Aurora Cannabis Inc 6-K, filed Feb 13, 2020
Aurora Cannabis Inc (ACB)
About this 6-K
Aurora Cannabis Inc filed this 6-K on February 13, 2020.
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of February 2020
Commission File No. 001-38691
AURORA CANNABIS INC.
(Translation of registrant's name into English)
500 - 10355 Jasper Avenue
Edmonton, Alberta, T5J 1Y6, Canada
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F
Form 20-F ☐ Form 40-F ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1) [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7) [ ]
SUBMITTED HEREWITH
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AURORA CANNABIS INC.
/s/ Glen Ibbott
Glen Ibbott
Chief Financial Officer
Date: February 13, 2020
Exhibit 99.1
AURORA CANNABIS INC.
Condensed Consolidated Interim Financial Statements
(Unaudited)
For the three and six months ended December 31, 2019 and 2018
(In Canadian Dollars)
Table of Contents
| Condensed Consolidated Interim Statements of Financial Position | 3 |
| Condensed Consolidated Interim Statements of Comprehensive (Loss) Income | 4 |
| Condensed Consolidated Interim Statements of Changes in Equity | 6 |
| Condensed Consolidated Interim Statements of Cash Flows | 8 |
| Notes to the Condensed Consolidated Interim Financial Statements |
| Note 1 | Nature of Operations | 9 | Note 13 | Convertible Debentures | 23 | |
| Note 2 | Significant Accounting Policies and Judgments | 9 | Note 14 | Loans and Borrowings | 24 | |
| Note 3 | Accounts Receivable | 11 | Note 15 | Share Capital | 25 | |
| Note 4 | Strategic Investments | 12 | Note 16 | Share-Based Compensation | 26 | |
| Note 5 | Marketable Securities and Derivatives | 15 | Note 17 | Earnings Per Share | 27 | |
| Note 6 | Investments in Associates and Joint Ventures | 17 | Note 18 | Other (Expense) Income, Net | 28 | |
| Note 7 | Biological Assets | 17 | Note 19 | Supplementary Cash Flow Information | 28 | |
| Note 8 | Inventory | 18 | Note 20 | Commitments and Contingencies | 28 | |
| Note 9 | Property, Plant and Equipment | 18 | Note 22 | Segmented Information | 31 | |
| Note 10 | Non-Controlling Interests | 20 | Note 23 | Fair Value of Financial Instruments | 32 | |
| Note 11 | Assets Held for Sale | 20 | Note 24 | Financial Instruments Risk | 33 | |
| Note 12 | Intangible Assets and Goodwill | 21 | Note 25 | Subsequent Events | 34 | |
AURORA CANNABIS INC.
Condensed Consolidated Interim Statements of Financial Position
As at December 31, 2019 and June 30, 2019
(Unaudited – Amounts reflected in thousands of Canadian dollars)
| Notes | December 31, 2019 | June 30, 2019 | |||
| $ | $ | ||||
| Assets | |||||
| Current | |||||
| Cash and cash equivalents | 156,334 | 172,727 | |||
| Restricted cash | 14(a) | 45,002 | 46,066 | ||
| Accounts receivable | 3, 24(a) | 82,264 | 103,493 | ||
| Income taxes receivable | 5,290 | 8,833 | |||
| Marketable securities | 5(a) | 26,148 | 143,248 | ||
| Derivatives | 5(b) | 9,551 | - | ||
| Biological assets | 7 | 45,617 | 51,836 | ||
| Inventory | 8 | 205,543 | 113,641 | ||
| Prepaids and other current assets | 35,876 | 24,323 | |||
| Assets held for sale | 11 | 18,234 | - | ||
| 629,859 | 664,167 | ||||
| Property, plant and equipment | 9 | 1,001,917 | 765,567 | ||
| Derivatives | 5(b) | 43,918 | 86,409 | ||
| Deposits | 10,406 | 6,926 | |||
| Loan receivable | 3,312 | - | |||
| Investments in associates and joint ventures | 6 | 69,681 | 118,845 | ||
| Intangible assets | 12 | 503,534 | 688,366 | ||
| Goodwill | 12 | 2,409,285 | 3,172,550 | ||
| Total assets | 4,671,912 | 5,502,830 | |||
| Liabilities | |||||
| Current | |||||
| Accounts payable and accrued liabilities | 24(b) | 125,432 | 152,884 | ||
| Deferred revenue | 21 | 6,151 | 749 | ||
| Convertible debentures | 13 | 30,632 | 235,909 | ||
| Loans and borrowings | 14 | 27,055 | 13,758 | ||
| Contingent consideration payable | 23 | 24,633 | 28,137 | ||
| Deferred gain on derivatives | 20 | 728 | |||
| Provisions | 20(a) | - | 4,200 | ||
| 213,923 | 436,365 | ||||
| Convertible debentures | 13 | 271,122 | 267,672 | ||
| Loans and borrowings | 14 | 273,314 | 127,486 | ||
| Derivative liability | 13(ii) | 8,470 | 177,395 | ||
| Other long-term liability | - | 11,979 | |||
| Deferred tax liability | 81,283 | 91,886 | |||
| Total liabilities | 848,112 | 1,112,783 | |||
| Shareholders’ equity | |||||
| Share capital | 15 | 5,456,618 | 4,673,118 | ||
| Reserves | 138,461 | 139,327 | |||
| Accumulated other comprehensive loss | (170,935 | ) | (143,170 | ) | |
| Deficit | (1,580,499 | ) | (283,638 | ) | |
| Total equity attributable to Aurora shareholders | 3,843,645 | 4,385,637 | |||
| Non-controlling interests | 10 | (19,845 | ) | 4,410 | |
| Total equity | 3,823,800 | 4,390,047 | |||
| Total liabilities and equity | 4,671,912 | 5,502,830 | |||
Nature of Operations (Note 1)
Strategic Investments (Note 4)
Commitments and Contingencies (Note 20)
Subsequent Events (Note 14(a) and 25)
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.
3
AURORA CANNABIS INC.
Condensed Consolidated Interim Statements of Comprehensive Loss
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
| Three months ended December 31, |
Six months ended December 31, | ||||||||
| Notes | 2019 | 2018 | 2019 | 2018 | |||||
| $ | $ | $ | $ | ||||||
| Revenue from sale of goods | 21 | 63,667 | 59,411 | 146,980 | 85,869 | ||||
| Revenue from provision of services | 21 | 1,355 | 2,589 | 3,199 | 5,805 | ||||
| Excise taxes | (8,995 | ) | (7,822 | ) | (18,907 | ) | (7,822 | ) | |
| Net revenue | 56,027 | 54,178 | 131,272 | 83,852 | |||||
| Cost of sales | 33,214 | 25,800 | 65,953 | 39,762 | |||||
| Gross profit before fair value adjustments | 22,813 | 28,378 | 65,319 | 44,090 | |||||
| Changes in fair value of inventory sold | 22,778 | 21,620 | 41,312 | 31,561 | |||||
| Unrealized gain on changes in fair value of biological assets | 7 | (29,880 | ) | (25,384 | ) | (59,616 | ) | (27,663 | ) |
| Gross profit | 29,915 | 32,142 | 83,623 | 40,192 | |||||
| Expense | |||||||||
| General and administration | 70,751 | 43,621 | 129,872 | 79,564 | |||||
| Sales and marketing | 29,131 | 22,741 | 51,142 | 52,117 | |||||
| Acquisition costs | 2,059 | 5,692 | 3,023 | 20,672 | |||||
| Research and development | 6,775 | 1,811 | 12,823 | 5,237 | |||||
| Depreciation and amortization | 9, 12 | 20,847 | 19,263 | 39,056 | 34,385 | ||||
| Share-based compensation | 16(a)(b) | 19,963 | 19,204 | 44,720 | 40,280 | ||||
| 149,526 | 112,332 | 280,636 | 232,255 | ||||||
| Loss from operations | (119,611 | ) | (80,190 | ) | (197,013 | ) | (192,063 | ) | |
| Other (expense) income | |||||||||
| Interest and other income | 2,194 | 128 | 3,171 | 878 | |||||
| Finance and other costs | (23,877 | ) | (10,208 | ) | (41,788 | ) | (18,735 | ) | |
| Foreign exchange (“FX”) loss | (999 | ) | (37 | ) | (4,708 | ) | (508 | ) | |
| Other (expense) income, net | 18 | (168,807 | ) | (119,696 | ) | (41,151 | ) | 109,139 | |
| Impairment of property, plant and equipment | 9 | (51,925 | ) | - | (51,925 | ) | - | ||
| Impairment of investment in associates | 6 | (46,226 | ) | (69,957 | ) | (46,226 | ) | (69,957 | ) |
| Impairment of intangible assets | 12 | (158,695 | ) | - | (158,695 | ) | - | ||
| Impairment of goodwill | 12 | (762,231 | ) | - | (762,231 | ) | - | ||
| (1,210,566 | ) | (199,770 | ) | (1,103,553 | ) | 20,817 | |||
| Loss before taxes | (1,330,177 | ) | (279,960 | ) | (1,300,566 | ) | (171,246 | ) | |
| Income tax recovery (expense) | |||||||||
| Current | 123 | 6,499 | 4,702 | 6,499 | |||||
| Deferred, net | 24,156 | 33,819 | 336 | 29,286 | |||||
| 24,279 | 40,318 | 5,038 | 35,785 | ||||||
| Net loss | (1,305,898 | ) | (239,642 | ) | (1,295,528 | ) | (135,461 | ) | |
| Other comprehensive (loss) income (“OCI”) that will not be reclassified to net loss | |||||||||
| Deferred tax recovery | 1,179 | 25,983 | 3,085 | 18,519 | |||||
| Unrealized loss on marketable securities | 5(a) | (11,481 | ) | (194,346 | ) | (30,555 | ) | (106,760 | ) |
| (10,302 | ) | (168,363 | ) | (27,470 | ) | (88,241 | ) | ||
| Other comprehensive (loss) income that may be reclassified to net loss | |||||||||
| Share of income (loss) from investment in associates | 69 | - | (23 | ) | - | ||||
| Foreign currency translation gain (loss) | (3,701 | ) | 3,002 | (5,497 | ) | (254 | ) | ||
| (3,632 | ) | 3,002 | (5,520 | ) | (254 | ) | |||
| Total other comprehensive loss | (13,934 | ) | (165,361 | ) | (32,990 | ) | (88,495 | ) | |
| Comprehensive loss | (1,319,832 | ) | (405,003 | ) | (1,328,518 | ) | (223,956 | ) | |
4
AURORA CANNABIS INC.
Condensed Consolidated Interim Statements of Comprehensive Loss
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
(Continued)
| Three months ended December 31, |
Six months ended December 31, | ||||||||
| Notes | 2019 | 2018 | 2019 | 2018 | |||||
| $ | $ | $ | $ | ||||||
| Net loss attributable to: | |||||||||
| Aurora Cannabis Inc. | (1,286,129 | ) | (237,752 | ) | (1,273,373 | ) | (132,290 | ) | |
| Non-controlling interests | (19,769 | ) | (1,890 | ) | (22,155 | ) | (3,171 | ) | |
| Comprehensive loss attributable to: | |||||||||
| Aurora Cannabis Inc. | (1,299,964 | ) | (403,105 | ) | (1,306,356 | ) | (220,763 | ) | |
| Non-controlling interests | (19,868 | ) | (1,898 | ) | (22,162 | ) | (3,193 | ) | |
| Net loss per share | |||||||||
| Basic and diluted | 17 | ($1.18 | ) | ($0.25 | ) | ($1.17 | ) | ($0.14 | ) |
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.
5
AURORA CANNABIS INC.
