secured against the officer’s shareholdings in the Company. The loan was repayable in full upon the officer’s departure, a change of control of the Company or sale of the Company. As at December 31, 2018, $245 thousand had been advanced under this shareholder loan agreement. In July 2019, the loan was extinguished against performance bonuses declared in the form of salary compensation such that no amount remains outstanding under the shareholder loan agreement.

The Company has entered into separate shareholder loan agreements with two (December 31, 2018 – three) employees of the Company. The loans bear interest at rates ranging from 0-1.5% per annum and are secured by the employees’ shareholdings in the Company. The loans are each repayable in full upon an employees’ departure from employment, a change of control of the Company or sale of the Company. As at December 31, 2019, $200 thousand (December 31, 2018 - $190 thousand), had been advanced under these loan agreements.

On February 15, 2018, the Company and an officer entered into a shareholder loan agreement that provides for a loan of up to $200 thousand per year. The loan bore interest at a rate of 2.5% per annum and was secured by the officer’s shareholdings in the Company. The loan was repayable in full upon the officer’s departure, a change of control of the Company or sale of the Company. During 2019, $400 thousand was advanced under this loan agreement. In July 2019, the loan was extinguished against performance bonuses declared in the form of salary compensation such that no amount remains outstanding under the shareholder loan agreement.

Promissory note

 

31

 


 

During the ten months ended December 31, 2018, the Company entered into an agreement with a former officer of the Company to repurchase a total of 9,815,701 common shares at a weighted average price of $1.69 per common share for total consideration of $16.6 million. A balance of $6.9 million remained unpaid under the agreement and was converted to an Unsecured Subordinated Promissory Note (the “Promissory Note”) as described under note 13(g) of the Audited Financial Statements. The Promissory Note matured on March 25, 2019 but was extended in accordance with the terms of the Note. The balance of $6.9 million outstanding included principal and interest which accrued from the date of extension at a rate of 1% per month and was repaid in full on June 5, 2019.

Transactions

Marketing, brand research and development and promotional costs totalling $3.1 million for the year ended December 31, 2019, (2018 - $2.3 million) were paid to a company controlled by a shareholder, officer and director of the Company. At December 31, 2019, the Company owed a balance of $0.3 million (December 31, 2018 - $0.3 million) relating to services under this contract.

Land lease costs related to our Bridge Farm operations, at an annual amount of £600,000, were paid to a family member of a former executive officer.

Consulting services were provided to the Company by an officer, including services related to private placements completed. For the year ended December 31, 2019, consulting and commission expenses totalled nil (2018 - $1.5 thousand).

The Company has two contracts with companies in which an officer (who is not considered a member of key management) of the Company maintains influence. The contracts relate to research and development services being provided to the Company and its ability to access and license certain strains of cannabis for research purposes. For the year ended December 31, 2019, the fees paid totaled $335 thousand (2018 - $229 thousand). At December 31, 2019, the Company owed a balance of $60 thousand (December 31, 2018 - $19 thousand) relating to services under these contracts.

A member of the Board of Directors is a partner at a law firm which provides legal services to the Company. For the year ended December 31, 2019, professional fees totalling $3.9 million (2018 - $0.6 million) were incurred for services provided by this firm. At December 31, 2019, the Company owed $0.4 million (December 31, 2018 - $0.3 million) relating to various corporate matters and financings in progress.

During the year ended December 31, 2019, the Company entered into an agreement with an employee to acquire certain equipment for $0.9 million.

During the ten months ended December 31, 2018, the Company forgave $5 thousand in debt owed by a former officer of the Company.

During the ten months ended December 31, 2018, the Company forgave $20 thousand in debt owed by a former member of the Board of Directors. This director resigned from the Board effective January 15, 2018.

Compensation of key management personnel

The Company considers directors and officers of the Company as key management personnel.

 

Year ended

December 31

 

Ten months ended December 31

 

($000s)

2019

 

2018

 

Salaries and short-term benefits

 

3,295

 

 

1,237

 

Share-based compensation

 

23,715

 

 

2,414

 

 

 

27,010

 

 

3,651

 

As at December 31, 2019, $nil (December 31, 2018 - $367 thousand) was owed to the Company from key management personnel

OFF BALANCE SHEET ARRANGEMENTS

As at December 31, 2019, the Company did not have any off-balance sheet arrangements. The Company has certain operating or rental lease agreements, as disclosed in the Contractual Commitments and Obligations section of this MD&A, which are entered into in the normal course of operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company makes assumptions in applying critical accounting estimates that are uncertain at the time the accounting estimate is made and may have a significant effect on the consolidated financial statements. Critical accounting estimates include the classification and recoverable amounts of cash generating units (“CGUs”), value of biological assets and inventory, estimating potential future returns and pricing adjustments on revenue, deferred tax assets, share-based compensation, convertible

 

32

 


 

instruments, financial obligations, acquisitions and fair value of assets acquired and liabilities assumed in a business combination. Critical accounting estimates are based on variable inputs including but not limited to:

 

Demand for cannabis for recreational and medical purposes;

 

Price of cannabis;

 

Expected sales volumes;

 

Changes in market discount rates;

 

Future development and operating costs;

 

Costs to convert harvested cannabis to finished goods;

 

Expected yields from cannabis plants;

 

Potential returns and pricing adjustments;

 

Interpretation of income tax laws; and

 

Facts and circumstances supporting the likelihood and amount of contingent liabilities

Changes in critical accounting estimates can have a significant effect on net income as a result of their impact on revenue, costs of sales, provisions, impairments, losses and income taxes. Changes in critical accounting estimates can have a significant effect on the valuation of biological assets, inventory, property, plant and equipment, provisions, derivative financial instruments and accounts payable.

For a detailed discussion regarding the Company’s critical accounting policies and estimates, refer to the notes to the Audited Financial Statements.

NEW ACCOUNTING PRONOUNCEMENTS

The International Accounting Standards Board (IASB) and the IFRS Interpretations Committee regularly issue new and revised accounting pronouncements which have future effective dates and therefore are not reflected in the Company’s consolidated financial statements. Once adopted, these new and amended pronouncements may have an impact on the Company’s consolidated financial statements. The Company’s analysis of recent accounting pronouncements is included in the notes to the Audited Financial Statements.

RISK FACTORS

For a detailed discussion regarding the Company’s risk factors, refer to “Item 3D – Risk Factors” section of the Annual Report to which this MD&A is an exhibit.

DISCLOSURE CONTROLS AND PROCEDURES

The Company has designed disclosure controls and procedures to provide reasonable assurance that: (i) material information relating to the Company is made known to the Company’s Chief Executive Officer and Chief Financial Officer by others, particularly during the period in which the annual and interim filings are being prepared; and (ii) information required to be disclosed by the Company 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 period specified in securities legislation. During the financial year end of the Company, the appropriate officers have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company’s disclosure controls and procedures and have concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2019, as described below.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

The Company has designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. During the financial year end of the Company, the appropriate officers have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company’s internal controls over financial reporting and concluded that the Company’s internal controls over financial reporting were not effective due to the weaknesses in internal controls over financial reporting as at December 31, 2019, as described below.

Background

In connection with the audit of the Company’s consolidated financial statements for the fiscal period ended December 31, 2018, management concluded that there were three material weaknesses in the Company’s internal controls over financial reporting. A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal control over financial reporting such that it is reasonably possible that a material misstatement of the annual or interim financial statements will not be

 

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prevented or detected on a timely basis. The material weaknesses identified include limited number of finance personnel with appropriate experience and knowledge to address complex accounting matters, lack of management review over the valuation model used for biological assets and financing obligations and lack of segregation of duties due to limited number of employees in the finance department. Similar material weaknesses were identified at Bridge Farm.

December 31, 2019 update

During the year end December 31, 2019, the Company implemented a remediation plan including measures necessary to address the underlying causes of these material weaknesses. As at December 31, 2019, the material weaknesses related to the limited number of finance personnel with appropriate experience and knowledge to address complex accounting matters and lack of management review over the valuation model used for biological assets and financing obligations have been remediated through the addition of numerous professionally designated accountants to bring additional knowledge and expertise relating to complex accounting matters. These professionally designated accountants are directly involved in the preparation and review of these complex accounting matters. The Company has also engaged external third-party advisors when complex accounting matters arose to ensure treatment of those matters was appropriate. The Company will continue to seek external third-party advice when complex accounting matters arise in the future.