Condensed Consolidated Interim Statements of Changes in Equity
Six months ended December 31, 2019
(Unaudited - Amounts reflected in thousands of Canadian dollars, except share amounts)
| Share Capital | Reserves | AOCI | |||||||||||||||||||||||||||||||
| Note | Common Shares | Amount |
Share-Based Compensation |
Compensation Options/ Warrants |
Convertible Notes |
Change in Ownership Interest |
Total Reserves |
Fair Value |
Deferred Tax |
Associate OCI Pick-up | Foreign Currency Translation |
Total AOCI |
Retained Earnings (Deficit) |
Non-Controlling Interests | Total | ||||||||||||||||||
| # | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Balance, June 30, 2019 | 1,017,438,744 | 4,673,118 | 143,947 | 40,495 | 41,685 | (86,800 | ) | 139,327 | (156,249 | ) | 18,295 | 352 | (5,568 | ) | (143,170 | ) | (283,638 | ) | 4,410 | 4,390,047 | |||||||||||||
| Shares released for earn out payments | 328,935 | 4,075 | - | (2,893 | ) | - | - | (2,893 | ) | - | - | - | - | - | - | - | 1,182 | ||||||||||||||||
| Shares issued through equity financing | 15(b) | 77,507,893 | 325,183 | - | - | - | - | - | - | - | - | - | - | - | - | 325,183 | |||||||||||||||||
| Share issuance costs | - | (7,101 | ) | - | - | - | - | - | - | - | - | - | - | - | - | (7,101 | ) | ||||||||||||||||
| Conversion of notes | 13(i) | 69,135,117 | 433,177 | - | - | (41,266 | ) | - | (41,266 | ) | - | - | - | - | - | - | - | 391,911 | |||||||||||||||
| Deferred tax on convertible notes | - | 688 | - | - | 1,888 | - | 1,888 | - | - | - | - | - | - | - | 2,576 | ||||||||||||||||||
| Exercise of stock options | 16(a) | 938,264 | 6,092 | (3,468 | ) | - | - | - | (3,468 | ) | - | - | - | - | - | - | - | 2,624 | |||||||||||||||
| Exercise of warrants | 15(c) | 11,826 | 102 | - | (29 | ) | - | - | (29 | ) | - | - | - | - | - | - | - | 73 | |||||||||||||||
| Exercise of RSUs | 16(b) | 218,332 | 921 | (921 | ) | - | - | - | (921 | ) | - | - | - | - | - | - | - | - | |||||||||||||||
| Share-based compensation | - | - | 37,840 | 7,983 | - | - | 45,823 | - | - | - | - | - | - | - | 45,823 | ||||||||||||||||||
| Change in ownership interests in subsidiaries | 10 | 2,610,642 | 20,363 | - | - | - | - | - | - | - | - | - | - | (18,263 | ) | (2,100 | ) | - | |||||||||||||||
| Choom marketable securities transferred to investment in associate | 4(g) | - | - | - | - | - | - | - | 5,225 | - | - | - | 5,225 | (5,225 | ) | - | - | ||||||||||||||||
| Comprehensive income (loss) for the period | - | - | - | - | - | - | - | (30,555 | ) | 3,085 | (23 | ) | (5,497 | ) | (32,990 | ) | (1,273,373 | ) | (22,155 | ) | (1,328,518 | ) | |||||||||||
| Balance, December 31, 2019 | 1,168,189,753 | 5,456,618 | 177,398 | 45,556 | 2,307 | (86,800 | ) | 138,461 | (181,579 | ) | 21,380 | 329 | (11,065 | ) | (170,935 | ) | (1,580,499 | ) | (19,845 | ) | 3,823,800 | ||||||||||||
| (1) | As at December 31, 2019, there are 603,386 shares in escrow (June 30, 2019 - 723,255 common shares). These securities were originally deposited in escrow on November 30, 2017 in connection with the acquisition of H2 Biopharma Inc. The escrowed common shares are to be released upon receipt of relevant licenses to cultivate and sell cannabis. During the six months ended December 31, 2019, the Company released 119,869 escrowed common shares on achievement of the milestones (six months ended December 31, 2018 - 1,323,552 common shares). |
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.
6
AURORA CANNABIS INC.
Condensed Consolidated Interim Statements of Changes in Equity
Six months ended December 31, 2018
(Unaudited - Amounts reflected in thousands of Canadian dollars, except share amounts)
| Share Capital | Reserves | AOCI | |||||||||||||||||||||||||||||||
| Common Shares | Amount |
Share-Based Compensation |
Compensation Options/ Warrants |
Convertible Notes | Change in Ownership Interest |
Total Reserves |
Fair Value |
Deferred Tax |
Associate OCI Pick-up | Foreign Currency Translation |
Total AOCI |
Retained Earnings | Non-Controlling Interests | Total | |||||||||||||||||||
| # | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Balance, June 30, 2018 | 568,113,131 | 1,466,433 | 38,335 | 307 | 41,792 | (85,719 | ) | (5,285 | ) | (539 | ) | (55 | ) | - | 61 | (533 | ) | 87,749 | 4,562 | 1,552,926 | |||||||||||||
| Shares issued for business combinations & asset acquisitions | 416,692,177 | 2,917,019 | 75,490 | 27,111 | - | - | 102,601 | - | - | - | - | - | - | - | 3,019,620 | ||||||||||||||||||
| Shares issued for earn out payments | 217,917 | 12,336 | - | 3,283 | - | - | 3,283 | - | - | - | - | - | - | - | 15,619 | ||||||||||||||||||
| Conversion of notes | 331,328 | 1,539 | - | - | (469 | ) | - | (469 | ) | - | - | - | - | - | - | - | 1,070 | ||||||||||||||||
| Deferred tax on convertible notes | - | - | - | - | 425 | - | 425 | - | - | - | - | - | - | - | 425 | ||||||||||||||||||
| Exercise of stock options | 10,854,967 | 81,255 | (49,777 | ) | - | - | - | (49,777 | ) | - | - | - | - | - | - | 415 | 31,893 | ||||||||||||||||
| Exercise of warrants | 1,206,561 | 6,887 | - | (320 | ) | - | - | (320 | ) | - | - | - | - | - | - | - | 6,567 | ||||||||||||||||
| Exercise of RSUs | 666,663 | 1,840 | (1,840 | ) | - | - | - | (1,840 | ) | - | - | - | - | - | - | - | - | ||||||||||||||||
| Forfeited options | - | - | (3,419 | ) | - | - | - | (3,419 | ) | - | - | - | - | - | 3,419 | - | - | ||||||||||||||||
| Share-based compensation | - | - | 40,280 | - | - | - | 40,280 | - | - | - | - | - | - | - | 40,280 | ||||||||||||||||||
| Contribution from NCI | - | - | - | - | - | - | - | - | - | - | - | - | - | 5,850 | 5,850 | ||||||||||||||||||
| Change in ownership interests in subsidiaries | - | - | - | - | - | (4 | ) | (4 | ) | - | - | - | - | - | - | 4 | - | ||||||||||||||||
| Australis Capital first tranche private placement | - | 7,800 | - | - | - | - | - | - | - | - | - | - | - | - | 7,800 | ||||||||||||||||||
| Australis Capital non-controlling interest reclass on loss of control | - | (6,348 | ) | - | - | - | - | - | - | - | - | - | - | - | 6,348 | - | |||||||||||||||||
| Spin-out of Australis Capital | - | - | - | - | - | - | - | - | - | - | - | - | (151,695 | ) | (6,348 | ) | (158,043 | ) | |||||||||||||||
| Reclass gain from Australis Capital shares on derecognition upon spin-out | - | - | - | - | - | - | - | (76,873 | ) | 6,402 | - | - | (70,471 | ) | 70,471 | - | - | ||||||||||||||||
| Comprehensive income (loss) for the period | - | - | - | - | - | - | - | (106,760 | ) | 18,519 | - | (254 | ) | (88,495 | ) | (132,290 | ) | (3,171 | ) | (223,956 | ) | ||||||||||||
| Balance, December 31, 2018 | 998,082,744 | 4,488,761 | 99,069 | 30,381 | 41,748 | (85,723 | ) | 85,475 | (184,172 | ) | 24,866 | - | (193 | ) | (159,499 | ) | (122,346 | ) | 7,660 | 4,300,051 | |||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.
7
AURORA CANNABIS INC.
Condensed Consolidated Interim Statements of Cash Flows
Six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars)
| Six months ended December 31, | |||||
| Notes | 2019 | 2018 | |||
| $ | $ | ||||
| Operating activities | |||||
| Net loss for the period | (1,295,528 | ) | (135,461 | ) | |
| Adjustments for non-cash items: | |||||
| Unrealized gain on changes in fair value of biological assets | 7 | (59,616 | ) | (27,663 | ) |
| Changes in fair value included in inventory sold | 41,312 | 31,561 | |||
| Depreciation of property, plant and equipment | 9 | 40,197 | 19,632 | ||
| Amortization of intangible assets | 12 | 21,121 | 22,349 | ||
| Share-based compensation | 44,720 | 40,280 | |||
| Non-cash acquisition costs | - | 2,230 | |||
| Non-cash compensation expense from acquisitions | - | 3,283 | |||
| Impairment of property, plant and equipment | 9 | 51,925 | - | ||
| Impairment of investment in associate | 6 | 46,226 | 69,957 | ||
| Impairment of intangible assets | 12 | 158,695 | - | ||
| Impairment of goodwill | 12 | 762,231 | - | ||
| Accrued interest and accretion expense | 13, 14 | 9,650 | 10,348 | ||
| Interest and other income | - | (63 | ) | ||
| Deferred tax expense (recovery) | (5,038 | ) | (29,286 | ) | |
| Other (expense) income, net | 18 | 41,151 | (109,139 | ) | |
| Foreign exchange loss | 4,708 | 508 | |||
| Changes in non-cash working capital | 19 | (91,369 | ) | (31,488 | ) |
| Net cash used in operating activities | (229,615 | ) | (132,952 | ) | |
| Investing activities | |||||
| Marketable securities, derivatives and convertible debenture investments | 5 | (2,000 | ) | (49,286 | ) |
| Proceeds from disposal of marketable securities | 5 | 84,770 | 35,593 | ||
| Loan receivable | (3,312 | ) | - | ||
| Purchase of property, plant and equipment and intangible assets | 9 | (237,120 | ) | (150,107 | ) |
| Disposal of property, plant and equipment | 2,100 | - | |||
| Acquisition of businesses, net of cash acquired | - | 119,558 | |||
| Payment of contingent consideration | (1,607 | ) | - | ||
| Deposits | (3,902 | ) | (1,497 | ) | |
| Investments in associates | 6 | - | 959 | ||
| Net cash used in investing activities | (161,071 | ) | (44,780 | ) | |
| Financing activities | |||||
| Proceeds from long-term loans | 64,394 | 150,972 | |||
| Repayment of long-term loans | (3,750 | ) | (9,096 | ) | |
| Repayment of short-term loans | - | (2,249 | ) | ||
| Payments of lease liabilities | 14(b) | (6,491 | ) | - | |
| Restricted cash | 1,064 | (28,031 | ) | ||
| Financing fees | (941 | ) | (4,495 | ) | |
| Shares issued for cash, net of share issue costs | 320,779 | 38,446 | |||
| Capital contribution from non-controlling interest | - | 5,854 | |||
| Net cash provided by financing activities | 375,055 | 151,401 | |||
| Effect of foreign exchange on cash and cash equivalents | (762 | ) | (2,439 | ) | |
| Decrease in cash and cash equivalents | (16,393 | ) | (28,770 | ) | |
| Cash and cash equivalents, beginning of period | 172,727 | 76,785 | |||
| Cash and cash equivalents, end of period | 156,334 | 48,015 | |||
Supplemental cash flow information (Note 19)
The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.
8
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Note 1 Nature of Operations
Aurora was incorporated under the Business Corporations Act (British Columbia) on December 21, 2006 as Milk Capital Corp. Effective October 2, 2014, the Company changed its name to Aurora Cannabis Inc. The Company’s shares are listed on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”) under the trading symbol “ACB”, and on the Frankfurt Stock Exchange (“FSE”) under the trading symbol “21P”.
The Company’s head office and principal address is Suite 500 - 10355 Jasper Avenue, Edmonton, Alberta, Canada, T5J 1Y6. The Company’s registered and records office address is Suite 1500 - 1055 West Georgia Street, Vancouver, BC V6E 4N7.
The Company’s principal strategic business lines are focused on the production, distribution and sale of cannabis and hemp products in Canada and internationally. Aurora currently conducts the following key business activities in the jurisdictions listed below:
| • | Production, distribution and sale of medical and consumer cannabis products in Canada pursuant to the Cannabis Act; and |
| • | Distribution of wholesale medical cannabis in the European Union (“EU”) pursuant to the German Medicinal Products Act and German Narcotic Drugs Act. |
The United States (“U.S.”) represents the largest cannabis and hemp-derived cannabidiols (“CBD”) market globally and as such, Aurora continues to evaluate its alternatives to establishing an operating footprint in the U.S. As part of the U.S. market strategy, we are considering how various state and federal regulations will affect the Company’s business prospects. The Company is committed to only engage in activities which are permissible under both state and federal laws.
Note 2 Significant Accounting Policies and Judgments
| (a) | Basis of Presentation and Measurement |
The condensed consolidated interim financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and International Accounting Standards 34, “Interim Financial Reporting” (“IAS34”) as issued by the International Accounting Standards Board (“IASB”), and interpretations of the IFRS Interpretations Committee (“IFRIC”). Unless otherwise noted, all amounts are presented in thousands of Canadian dollars, except share and per share data.
The condensed consolidated interim financial statements are presented in Canadian dollars and are prepared in accordance with the same accounting policies, critical estimates and methods described in the Company’s annual consolidated financial statements, except for the adoption of new accounting standards identified in Note 2(c) and assets held for sale in Note 11. Given that certain information and footnote disclosures, which are included in the annual audited consolidated financial statements, have been condensed or excluded in accordance with IAS 34, these financial statements should be read in conjunction with our annual audited consolidated financial statements as at and for the year ended June 30, 2019, including the accompanying notes thereto.
For comparative purposes, the Company has reclassified certain immaterial items on the comparative consolidated statement of financial position and the consolidated statement of comprehensive loss to conform with current period’s presentation.
| (b) | Basis of Consolidation |
The condensed consolidated interim financial statements include the financial results of the Company and its subsidiaries. Subsidiaries include entities which are wholly-owned as well as entities over which Aurora has the authority or ability to exert power over the investee’s financial and/or operating decisions (i.e. control), which in turn may affect the Company’s exposure or rights to the variable returns from the investee. The condensed consolidated interim financial statements include the operating results of acquired or disposed entities from the date control is obtained or the date control is lost, respectively. All intercompany balances and transactions are eliminated upon consolidation.
The Company’s principal wholly-owned subsidiaries are as follows:
| Major subsidiaries | Percentage Ownership | Functional Currency |
| 1769474 Alberta Ltd. (“1769474”) | 100% | Canadian Dollar |
| 2105657 Alberta Inc. (“2105657”) | 100% | Canadian Dollar |
| Aurora Cannabis Enterprises Inc. (“ACE”) | 100% | Canadian Dollar |
| Aurora Deutschland GmbH (“Aurora Deutschland”) | 100% | European Euro |
| Aurora Nordic Cannabis A/S (“Aurora Nordic”) | 51% | Danish Krone |
| CanniMed Therapeutics Inc. (“CanniMed”) | 100% | Canadian Dollar |
| H2 Biopharma Inc. (“H2” or “Aurora Eau”) | 100% | Canadian Dollar |
| MedReleaf Corp. (“MedReleaf”) | 100% | Canadian Dollar |
| Peloton Pharmaceuticals Inc. (“Peloton” or “Aurora Vie”) | 100% | Canadian Dollar |
All shareholdings are of ordinary shares or other equity. Other subsidiaries, while included in the consolidated financial statements, are not material and have not been reflected in the table above.
9
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
| (c) | Adoption of New Accounting Pronouncements Effective July 1, 2019 |
| (i) | IFRS 16 Leases |
In January 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), which replaces IAS 17, Leases (“IAS 17”) and related interpretations. The standard introduces a single lessee accounting model and requires lessees to recognize assets and liabilities for all leases with a term exceeding 12 months, unless the underlying asset is insignificant. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. Lessors continue to classify leases as operating or finance, with lessor accounting remaining substantially unchanged from the preceding guidance under IAS 17. The Company adopted the standard on July 1, 2019 using the modified retrospective method, with the cumulative effect initially recognized in retained earnings, and no restatement of prior comparative periods.
The majority of our property leases, which were previously treated as operating leases, were impacted by IFRS 16. The adoption of IFRS 16 has resulted in:
| i) | higher non-current assets related to the initial recognition of the present value of our unavoidable future lease payments as right-of-use assets under property, plant and equipment, adjusted by the amount of any prepaid or accrued lease payments relating to the lease recognized in the balance sheet as at July 1, 2019; |
| ii) | higher current and non-current liabilities related to the concurrent recognition of lease liabilities, which are measured at the present value of the remaining fixed lease payments, discounted by our weighted average incremental borrowing rate of 5.62% as of July 1, 2019; |
| iii) | replacement of rent expense previously recorded in cost of goods sold, general and administration, and sales and marketing expenses with depreciation expense of these right-of-use assets and higher finance costs related to the accretion and interest expense of the corresponding lease liabilities; and |
| iv) | variable lease payments and non-lease components are expensed as incurred. |
The new standard does not change the amount of cash transferred between the lessor and lessee but impacts the presentation of the operating and financing cash flows presented on the Company’s consolidated statement of cash flows by decreasing operating cash flows and increasing financing cash flows.
The Company elected to apply the following recognition exemptions and practical expedients, as described under IFRS 16:
| i) | recognition exemption of short-term leases; |
| ii) | recognition exemption of low-value leases; |
| iii) | application of a single discount rate to a portfolio of leases with similar characteristics on transition; |
| iv) | exclusion of initial direct costs from the measurement of the right-of-use assets upon transition; |
| v) | application of hindsight in determining the applicable lease term at the date of transition; and |
| vi) | election to not separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component. |
The following table summarizes the adjustments to opening balances resulting from the initial adoption of IFRS 16, with the effects on transition being recognized directly to retained earnings:
| As at July 1, 2019 | As previously reported under IAS 17 | IFRS 16 transition adjustments | As reported under IFRS 16 | |||
| $ | $ | $ | ||||
| Prepaid deposits | 24,323 | (585 | ) | 23,738 | ||
| Property, plant and equipment | 765,567 | 96,049 | 861,616 | |||
| Current loans and borrowings | (13,758 | ) | (6,630 | ) | (20,388 | ) |
| Non-current loans and borrowings | (127,486 | ) | (88,834 | ) | (216,320 | ) |
| Accumulated deficit | 283,638 | - | 283,638 | |||
The following table reconciles the operating lease commitments as at June 30, 2019 to the opening balance of lease liabilities as at July 1, 2019:
| Operating lease commitments as at June 30, 2019 | $ | 94,780 | |
| Add: finance lease liabilities recognized as at June 30, 2019 | 1,318 | ||
| Add: adjustments as a result of a different treatment for extension and termination options | 94,829 | ||
| Effect of discounting using the lessee's incremental borrowing rate | (88,767 | ) | |
| Less: lease commitments not yet in effect | (4,068 | ) | |
| Less: short-term, low-value asset leases and others | (1,310 | ) | |
| Lease liabilities recognized as at July 1, 2019 | $ | 96,782 | |
10
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
As a result of adopting IFRS 16, the Company updated its lease accounting policies as follows:
The Company assesses whether a contract is or contains a lease at inception of the contract. A lease is recognized as a right-of-use asset and corresponding liability at the commencement date. Each lease payment included in the lease liability is apportioned between the repayment of the liability and a finance cost. The finance cost is recognized in “finance and other costs” in the condensed consolidated interim statement of comprehensive loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability. Lease liabilities represent the net present value of fixed lease payments (including in-substance fixed payments); variable lease payments based on an index, rate, or subject to a fair market value renewal condition; amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if it is probable that the lessee will exercise that option.
The Company’s lease liability is recognized net of lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate. The period over which the lease payments are discounted is the expected lease term, including renewal and termination options that the Company is reasonably certain to exercise.
Payments associated with short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis in general and administration and sales and marketing expense in the condensed consolidated interim statement of comprehensive loss. Short-term leases are defined as leases with a lease term of 12 months or less. Variable lease payments that do not depend on an index, rate, or subject to a fair market value renewal condition are expensed as incurred and recognized in costs of goods sold, general and administration or sales and marketing expense, as appropriate given how the underlying leased asset is used, in the consolidated statement of comprehensive loss.
Right-of-use assets are measured at cost, which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the commencement date, any initial direct costs and related restoration costs. The right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the useful life of the underlying asset. The depreciation is recognized from the commencement date of the lease.
| (ii) | IFRIC 23 Uncertainty Over Income Tax Treatments |
IFRIC 23 provides guidance that adds to the requirements in IAS 12, Income Taxes by specifying how to reflect the effects of uncertainty in accounting for income taxes. IFRIC 23 requires an entity to determine whether uncertain tax positions are assessed separately or as a group; and assess whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used, by an entity in its income tax filings. If yes, the entity should determine its accounting tax position consistently with the tax treatment used or planned to be used in its income tax filings. If not, the entity should reflect the effect of uncertainty in determining its accounting tax position. The Company adopted IFRIC 23 effective July 1, 2019 and was applied using the modified retrospective approach without restatement of comparative information. There was no material impact on the Company’s consolidated financial statements.
| (d) | New Accounting Pronouncements |
The following IFRS standards have been recently issued by the IASB. Pronouncements that are irrelevant or not expected to have a significant impact have been excluded.
Definition of a Business
In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)”. The amendments clarify the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendment provides an assessment framework to determine when a series of integrated activities is not a business. The amendments are effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.
Amendments to IFRS 9, IAS 39 and IFRS 7
The amendments revise the existing requirements for hedge accounting and are designed to support the provision of useful financial information by companies during the period of uncertainty arising from the phasing out of interest-rate benchmarks such as IBORs. The amendments modify some specific hedge accounting requirements to provide relief from potential effects of the uncertainty caused by the IBOR reform. In addition, the amendments require companies to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties. The amendments are effective for annual periods beginning on or after January 1, 2020, with earlier application permitted. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.
Note 3 Accounts Receivable
| December 31, 2019 | June 30, 2019 | ||||
| $ | $ | ||||
| Trade receivables | 63,698 | 85,232 | |||
| Sales taxes receivable | 18,566 | 18,261 | |||
| 82,264 | 103,493 | ||||
11
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Note 4 Strategic Investments
| (a) | Cann Group Limited (“Cann Group”) |
Cann Group is a public company listed on the Australian Stock Exchange and is licensed in Australia for research and cultivation of medical cannabis for human use.