The material weakness associated with a lack of segregation of duties due to limited number of employees in the finance department was not fully remediated in 2019. While the limited number of employees in the finance department has been remediated with the addition of staff, the specific component of the prior year material weakness related to segregation of duties has not yet been remediated and therefore remained as a material weakness as at December 31, 2019.

2020 Remediation plan

The Company’s remediation plan is ongoing and involves the engagement of external third-party advisors to assist management in evaluating the design and operating effectiveness of internal controls over financial reporting, including identification of business process improvement areas and documenting the future state of significant business processes. This review over internal controls will ensure that measures are implemented to adequately address and remediate any lack of segregation of duties.

The Company expects the remediation of this material weakness to be complete by December 31, 2020. Remediation may take longer than the Company expects, and its efforts may not prove to be successful in remediating this material weakness. The Company may also identify additional material weaknesses in its internal control over financial reporting in the future. It should be noted that a control system, including the Company’s disclosure and internal controls and procedures, no matter how well conceived, can provide only reasonable, but not absolute assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.

ABBREVIATIONS

The following provides a summary of common abbreviations used in this document:

Financial and Business Environment

Measurement

$ or C$

Canadian dollars

G or GM

Gram

IFRS

International Financial Reporting Standards

sq ft

Square feet

MD&A

Management’s Discussion and Analysis

 

 

U.K.

United Kingdom

 

 

U.S.

United States

 

 

US$

United States dollars

 

 

£

Great Britain Pounds

 

 

CBD

Cannabidiol

 

 

THC

Tetrahydrocannabinol

 

 

 

 

 

 

ADVISORY

Forward-Looking Information

This document may contain forward-looking information concerning the Company’s business, operations and financial performance and condition, as well as its plans, objectives and expectations for its business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim”, “anticipate”, “assume”, “believe”, “contemplate”, “continue”, “could”, “due”, “estimate”, “expect”, “goal”, “intend”, “may”, “objective”, “plan”, “predict”, “potential”, “positioned”, “pioneer”, “seek”, “should”, “target”, “will”, “would”, and other similar

 

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expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable technology.

These forward-looking statements are based on current expectations, estimates, forecasts and projections about the Company’s business and the industry in which it operates and management’s beliefs and assumptions, and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond its control. As a result, any or all of the forward-looking information in this document may turn out to be inaccurate. Factors that may case actual results to differ materially from current expectations include, among other things, those listed under the “Item 3D—Risk Factors” section of the Annual Report to which this MD&A is an exhibit. Except as required by law, the Company assumes no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This document contains estimates, projections and other information concerning the Company’s industry, business and the markets for its products. Information that is based on estimates, forecasts, projections, market research of similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, the Company obtained this industry, business, market and other data from its own internal estimates and research as well as from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

In addition, assumptions and estimates of the Company’s and industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the “Item 3D—Risk Factors” section of the Annual Report to which this MD&A is an exhibit. These and other factors could cause the Company’s future performance to differ materially from the Company’s assumptions and estimates.

Further information regarding the assumptions and risks inherent in the making of forward-looking statements can be found in the Company’s most recently filed Annual Report on Form 20-F, along with the Company’s other public disclosure documents. Copies of the Annual Report and other public disclosure documents are available through the SEDAR website which is available at www.sedar.com

Non-IFRS Measures

Certain financial measures in this MD&A do not have a standardized meaning as prescribed by IFRS including consolidated adjusted EBITDA, adjusted EBITDA from cannabis operations, adjusted EBITDA from ornamental flower operations, cash costs to produce, cultivation and production costs and gross margin before fair value adjustments. As such, these measures are considered non-IFRS financial measures. These terms are not defined by IFRS and, therefore, may not be comparable to similar measures provided by other companies. These non-IFRS financial measures should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS. These measures are presented and described in order to provide shareholders and potential investors with additional measures in understanding the Company’s operating results in the same manner as the management team. The definition and reconciliation of each non-IFRS measure is presented in the “NON-IFRS MEASURES” section of this MD&A.

ADDITIONAL INFORMATION

Additional information relating to the Company can be viewed at www.sedar.com or on the Company’s website at www.sndlgroup.com. The information on or accessible through our website is not part of and is not incorporated by reference into this MD&A, and the inclusion of our website address in this MD&A is only for reference.

 

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