As of December 31, 2019, the Company held an aggregate of 31,956,347 shares in Cann Group (June 30, 2019 - 31,956,347), representing a 22.4% ownership interest (June 30, 2019 - 22.5%). Given that the Company has significant influence over Cann Group, the investment has been accounted for under the equity method (Note 6). Based on Cann Group’s closing stock price of A$0.63 on December 31, 2019, the 31,956,347 shares classified under investment in associates have a fair value of approximately $18.2 million (A$19.9 million). During the three and six months ended December 31, 2019, the Company assessed the carrying value of the investment against the estimated recoverable amount and as a result, recognized an impairment charge of $37.2 million (three and six months ended December 31, 2018 - nil) which has been recognized through the statement of comprehensive loss (Note 6).
| (b) | Alcanna Inc. (“Alcanna”) |
Alcanna is an Alberta based public company listed on the TSX. Its principal business activity is the retailing of wines, beers and spirits in Canada and the U.S. Alcanna also has developed and launched a retail cannabis business in Alberta and has advanced plans to develop and launch a retail cannabis business in other Canadian jurisdictions where private retailing is permitted.
| (i) | Common Shares and Investment in Associate |
As of December 31, 2019, the Company held an aggregate of 9,200,000 shares in Alcanna (June 30, 2019 - 9,200,000) representing a 24.8% ownership interest (June 30, 2019 - 24.8%) with a fair value of $40.9 million (June 30, 2019 - $54.9 million) based on the closing stock price of $4.45 (June 30, 2019 - $5.97). Given that the Company has significant influence over Alcanna, the investment is accounted for under the equity method (Note 6).
| (ii) | Warrants |
During the three and six months ended December 31, 2019, 10,130,000 warrants in Alcanna expired unexercised. At December 31, 2019, the Company’s remaining 1,750,000 warrants in Alcanna (June 30, 2019 - 11,880,000) had a fair value of $0.2 million (June 30, 2019 - $0.4 million) resulting in a net unrealized loss of $0.01 million and $0.2 million for the three and six months ended December 31, 2019, respectively (three and six months ended December 31, 2018 - $5.7 million and $2.3 million) (Note 5(b)). The fair value of the warrants was estimated using the Binomial model with the following weighted average assumptions: risk-free interest rate of 2.01% (June 30, 2019 - 1.93%); dividend yield of 0% (June 30, 2019 - 0%); historical stock price volatility of 48.85% (June 30, 2019 - 46.32%); and an expected life of 2.09 years (June 30, 2019 - 0.49 years). If the estimated volatility increased or decreased by 10%, the estimated fair value would increase or decrease by approximately $0.2 million.
| (c) | Capcium Inc. (“Capcium”) |
Capcium is a Montreal-based private company which is in the business of manufacturing soft-gels.
As of December 31, 2019, the Company held 8,828,662 shares (June 30, 2019 - 8,828,662) in Capcium representing an 18.5% ownership interest. Given that the Company has significant influence over Capcium, the investment has been accounted for under the equity method (Note 6). During the three months ended December 31, 2019, the Company identified indicators of impairment within its investment in associate and as such assessed the carrying value of the investment against the estimated recoverable amount. The recoverable amount of the investment in associate was determined using a value-in-use calculation by discounting the most recent expected future net cash flows to the Company from the investment in associate. As a result, management recognized an impairment loss of $9.0 million through the statement of comprehensive loss (Note 6).
The Company also holds debentures in Capcium that are convertible at the option of Aurora upon the occurrence of a Liquidity Event, which is the occurrence of either a public offering, a reverse take-over or a merger transaction which results in the common shares of Capcium being listed on a recognized stock exchange. The convertible debentures have a fair value of nil (June 30, 2019 - $7.5 million)(Note 5(b)), which resulted in unrealized loss of $7.4 million and $7.5 million for the three and six months ended December 31, 2019, respectively (three and six months ended December 31, 2018 - unrealized gain of $0.6 million and $2.0 million). The fair value of the convertible debenture was estimated using the Monte-Carlo and FINCAD model with the following assumptions: share price of $1.13 (June 30, 2019 - $1.13); risk-free rate of 1.96% (June 30, 2019 - 1.83%); dividend yield of 0% (June 30, 2019 - 0%); stock price volatility of 39% (June 30, 2019 - 46%); an expected life of 0.68 years (June 30, 2019 - 1.44 years); adjusted for a credit spread of 26% (June 30, 2019 - 26%) and a probability factor of 0% (June 30, 2019 - 80%) for the Liquidity Event. The Company also estimates the probability of collection in its assessment of fair value. If the estimated volatility increased or decreased by 10%, the estimated change in fair value would be negligible.
12
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
| (d) | The Green Organic Dutchman Holdings Ltd. (“TGOD”) |
TGOD is an Ontario based licensed producer of cannabis in Canada, which is publicly listed on the TSX.
During the six months ended December 31, 2019, the Company sold its remaining 28,833,334 common shares of TGOD for gross proceeds of $86.5 million at an average price of $3.00 per share resulting in a realized loss of $115.3 million. The realized loss was calculated based on the deemed cost of $6.94 per share, which represents the September 27, 2018 quoted market price at the time the Company lost significant influence. As of December 31, 2019, the Company no longer holds any share of TGOD, however, the Company continues to hold warrants to purchase 19,837,292 shares of TGOD, which consist of 16,666,667 subscription receipt warrants and 3,170,625 participating right warrants.
As of December 31, 2019, the $2.1 million fair value (June 30, 2019 - $23.6 million) of the remaining 16,666,667 subscription receipt warrants (Note 5(b)) was estimated using the quoted market price of $0.0004 (June 30, 2019 - $1.41), contributing to a total fair value loss of $10.1 million and $21.5 million for the three and six months ended December 31, 2019 (three and six months ended December 31, 2018 - $78.6 million and $80.2 million).
As of December 31, 2019, the nominal (June 30, 2019 - $0.6 million) fair value of the 3,170,625 participation right warrants was estimated using the Monte-Carlo model with the following weighted average assumptions: share price of $0.75 (June 30, 2019 - $3.23); risk-free interest rate of 1.98% (June 30, 2019 - 1.77%); dividend yield of 0% (June 30, 2019 - 0%); stock price volatility of 103.35% (June 30, 2019 - 74.56%); and an expected life of 0.34 years (June 30, 2019 - 0.84 years). In connection with the valuation of the participation right warrants, the Company recognized a fair value loss of $0.01 million and $0.6 million during the three and six months ended December 31, 2019 (three and six months ended December 31, 2018 - $5.2 million and $3.8 million).
| (e) | High Tide Inc. (“High Tide”) |
High Tide is an Alberta based, retail focused cannabis and lifestyle accessories company.
On December 12, 2018, the Company invested $10.0 million in unsecured convertible debentures bearing an interest rate of 8.5% per annum and maturing on December 12, 2020. The December 2018 debentures are convertible into common shares of High Tide at $0.75 per share at the option of the Company at any time after June 12, 2019. On November 14, 2019, the Company invested $2.0 million in senior unsecured convertible debentures of High Tide bearing an interest rate of 10% per annum and maturing on November 14, 2021. The November 2019 debentures are convertible into common shares of High Tide at $0.252 per share at the option of the Company any time after May 14, 2020. The conversion of the derivatives in High Tide are subject to Aurora holding no more than 9.9% ownership interest in High Tide.
At December 31, 2019, the convertible debentures had a fair value of $12.9 million (June 30, 2019 - $10.2 million) resulting in an unrealized gain of $0.6 million for both the three and six months ended December 31, 2019 (three and six months ended December 31, 2018 - nil). The fair value of the convertible debentures were estimated using the FINCAD model based on the following weighted average assumptions: share price of $0.17 (June 30, 2019 - $0.36); dividend yield of 0% (June 30, 2019 - 0%); stock price volatility of 95.0% (June 30, 2019 - 70.2%); credit spread of 11.7% (June 30, 2019 - 13.5%); expected life of 1.13 years (June 30, 2019 - 1.51 years).
| (f) | Australis Capital Inc. (“ACI”) |
ACI is a public company that is focused on building the infrastructure required to meet the demands of the growing U.S. cannabis market. ACI was previously wholly-owned by Aurora and was spun-out to Aurora shareholders on September 19, 2018. As of December 31, 2019, the Company holds the following restricted back-in right warrants:
| (a) | 22,628,751 warrants exercisable at $0.20 per share expiring September 19, 2028; and |
| (b) | The number of warrants equal to 20% of the number of common shares issued and outstanding in ACI as of the date of exercise. The warrants are exercisable at the five-day volume weighted average trading price (“VWAP”) of ACI’s shares and have an expiration date of September 19, 2028. |
Aurora is restricted from exercising the back-in right warrants unless all of ACI’s business operations in the U.S. are permitted under applicable U.S. federal and state laws and Aurora has received consent of the TSX and any other stock exchange on which Aurora may be listed, as required. As of December 31, 2019, the warrants remain un-exercisable.
As of December 31, 2019, the warrants had a fair value of $5.3 million (June 30, 2019 - $10.1 million) estimated using the Binomial model with the following assumptions: share price of $0.45 (June 30, 2019 - $0.92); risk-free interest rate of 2.14% (June 30, 2019 - 1.81%); dividend yield of 0% (June 30, 2019 - 0%); stock price volatility of 100.95% (June 30, 2019 - 48.97%); an expected life of 8.73 years (June 30, 2019 - 9.23 years); and adjusted for a probability factor of legalization of cannabis in the U.S. under federal and certain state laws. As a result, the Company recognized a $2.8 million and $4.7 million unrealized loss on fair value during the three and six months ended December 31, 2019, respectively (three and six months ended December 31, 2018 - nil) (Note 5(b)).
13
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
| (g) | Choom Holdings Inc. (“Choom”) |
Choom is an emerging consumer cannabis company that is developing retail networks across Canada. Choom is publicly listed on the Canadian Securities Exchange.
On June 12, 2018, the Company subscribed to 9,859,155 common shares of Choom at $0.71 per share for a total cost of $7.0 million, representing an 8% ownership interest. The $9.3 million fair value of the shares at initial recognition was based on a quoted market price of $0.94 per share which differed from the transaction price resulting in an unrealized gain of $2.3 million recognized at inception immediately through profit and loss for the year ended June 30, 2018.
On November 2, 2018, the Company subscribed to a $20.0 million unsecured convertible debenture in Choom bearing interest at 6.5% per annum and maturing on November 2, 2022. The debenture is convertible into common shares of Choom at $1.25 per share after March 3, 2019. In connection with the debenture, the Company also received an aggregate of 96,464,248 share purchase warrants in Choom. The share purchase warrants are exercisable between $1.25 and $2.75 per share beginning November 2, 2018 and expire on November 2, 2020. Per the terms of the arrangement and in accordance with the Cannabis Retail Regulations in Ontario, licensed producers are subject to an ownership interest in licensed retailers. On December 12, 2019, the Cannabis Retail Regulations in Ontario was amended increasing the ownership restriction to 25% from 9.9%.
| (i) | Common Shares and Investment in Associate |
As a result of the amendment to the Cannabis Retail Regulations in Ontario, the Company now has the right to acquire up to 25% of the voting rights in Choom, an increase from 9.9%. As a result of this increase to potential future ownership, the Company obtained significant influence in Choom effective December 12, 2019, being the date of the amendment. The 9,859,155 common shares had a fair value of $1.8 million based on a quoted market price of $0.18 and was reclassified from marketable securities (Note 5(a)) to investment in associates (Note 6). The cumulative unrealized loss of $5.2 million as at December 12, 2019 was reclassified from other comprehensive loss to deficit. As of December 31, 2019, the Company held an aggregate of 9,859,155 shares in Choom (June 30, 2019 - 9,859,155) representing a 4.9% ownership interest with a fair value of $1.8 million based on the closing stock price of $0.18.
14
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Note 5 Marketable Securities and Derivatives
| (a) | Marketable securities |
At December 31, 2019, the Company held the following marketable securities:
| Financial asset hierarchy level | Level 1 | Level 1 | Level 1 | Level 1 | Level 1 | Level 1 | Level 3 | |||||||||
| Marketable securities designated at fair value through other comprehensive income (“FVTOCI”) | Micron | Radient |
TGOD Note 4(d) |
ACI Note 4(f) |
Choom Note 4(g) |
EnWave | Other immaterial investments | Total | ||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||
| Balance, June 30, 2019 | 1,148 | 30,866 | 93,132 | - | 4,388 | 12,619 | 1,095 | 143,248 | ||||||||
| Disposals | - | - | (84,770 | ) | - | - | - | - | (84,770 | ) | ||||||
| Transfer to investment in associates | - | - | - | - | (1,775 | ) | - | - | (1,775 | ) | ||||||
| Unrealized loss on changes in fair value | (949 | ) | (14,869 | ) | (8,362 | ) | - | (2,613 | ) | (3,712 | ) | (50 | ) | (30,555 | ) | |
| Balance, December 31, 2019 | 199 | 15,997 | - | - | - | 8,907 | 1,045 | 26,148 | ||||||||
| Unrealized gain (loss) on marketable securities | ||||||||||||||||
| Three months ended December 31, 2019 | ||||||||||||||||
| OCI unrealized loss | (662 | ) | (8,093 | ) | - | - | (1,479 | ) | (1,220 | ) | (27 | ) | (11,481 | ) | ||
| Three months ended December 31, 2018 | ||||||||||||||||
| OCI unrealized loss | (1,124 | ) | (17,318 | ) | (168,461 | ) | - | (7,443 | ) | - | - | (194,346 | ) | |||
| Six months ended December 31, 2019 | ||||||||||||||||
| OCI unrealized loss | (949 | ) | (14,869 | ) | (8,362 | ) | - | (2,613 | ) | (3,712 | ) | (50 | ) | (30,555 | ) | |
| Six months ended December 31, 2018 | ||||||||||||||||
| OCI unrealized (loss) gain | (1,168 | ) | (16,188 | ) | (157,749 | ) | 76,873 | (8,528 | ) | - | - | (106,760 | ) | |||
15
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
| (b) | Derivatives |
At December 31, 2019, the Company held the following derivative investments:
| Financial asset hierarchy level | Level 3 | Level 3 | Level 3 | Level 2 | Level 2 | Level 2 | Level 2 | Level 2 | Level 3 | Level 2 | Level 2 | |||||||||||||
| Derivatives and convertible debentures at fair value through profit or loss (“FVTPL”) | Micron | Radient | Alcanna Note 4(b) | CTT | Capcium Note 4(c) | TGOD Note 4(d) | ACI Note 4(f) |
Choom Note 4(g) |
Investee-B | High Tide Note 4(e) | Namaste | Total | ||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||
| Balance, June 30, 2019 | 84 | 65 | 425 | 33 | 7,518 | 24,162 | 10,083 | 19,369 | 14,316 | 10,241 | 113 | 86,409 | ||||||||||||
| Additions | - | - | - | - | - | - | - | - | - | 2,000 | - | 2,000 | ||||||||||||
| Unrealized (loss) gain on changes in fair value | (84 | ) | (65 | ) | (236 | ) | (26 | ) | (7,518 | ) | (22,112 | ) | (4,742 | ) | (847 | ) | 126 | 640 | (100 | ) | (34,964 | ) | ||
| Foreign exchange | - | - | - | - | - | - | - | - | 24 | - | - | 24 | ||||||||||||
| Balance, December 31, 2019 | - | - | 189 | 7 | - | 2,050 | 5,341 | 18,522 | 14,466 | 12,881 | 13 | 53,469 | ||||||||||||
| Current portion | - | - | - | - | - | (1 | ) | - | - | - | (9,550 | ) | - | (9,551 | ) | |||||||||
| Long-term portion | - | - | 189 | 7 | - | 2,049 | 5,341 | 18,522 | 14,466 | 3,331 | 13 | 43,918 | ||||||||||||
| Unrealized gain (loss) on derivatives (Note 18) | ||||||||||||||||||||||||
| Three months ended December 31, 2019 | ||||||||||||||||||||||||
| Foreign exchange gain | - | - | - | - | - | - | - | - | 24 | - | - | 24 | ||||||||||||
| Inception gains amortized | 153 | 171 | - | - | - | - | - | - | - | - | - | 324 | ||||||||||||
| Unrealized (loss) gain on changes in fair value | (31 | ) | - | (11 | ) | (438 | ) | (7,369 | ) | (10,175 | ) | (2,759 | ) | (210 | ) | (44 | ) | 634 | (58 | ) | (20,461 | ) | ||
| 122 | 171 | (11 | ) | (438 | ) | (7,369 | ) | (10,175 | ) | (2,759 | ) | (210 | ) | (20 | ) | 634 | (58 | ) | (20,113 | ) | ||||
| Three months ended December 31, 2018 | ||||||||||||||||||||||||
| Inception gains amortized | 153 | 232 | - | - | - | - | - | - | - | - | - | 385 | ||||||||||||
| Unrealized (loss) gain on changes in fair value | (648 | ) | (1,044 | ) | (5,651 | ) | (28,014 | ) | 353 | (83,853 | ) | - | (806 | ) | 118 | - | (712 | ) | (120,257 | ) | ||||
| (495 | ) | (812 | ) | (5,651 | ) | (28,014 | ) | 353 | (83,853 | ) | - | (806 | ) | 118 | - | (712 | ) | (119,872 | ) | |||||
| Six months ended December 31, 2019 | ||||||||||||||||||||||||
| Foreign exchange gain | - | - | - | - | - | - | - | - | 24 | - | - | 24 | ||||||||||||
| Inception gains amortized | 306 | 403 | - | - | - | - | - | - | - | - | - | 709 | ||||||||||||
| Unrealized (loss) gain on changes in fair value | (84 | ) | (65 | ) | (236 | ) | (26 | ) | (7,518 | ) | (22,112 | ) | (4,742 | ) | (847 | ) | 126 | 640 | (100 | ) | (34,964 | ) | ||
| 222 | 338 | (236 | ) | (26 | ) | (7,518 | ) | (22,112 | ) | (4,742 | ) | (847 | ) | 150 | 640 | (100 | ) | (34,231 | ) | |||||
| Six months ended December 31, 2018 | ||||||||||||||||||||||||
| Foreign exchange gain | - | - | - | - | - | - | - | - | 600 | - | - | 600 | ||||||||||||
| Inception gains amortized | 306 | 464 | - | - | - | - | - | - | - | - | - | 770 | ||||||||||||
| Unrealized (loss) gain on changes in fair value | (786 | ) | (1,113 | ) | (2,296 | ) | (14,440 | ) | 1,914 | (84,049 | ) | 68,514 | (806 | ) | (346 | ) | - | (289 | ) | (33,697 | ) | |||
| (480 | ) | (649 | ) | (2,296 | ) | (14,440 | ) | 1,914 | (84,049 | ) | 68,514 | (806 | ) | 254 | - | (289 | ) | (32,327 | ) | |||||
16
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Note 6 Investments in Associates and Joint Ventures
The carrying value of investments in associates and joint ventures consist of:
| Cann Group | Alcanna | CTT | Capcium | Choom | Total | ||||||||
| Note 4(a) | Note 4(b) | Note 4(c) | Note 4(g) | ||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||
| Balance, June 30, 2019 | 57,017 | 50,950 | 1,025 | 9,853 | - | 118,845 | |||||||
| Share of net loss | (615 | ) | (1,471 | ) | (7 | ) | (299 | ) | - | (2,392 | ) | ||
| OCI FX and share of OCI loss | (1,568 | ) | (91 | ) | - | - | - | (1,659 | ) | ||||
| Balance, September 30, 2019 | 54,834 | 49,388 | 1,018 | 9,554 | - | 114,794 | |||||||
| Additions | - | - | - | - | 1,775 | 1,775 | |||||||
| Share of net loss(1) | (613 | ) | (759 | ) | (17 | ) | (541 | ) | - | (1,930 | ) | ||
| Impairment | (37,213 | ) | - | - | (9,013 | ) | - | (46,226 | ) | ||||
| OCI FX and share of OCI income (loss) | 1,207 | 69 | (8 | ) | - | - | 1,268 | ||||||
| Balance, December 31, 2019 | 18,215 | 48,698 | 993 | - | 1,775 | 69,681 | |||||||
| (1) | Represents an estimate of the Company’s share of net loss based on the latest available information of each investee. |
Note 7 Biological Assets
The following inputs and assumptions are all categorized within Level 3 on the fair value hierarchy and were used in determining the fair value of biological assets:
| Inputs and assumptions | Description | Correlation between inputs and fair value |
| Average selling price per gram | Represents the average selling price per gram of dried cannabis net of excise taxes, where applicable, for the period for all strains of cannabis sold, which is expected to approximate future selling prices. | If the average selling price per gram were higher (lower), estimated fair value would increase (decrease). |
| Average attrition rate | Represents the weighted average number of plants culled at each stage of production. | If the average attrition rate was lower (higher), estimated fair value would increase (decrease). |
| Weighted average yield per plant | Represents the weighted average number of grams of dried cannabis inventory expected to be harvested from each cannabis plant. | If the weighted average yield per plant was higher (lower), estimated fair value would increase (decrease). |
| Standard cost per gram to complete production | Based on actual production costs incurred divided by the grams produced in the period. | If the standard cost per gram to complete production was lower (higher), estimated fair value would increase (decrease). |
| Stage of completion in the production process | Calculated by taking the weighted average number of days in production over a total average grow cycle of approximately twelve weeks. | If the number of days in production was higher (lower), estimated fair value would increase (decrease). |
The following table highlights the sensitivities and impact of changes in significant assumptions on the fair value of biological assets:
| Significant inputs & assumptions | Range of inputs | Impact on fair value | |||||||
| December 31, 2019 | June 30, 2019 | Sensitivity | December 31, 2019 | June 30, 2019 | |||||
| Average selling price per gram | $6.11 | $5.86 | Increase or decrease of $1.00 per gram | $11,937 | $14,868 | ||||
| Weighted average yield (grams per plant) | 40.07 | 42.85 | Increase or decrease by 5 grams per plant | $6,057 | $6,417 | ||||
The Company’s estimates are, by their nature, subject to change, and differences from the anticipated yield will be reflected in the gain or loss on biological assets in future periods.
The changes in the carrying value of biological assets during the period are as follows:
| $ | ||
| Balance, June 30, 2019 | 51,836 | |
| Production costs capitalized | 24,633 | |
| Changes in fair value less cost to sell due to biological transformation | 59,616 | |
| Transferred to inventory upon harvest | (90,468 | ) |
| Balance, December 31, 2019 | 45,617 | |
As of December 31, 2019, the weighted average fair value less cost to complete and cost to sell a gram of dried cannabis was $3.13 per gram (June 30, 2019 - $2.94 per gram).
17
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
During the three and six months ended December 31, 2019, the Company’s biological assets produced 30,691 and 72,127 kilograms of dried cannabis, respectively (three and six months ended December 31, 2018 - 7,822 and 12,818 kilograms). As at December 31, 2019, it is expected that the Company’s biological assets will yield approximately 29,110 kilograms (June 30, 2019 - 36,010 kilograms) of cannabis when harvested. As of December 31, 2019, the weighted average stage of growth for the biological assets in was 50% (June 30, 2019 - 49%).
Note 8 Inventory
The following is a breakdown of inventory:
| December 31, 2019 | June 30, 2019 | |||||||||||
|
Capitalized cost |
Fair value adjustment |
Carrying value |
Capitalized cost |
Fair value adjustment |
Carrying value | |||||||
| $ | $ | $ | ||||||||||
| Harvested cannabis | ||||||||||||
| Work-in-process | 56,454 | 50,365 | 106,819 | 31,381 | 33,745 | 65,126 | ||||||
| Finished goods | 16,723 | 5,729 | 22,452 | 7,771 | 4,182 | 11,953 | ||||||
| 73,177 | 56,094 | 129,271 | 39,152 | 37,927 | 77,079 | |||||||
| Extracted cannabis | ||||||||||||
| Work-in-process | 17,921 | 3,903 | 21,824 | 4,788 | 1,761 | 6,549 | ||||||
| Finished goods | 16,493 | 3,530 | 20,023 | 7,556 | 1,255 | 8,811 | ||||||
| 34,414 | 7,433 | 41,847 | 12,344 | 3,016 | 15,360 | |||||||
| Hemp products | ||||||||||||
| Raw materials | 7,509 | - | 7,509 | 4,508 | - | 4,508 | ||||||
| Work-in-process | 1,214 | - | 1,214 | 1,000 | - | 1,000 | ||||||
| Finished goods | 8,261 | - | 8,261 | 3,183 | - | 3,183 | ||||||
| 16,984 | - | 16,984 | 8,691 | - | 8,691 | |||||||
| Supplies and consumables | 14,130 | - | 14,130 | 2,204 | - | 2,204 | ||||||
| Merchandise and accessories | 3,311 | - | 3,311 | 10,307 | - | 10,307 | ||||||
| Ending balance | 142,016 | 63,527 | 205,543 | 72,698 | 40,943 | 113,641 | ||||||
During the three and six months ended December 31, 2019, inventory expensed to cost of goods sold was $56.0 million and $107.3 million (three and six months ended December 31, 2018 - $47.4 million and $71.3 million), respectively, which included $22.8 million and $41.3 million (three and six months ended December 31, 2018 - $21.6 million and $31.6 million) of non-cash expense, respectively, related to the changes in fair value of inventory sold.
Note 9 Property, Plant and Equipment
The following summarizes the carrying values of property, plant and equipment for the periods reflected:
| December 31, 2019 | June 30, 2019 | |||||||||||||
| Cost | Accumulated depreciation | Impairment | Net book value | Cost | Accumulated depreciation | Net book value | ||||||||
| Owned assets | ||||||||||||||
| Land | 38,052 | - | (893 | ) | 37,159 | 39,532 | - | 39,532 | ||||||
| Real estate | 477,009 | (40,874 | ) | (5,253 | ) | 430,882 | 420,737 | (25,682 | ) | 395,055 | ||||
| Construction in progress | 351,562 | - | (38,720 | ) | 312,842 | 222,884 | - | 222,884 | ||||||
| Computer software & equipment | 28,554 | (8,696 | ) | (40 | ) | 19,818 | 20,850 | (5,367 | ) | 15,483 | ||||
| Furniture & fixtures | 9,663 | (3,339 | ) | (124 | ) | 6,200 | 9,312 | (2,847 | ) | 6,465 | ||||
| Production & other equipment | 134,840 | (31,592 | ) | (6,895 | ) | 96,353 | 102,403 | (17,894 | ) | 84,509 | ||||
| Total owned assets | 1,039,680 | (84,501 | ) | (51,925 | ) | 903,254 | 815,718 | (51,790 | ) | 763,928 | ||||
| Right-of-use lease assets (1) | ||||||||||||||
| Land | 30,936 | (498 | ) | - | 30,438 | - | - | - | ||||||
| Real estate | 69,168 | (3,806 | ) | - | 65,362 | - | - | - | ||||||
| Production & other equipment | 4,684 | (1,821 | ) | - | 2,863 | 2,010 | (371 | ) | 1,639 | |||||
| Total right-of-use lease assets | 104,788 | (6,125 | ) | - | 98,663 | 2,010 | (371 | ) | 1,639 | |||||
| Total property, plant and equipment | 1,144,468 | (90,626 | ) | (51,925 | ) | 1,001,917 | 817,728 | (52,161 | ) | 765,567 | ||||
| (1) | Effective July 1, 2019, the Company adopted IFRS 16 Leases (Note 2(c)(i)). |
18
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
The following summarizes the changes in the net book values of property, plant and equipment for the periods presented:
| Balance, June 30, 2019 | IFRS 16 Transition (1) | Additions | Disposals | Other (2) | Depreciation | Impairment | Foreign currency translation | Balance, December 31, 2019 | ||||||||||
| Owned assets | ||||||||||||||||||
| Land | 39,532 | - | 495 | - | (1,919 | ) | - | (893 | ) | (56 | ) | 37,159 | ||||||
| Real estate | 395,055 | - | 32,640 | - | 25,986 | (16,886 | ) | (5,253 | ) | (660 | ) | 430,882 | ||||||
| Construction in progress (3) | 222,884 | - | 180,266 | - | (50,618 | ) | - | (38,720 | ) | (970 | ) | 312,842 | ||||||
| Computer software & equipment | 15,483 | - | 7,307 | (40 | ) | 458 | (3,343 | ) | (40 | ) | (7 | ) | 19,818 | |||||
| Furniture & fixtures | 6,465 | - | 46 | - | 367 | (508 | ) | (124 | ) | (46 | ) | 6,200 | ||||||
| Production & other equipment | 84,509 | - | 27,129 | (2,060 | ) | 7,492 | (13,726 | ) | (6,895 | ) | (96 | ) | 96,353 | |||||
| Total owned assets | 763,928 | - | 247,883 | (2,100 | ) | (18,234 | ) | (34,463 | ) | (51,925 | ) | (1,835 | ) | 903,254 | ||||
| Right-of-use lease assets (1) | ||||||||||||||||||
| Land | - | 30,936 | - | - | - | (498 | ) | - | - | 30,438 | ||||||||
| Real estate | - | 62,817 | 6,402 | - | - | (3,786 | ) | - | (71 | ) | 65,362 | |||||||
| Production & other equipment | 1,639 | 2,296 | 422 | (39 | ) | - | (1,450 | ) | - | (5 | ) | 2,863 | ||||||
| Total right-of-use lease assets | 1,639 | 96,049 | 6,824 | (39 | ) | - | (5,734 | ) | - | (76 | ) | 98,663 | ||||||
| Total property, plant and equipment | 765,567 | 96,049 | 254,707 | (2,139 | ) | (18,234 | ) | (40,197 | ) | (51,925 | ) | (1,911 | ) | 1,001,917 | ||||
| (1) | Effective July 1, 2019, the Company adopted IFRS 16 Leases (Note 2(c)(i)). |
| (2) | Includes reclassification of construction in progress when associated projects are complete. Includes the transfer of land and real estate to assets held for sale of $18.2 million associated with the Exeter property (Note 11). |
| (3) | Construction in process includes $216,751 relating to the Aurora Sun Facility and $3,687 relating to the Nordic Sky Facility. |
During the three and six months ended December 31, 2019, $4.8 million and $13.8 million (three and six months ended December 31, 2018 - $0.5 million and $1.5 million) in borrowing costs were capitalized to construction in progress at a weighted average interest rate of 18% and 16% (three and six months ended December 31, 2018 - 18% and 19%).
Depreciation relating to manufacturing equipment and production facilities for owned and right-of-use lease assets is capitalized into biological assets and inventory, and is expensed to cost of sales upon the sale of goods. For the three and six months ended December 31, 2019, $5.7 million and $11.6 million (three and six months ended December 31, 2018 - $0.8 million and $1.2 million) of depreciation was recognized in cost of sales.
Impairments
The Company reviews the carrying value of its property, plant and equipment at each reporting period for indicators of impairment. During the period ended December 31, 2019 management noted indicators of impairment both at the asset specific level and at the Cash Generating Unit (“CGU”) level.
Asset specific impairments
During the period ended December 31, 2019, the Company halted construction of its Nordic Sky facility which is an indicator of impairment. The fair value of the Nordic facility was determined based on a third party appraisal using a fair value less cost to sell approach with the capitalization methodology using unobservable inputs (level 3). As a result, the Company recognized a $34.6 million impairment loss for Nordic Sky for the three and six months ended December 31, 2019. The Nordic Sky facility, and the corresponding impairment loss, is allocated to the cannabis operating segment (Note 22).
During the three and six months ended December 31, 2019, the Company recognized a $1.4 million impairment loss for its Exeter property (see Note 11 for more information).
CGU impairments
During the three and six months ended December 31, 2019, the Company recognized impairment losses within its Latin American Hemp CGU and its European Hemp CGU and allocated impairment losses of $15.9 million to property, plant and equipment (Note 12). The recoverable amount of property, plant and equipment within these CGUs was determine through a fair value less cost to sell approach based on third party appraisals using a cost approach for buildings and equipment and a market approach for land (Level 3 inputs). The property, plant and equipment of the Latin American Hemp CGU and the European Hemp CGU and the corresponding impairment loss, is allocated to the cannabis operating segment (Note 22).
19
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Note 10 Non-Controlling Interests (“NCI”)
Aurora Nordic
As of December 31, 2019, the Company held a 51% ownership interest in Aurora Nordic. The following table presents the summarized financial information for Aurora Nordic before intercompany eliminations.
| December 31, 2019 | |||
| $ | |||
| Current assets | 4,198 | ||
| Non-current assets | 23,886 | ||
| Current liabilities | (4,603 | ) | |
| Non-current liabilities | (70,142 | ) | |
| Revenues for the six months ended | - | ||
| Net loss for the six months ended | 45,213 | ||
Hempco
Hempco is a producer of industrial hemp products and is developing hemp foods, hemp fiber and hemp nutraceuticals. Aurora initially acquired a 22.3% ownership interest in Hempco by subscribing to its private placement of 10,558,676 units at $0.3075 per unit for gross proceeds of $3.2 million. On March 22, 2018 and May 7, 2018, the Company increased its ownership in Hempco to 35.1% and 52.3%, respectively, through the exercise of 10,558,676 share purchase warrants at $0.41 for a cost of $4.3 million, and the exercise of its call option to purchase 10,754,942 shares from the two founders at $0.40 per share for a cost $4.3 million, respectively.
In August 2019, the Company completed the acquisition of the remaining common shares of Hempco not previously owned by Aurora. The Company issued a total of 2,610,642 shares and reserved 242,602 of shares issuable upon the potential exercise of certain outstanding Hempco stock options. As Aurora previously controlled Hempco with a 51% ownership interest, the transaction resulted in a change to Aurora’s ownership stake and was accounted for as an equity transaction. The $18.3 million difference between the $2.1 million in NCI interest and the $20.4 million fair value of consideration paid was recognized directly in deficit. Prior to the acquisition of the remaining ownership interest, Hempco was listed on the TSX Venture Exchange.
Note 11 Assets Held for Sale
|
Accounting Policy
Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale and subsequent gains and losses on remeasurement are recognized in profit or loss. Once classified as held-for-sale, intangible assets and property, plant and equipment are no longer amortized or depreciated.
|
In connection with management’s plan to rationalize capital expenditures to align the Company’s cultivation footprint to current demand, in November 2019, the Company has committed to sell its Exeter land and greenhouse (the “Exeter Property”) and reclassified it from property, plant and equipment to assets-held-for-sale. The Company obtained a third-party appraisal to determine the fair value of the Exeter Property based on a direct comparison approach (Level 2). Based on the estimated fair value less cost of disposal of $18.2 million, the Company recognized a $1.4 million impairment loss during the three and six months ended December 31, 2019. The Exeter Property, and the corresponding impairment loss, is allocated to the cannabis operating segment (Note 22).
| Land | Building & Improvements |
Total Value | ||||
| $ | $ | $ | ||||
| Balance, June 30, 2019 | 2,653 | 17,430 | 20,083 | |||
| Depreciation | - | (406 | ) | (406 | ) | |
| Balance, November 25, 2019 | 2,653 | 17,024 | 19,677 | |||
| Impairment | (734 | ) | (709 | ) | (1,443 | ) |
| Fair value at November 25, 2019 | 1,919 | 16,315 | 18,234 | |||
20
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Note 12 Intangible Assets and Goodwill
The following is a continuity schedule of intangible assets and goodwill:
| December 31, 2019 | June 30, 2019 | |||||||||||||
| Cost | Accumulated amortization | Impairment | Net book value | Cost | Accumulated amortization | Net book value | ||||||||
| Definite life intangible assets: | ||||||||||||||
| Customer relationships | 86,278 | (22,691 | ) | (4,203 | ) | 59,384 | 86,278 | (14,710 | ) | 71,568 | ||||
| Permits and licenses | 216,220 | (24,030 | ) | (4,977 | ) | 187,213 | 227,916 | (18,588 | ) | 209,328 | ||||
| Patents | 1,895 | (385 | ) | - | 1,510 | 1,895 | (293 | ) | 1,602 | |||||
| Intellectual property and know-how | 82,500 | (18,882 | ) | (4,401 | ) | 59,217 | 82,500 | (12,386 | ) | 70,114 | ||||
| Software | 26,183 | (2,282 | ) | - | 23,901 | 17,824 | (1,172 | ) | 16,652 | |||||
| Indefinite life intangible assets: | ||||||||||||||
| Brand | 148,399 | - | (1,700 | ) | 146,699 | 148,399 | - | 148,399 | ||||||
| Permits and licenses | 169,024 | - | (143,414 | ) | 25,610 | 170,703 | - | 170,703 | ||||||
| Total intangible assets | 730,499 | (68,270 | ) | (158,695 | ) | 503,534 | 735,515 | (47,149 | ) | 688,366 | ||||
| Goodwill | 3,171,516 | - | (762,231 | ) | 2,409,285 | 3,172,550 | - | 3,172,550 | ||||||
| Total | 3,902,015 | (68,270 | ) | (920,926 | ) | 2,912,819 | 3,908,065 | (47,149 | ) | 3,860,916 | ||||
The following summarizes the changes in the net book value of intangible assets and goodwill for the periods presented:
| Balance, June 30, 2019 | Additions | Disposals | Amortization | Impairment | Foreign currency translation | Balance, December 31, 2019 | ||||||||
| Definite life intangible assets: | ||||||||||||||
| Customer relationships | 71,568 | - | - | (7,981 | ) | (4,203 | ) | - | 59,384 | |||||
| Permits and licenses | 209,328 | - | (11,696 | ) | (5,442 | ) | (4,977 | ) | - | 187,213 | ||||
| Patents | 1,602 | - | - | (92 | ) | - | - | 1,510 | ||||||
| Intellectual property and know-how | 70,114 | - | - | (6,496 | ) | (4,401 | ) | - | 59,217 | |||||
| Software | 16,652 | 8,359 | - | (1,110 | ) | - | - | 23,901 | ||||||
| Indefinite life intangible assets: (1) | ||||||||||||||
| Brand | 148,399 | - | - | - | (1,700 | ) | - | 146,699 | ||||||
| Permits and licenses | 170,703 | - | - | - | (143,414 | ) | (1,679 | ) | 25,610 | |||||
| Total intangible assets | 688,366 | 8,359 | (11,696 | ) | (21,121 | ) | (158,695 | ) | (1,679 | ) | 503,534 | |||
| Goodwill | 3,172,550 | - | - | - | (762,231 | ) | (1,034 | ) | 2,409,285 | |||||
| Total | 3,860,916 | 8,359 | (11,696 | ) | (21,121 | ) | (920,926 | ) | (2,713 | ) | 2,912,819 | |||
| (1) | Indefinite life permits and licenses are predominantly held by the Company’s foreign subsidiaries. Given that these permits and licenses are connected to the subsidiary rather than a specific asset, there is no foreseeable limit to the period over which these assets are expected to generate future cash inflows for the Company. |
As at December 31, 2019, all of the $172.3 million (June 30, 2019 - $319.1 million) indefinite life intangibles are allocated to the group of CGU that comprise the cannabis segment.
Impairments
At the end of each reporting period, the Company assesses whether there were events or changes in circumstances that would indicate that a CGU or group of CGUs were impaired. The Company considers external and internal factors, including overall financial performance and relevant entity-specific factors, as part of this assessment. The following factors were identified as impairment indicators:
| i. | Revenue decline - Constraints in the provincial retail distribution network, including a slower than expected roll-out of retail stores across Canada, has resulted in a decrease of expected sales and profitability as compared to outcomes initially forecasted by management; |
| ii. | Change in strategic plans - Halting of construction at Aurora’s Nordic Sky Facility and deferral of the majority of final construction and commissioning activities at its Aurora Sun Facility; |
| iii. | Decline in stock price and market capitalization - As at December 31, 2019, the carrying amount of the Company’s total net assets exceeded the Company’s market capitalization. |
As a result of these factors, management performed an indicator-based impairment test as at December 31, 2019.
21
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
The Company allocated all of its goodwill to the cannabis operating segment for the purpose of the impairment test as this represented the lowest level at which management monitored goodwill. As the cannabis operating segment is comprised of various CGUs, management tested the individual CGUs, which had indicators of impairment, for impairment before the cannabis operating segment which contains the associated goodwill. The recoverable amount of all CGUs was determined based on a Fair Value Less Cost of Disposal (“FVLCD”) using level 3 inputs in a Discounted Cash Flow (“DCF”) methodology. The significant assumptions applied in the determination of the recoverable amount are described below:
| i. | Cash flows: Estimated cash flows were projected based on actual operating results from internal sources as well as industry and market trends. The forecasts are extended to a total of five years (and a terminal year thereafter); |
| ii. | Terminal value growth rate: The terminal growth rate was based on historical and projected consumer price inflation, historical and projected economic indicators, and projected industry growth; |
| iii. | Post-tax discount rate: The post-tax discount rate is reflective of the CGUs Weighted Average Cost of Capital (“WACC”). The WACC was estimated based on the risk-free rate, equity risk premium, beta adjustment to the equity risk premium based on a direct comparison approach, an unsystematic risk premium, and after-tax cost of debt based on corporate bond yields; and |
| iv. | Tax rate: The tax rates used in determining the future cash flows were those substantively enacted at the respective valuation date. |
Key assumptions used in calculating the recoverable amount for each CGU tested for impairment as at December 31, 2019 is outlined in the following table:
| Canadian Cannabis CGU | Latin American CGU | European Hemp CGU | Analytical Testing CGU | |||||||||
| Terminal value growth rate | 3.0 | % | 3.0 | % | 3.0 | % | 3.0 | % | ||||
| Discount Rate | 11.5 | % | 31.8 | % | 15.0 | % | 14.0 | % | ||||
| Budgeted Revenue growth rate (average of next five years) | 46.0 | % | 3.0 | % | 13.5 | % | 12.5 | % | ||||
| Fair Value Less Cost to Dispose | $ | 3,712,967 | $ | 12,386 | $ | 11,572 | $ | 8,064 | ||||
Canadian Cannabis CGU
The Company’s Canadian Cannabis CGU represents its operations dedicated to the cultivation and sale of cannabis products within Canada. Management concluded that the recoverable amount was higher than the carrying value as at December 31, 2019, and no impairment was recognized within the Canadian Cannabis CGU.
Latin American (“LATAM”) CGU
The Company’s LATAM CGU represents its operations dedicated to the cultivation and sale of cannabis and hemp products within LATAM. This CGU is attributed to the Company’s cannabis operating segment. As a result of the impairment test, management concluded that the carrying value was higher than the recoverable amount and recorded impairment losses of $152.3 million during the three and six months ended December 31, 2019 (three and six months ended December 31, 2018 - nil). Management allocated the impairment loss based on the relative carrying amounts of the CGU’s assets at the impairment date, with no individual asset being reduced below its recoverable amount. Management allocated $143.4 million of impairment losses to the CGU’s indefinite life permits and licenses and $8.8 million of impairment losses to property, plant and equipment (Note 9).
European Hemp CGU
The Company’s European Hemp CGU represents its operations dedicated to the cultivation and sale of hemp products within Europe. This CGU is attributed to the Company’s cannabis operating segment. As a result of the impairment test, management concluded that the carrying value was higher than the recoverable amount and recorded impairment losses of $7.0 million during the three and six months ended December 31, 2019 (three and six months ended December 31, 2018 - nil). Management allocated the impairment loss based on the relative carrying amounts of the CGU’s assets at the impairment date, with no individual asset being reduced below its recoverable amount. The impairment loss was fully allocated to property, plant and equipment (Note 9).
Analytical Testing CGU
The Company’s Analytical Testing CGU represents its operations dedicated to analytical and quality control testing of cannabis. This CGU is attributed to the Company’s cannabis operating segment. As a result of the impairment test, management concluded that the carrying value was higher than the recoverable amount and recorded impairment losses of $12.8 million during the three and six months ended December 31, 2019 (three and six months ended December 31, 2018 - nil). Management allocated the impairment loss based on the relative carrying amounts of the CGU’s assets at the impairment date, with no individual asset being reduced below its recoverable amount. The impairment loss was allocated among intangible assets including customer relationships, definite life permits and licenses, know-how and brand.
Patient Counseling CGU
The Company’s Patient Counseling CGU represents its operations dedicated to patient counseling and educational operations. This CGU is attributed to the Company’s cannabis operating segment. The recoverable amount of $0.5 million was determined using a FVLCD method by discounting the most recent expected future net cash flows to the Company from the investment. Management concluded that the estimated recoverable amount of the investment is nominal and as a result, recorded impairment losses of $2.5 million during the three and six months ended December 31, 2019 (three and six months ended December 31, 2018 - nil). Management allocated the impairment loss based on the relative carrying amounts of the CGU’s assets at the impairment date, with no individual asset being reduced below its recoverable amount. The impairment loss was allocated to the customer relationship intangible asset.
22
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Cannabis Operating Segment (Goodwill)
The recoverable amount of the cannabis operating segment was determined based on FVLCD using Level 3 inputs in a DCF analysis. The Company uses its market capitalization and comparative market multiples to corroborate discounted cash flow results. The significant assumptions applied in determining the recoverable amount are described below:
| i. | Cash flows: Estimated cash flows were projected based on actual operating results from internal sources as well as industry and market trends. The forecasts was five years including a terminal year thereafter. Management used an average sales growth rate of 49% over the forecasted period (exclusive of terminal year); |
| ii. | Terminal value growth rate: Management used a 3.0% terminal growth rate which is based on historical and projected consumer price inflation, historical and projected economic indicators, and projected industry growth; |
| iii. | Post-tax discount rate: Management used a 13.0% post-tax discount rate (June 30, 2019 - 13.5%) which is reflective of the cannabis operating segment’s WACC. The WACC was estimated based on the risk-free rate, equity risk premium, beta adjustment to the equity risk premium based on a direct comparison approach, a size premium and company specific risk, and after-tax cost of debt based on corporate bond yields; and |
| iv. | Tax rate: The tax rates used in determining the future cash flows were those substantively enacted at the respective valuation date. |
As a result, management concluded that the carrying value of the cannabis operating segment was higher than the $3.9 billion recoverable amount and recorded impairment losses of $762.2 million during the three and six months ended December 31, 2019 (three and six months ended December 31, 2018 - nil). The impairment was allocated entirely to reduce goodwill for the cannabis operating segment. The impairment loss was recognized due to a change in overall industry/market conditions, a change in management’s forecasted sales and profitability outlook and a realignment and refocus of strategic plans to meet market demand.
Note 13 Convertible Debentures
| Mar 2018 (i) |
Jan 2019 (ii) |
Total | ||||
| $ | $ | $ | ||||
| Balance, June 30, 2019 | 212,094 | 291,487 | 503,581 | |||
| Conversion of debt | (219,614 | ) | - | (219,614 | ) | |
| Interest paid | (7,926 | ) | (15,142 | ) | (23,068 | ) |
| Accretion | 9,808 | 12,763 | 22,571 | |||
| Accrued interest | 7,895 | 12,660 | 20,555 | |||
| Unrealized gain on foreign exchange | - | (2,271 | ) | (2,271 | ) | |
| Balance, December 31, 2019 | 2,257 | 299,497 | 301,754 | |||
| Current portion | (2,257 | ) | (28,375 | ) | (30,632 | ) |
| Long-term portion | - | 271,122 | 271,122 | |||
| (i) | In November 2019, the Company provided notice to all holders of Aurora’s $230.0 million 5% unsecured, convertible debentures due March 9, 2020 (the “Debentures”) of an option to voluntarily convert their Debentures at a temporarily amended early conversion price of $3.2837 (the “Amended Early Conversion Price”) calculated based on a 6% discount to the average daily VWAP of Aurora’s common shares on both the Canadian and U.S. stock exchanges. |
On November 25, 2019, $227.0 million principal amount, or approximately 99%, of the Debentures were converted under the Amended Early Conversion Price into 69,135,117 common shares of Aurora. Debenture holders that elected to convert also received a total of $7.9 million of interest paid in cash which was comprised of: (i) $4.7 million of accrued and unpaid interest from the last interest payment date, being June 30, 2019, to, but excluding, November 25, 2019, and (ii) $3.2 of million future unpaid interest from November 25, 2019, to, but excluding, the date of maturity of the Debentures, being March 9, 2020. In accordance with IAS 32 - financial instruments: presentation, the reduction of the conversion price to induce early conversion resulted in a loss of $172.3 million during the three and six months ended December 31, 2019 (Note 18). The loss is calculated as the difference between the fair value of the consideration the holders received on conversion under the revised terms and the fair value of the consideration the holders would have received under the original terms of the agreement.
As of December 31, 2019, $2.3 million principal amount remains, which will continue to exist under the original terms of the Indenture with a conversion price of $13.05 maturing on March 9, 2020.
| (ii) | On January 24, 2019, the Company issued $460.6 million (US$345.0 million) in aggregate principal amount of Convertible Senior Notes due 2024 (“Senior Notes”) issued at par value. Holders may convert all or any portion of the Senior Notes at any time. The Senior Notes are unsecured, mature on February 28, 2024 and bear cash interest semi-annually at a rate of 5.5% per annum. The initial conversion rate for the Senior Notes is 138.37 common shares per US$1,000 principal amount of Senior Notes, equivalent to an initial conversion price of approximately US$7.23 per common share. |
23
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
In accordance with IFRS 9, the equity conversion option embedded in the Senior Notes was determined to be a derivative liability, which has been recognized separately at its fair value. Subsequent changes in the fair value of the equity conversion option will be recognized through profit and loss (i.e. FVTPL). The equity conversion option was classified as an option liability as it can be settled through the issuance of a variable number of shares, cash or a combination thereof, based on the exchange rate and or trading price at the time of settlement.
As of December 31, 2019, the conversion option had a fair value of $8.5 million (June 30, 2019 - $177.4 million) and the Company recognized a $25.1 million and $168.9 million unrealized gain on the derivative liability for the three and six months ended December 31, 2019, respectively. The fair value of the conversion option was determined based on the Kynex valuation model with the following assumptions: share price of US$2.16 (June 30, 2019 - US$7.82), volatility of 60% (June 30, 2019 - 60%), implied credit spread of 1,888 bps (June 30, 2019 - 897 bps), and assumed stock borrow rate of 30% (June 30, 2019 - 15%). As of December 31, 2019, the Company has accrued interest of $12.7 million on these Senior Notes.
Note 14 Loans and Borrowings
As at December 31, 2019, the Company had the following loans and borrowings:
| Note | December 31, 2019 | June 30, 2019 | |||
| $ | $ | ||||
| Term loans | 14(a) | 200,338 | 139,900 | ||
| Debentures | 4 | 18 | |||
| Lease liabilities | 14(b) | 100,027 | 1,326 | ||
| Total loans and borrowings | 300,369 | 141,244 | |||
| Current portion | (27,055 | ) | (13,758 | ) | |
| Long-term | 273,314 | 127,486 | |||
| (a) | Term loans |
The changes in the carrying value of current and non-current term loans are as follows:
| $ | ||
| Balance, June 30, 2019 | 139,900 | |
| Additions | 64,394 | |
| Deferred financing fee | (941 | ) |
| Gain on debt modification | (53 | ) |
| Accretion | 6,128 | |
| Interest payments | (5,340 | ) |
| Principal repayments | (3,750 | ) |
| Balance, December 31, 2019 | 200,338 | |
| Current portion | (20,397 | ) |
| Long-term portion | 179,941 | |
On August 29, 2018, the Company entered into a secured credit agreement (as amended, the “Credit Agreement”) with Bank of Montreal (“BMO”) and certain lenders to establish a credit facility (as amended, the “Credit Facility”). Under the original terms of the Credit Facility, we have access to an aggregate of $200.0 million in funds that are available through a $50.0 million revolving credit facility (“Facility A”) and a $150.0 million non-revolving facility (“Facility B”). On September 4, 2019, the Company executed an amendment and upsizing of its existing C$200.0 million Credit Facility to C$360.0 million.
The amendment to the Credit Facility consists of an additional C$160.9 million comprised of a $64.4 million non-revolving facility (“Facility C”) and a $96.5 million non-revolving facility (“Facility D”); an additional option to increase the amended credit facility by $39.1 million subject to certain customary terms and conditions is also available. The Credit Facility matures on August 29, 2021 and has a first ranking general security interest in the assets of Aurora and the loans can be repaid without penalty at Aurora’s discretion. Interest and standby fees are accrued at variable rates based on the Company’s borrowing elections and certain financial metrics. Under the terms of the amended Credit Agreement, the Company is subject to certain customary financial and non-financial covenants and restrictions, including a requirement to hold restricted cash of $45.0 million as cash collateral.
As at December 31, 2019, the Company had a total of $1.8 million of letters of credit outstanding under Facility A, $142.5 million principal outstanding under Facility B, and $64.4 million principal outstanding under Facility C. In accordance with IFRS 9, the amounts outstanding under the amended Credit Facility were initially recorded at fair value and subsequently accounted for at amortized cost based on the effective interest rate.
Under the terms of the amended Credit Facility, the Company elected, at its sole discretion, to receive advances under Facility B and Facility C through certain availment options, which includes prime rate loans and bankers’ acceptances with 3-month maturity dates that at the direction of the Company, roll over upon their maturities unless Aurora elects to convert the then outstanding principal and interest into prime rate loans at any time before August 29, 2021. During the three and six months ended December 31, 2019, the Company drew on Facility C at prime rate and continued to roll the majority of the advances under Facility B using bankers’ acceptances with 3-month maturity dates and the balance at prime rate loans. The average interest rate was 5.33% under the bankers’ acceptance. In accordance with IFRS 9, the loan conversion was determined to be a non-substantial modification of the loan terms. As a result, the Company recognized a $0.4 million loss and a $0.1 million gain in the condensed consolidated interim statement of comprehensive loss for the three and six months ended December 31, 2019 (three and six months ended December 31, 2018 - $1.8 million and $1.8 million gain), respectively, with a corresponding adjustment to the carrying value of the Credit Facility. The gain (loss) was determined based on the difference between the original contractual cash flows and the modified expected cash flows, which was discounted at the original effective interest rate.
24
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Under the amended Credit Facility, the Company is required to have a total funded debt to adjusted shareholders’ equity ratio not to exceed 0.25:1 prior to September 30, 2020. Effective September 30, 2020, the Company must have a minimum fixed charge ratio of not less than 1.25:1, a senior funded debt to Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) ratio not to exceed 3.00:1, and a total funded debt to EBITDA ratio not to exceed 4.00:1. As of December 31, 2019, the Company was in compliance with all covenants under the amended Credit Facility and term loans.
Subsequent to December 31, 2019, the Company entered into a binding commitment with BMO and its syndicate of lenders to amend certain material terms of its amended Credit Facility to better align its capital structure with current market conditions. As part of the amendments agreed to in February 2020 (the “February Amendment”) the Company has agreed to the following:
| i. | the complete removal of a senior funded debt to EBITDA of 3.00:1 covenant and a total funded debt to EBITDA of 4.00:1 covenant; |
| ii. | the complete removal of a 1.25:1 minimum fixed charge coverage ratio; |
| iii. | an adjustment to the total funded debt to adjusted shareholders’ equity ratio not to exceed 0.25:1 prior to September 30, 2020 to 0.20:1 effective March 31, 2020; |
| iv. | an elimination of Facility D representing $96.5 million of capital committed for construction costs at Aurora Sun, use of $45 million of restricted cash to be used to repay and permanently reduce the outstanding term loan balance under Facility B and Facility C on a pro-rata basis; |
| v. | the introduction of a minimum liquidity covenant of $35.0 million; and |
| vi. | the introduction of minimum EBITDA thresholds to be met beginning in the quarter ending September 30, 2020. |
| (b) | Lease liabilities |
The following is a continuity schedule of lease liabilities for the six months ended December 31, 2019:
| $ | |||
| Balance, June 30, 2019 | 1,318 | ||
| IFRS 16 transition (1) | 95,464 | ||
| Lease additions | 6,984 | ||
| Disposal of leases | (39 | ) | |
| Lease payments | (6,491 | ) | |
| Changes due to foreign exchange rates | (100 | ) | |
| Interest expense on lease liabilities | 2,891 | ||
| Balance, December 31, 2019 | 100,027 | ||
| Current portion | (6,658 | ) | |
| Long-term portion | 93,369 | ||
| (1) | Effective July 1, 2019, the Company adopted IFRS 16 Leases (Note 2(c)(i)). |
Note 15 Share Capital
| (a) | Authorized |
The authorized share capital of the Company is comprised of the following:
| (i) | Unlimited number of common voting shares without par value. |
| (ii) | Unlimited number of Class “A” Shares each with a par value of $1.00. As at December 31, 2019, no Class “A” Shares were issued and outstanding. |
| (iii) | Unlimited number of Class “B” Shares each with a par value of $5.00. As at December 31, 2019, no Class “B” Shares were issued and outstanding. |
| (b) | Shares Issued and Outstanding |
At December 31, 2019, 1,168,189,753 common shares (June 30, 2019 - 1,017,438,744) were issued and fully paid.
During the three and six months ended December 31, 2019, the Company issued 69,949,434 and 77,507,893 common shares, respectively, under its At-the-Market (“ATM”) program (Note 24(b)) for gross proceeds of $267.7 million and $325.2 million (US$202.0 million and US$245.3 million) at an average price of $3.83 and $4.20 per share (US$2.89 and US$3.16 per share), respectively. The Company paid commissions of $5.4 million and $6.5 million (US$4.0 million and US$4.9 million) for net proceeds of $262.4 million and $318.7 million (US$198.0 million and US$240.4 million), respectively.
25
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
During the three months ended December 31, 2019, the Company issued 69,135,117 common shares in connection with the conversion of its Debentures as described in Note 13(i).
| (c) | Share Purchase Warrants |
Each whole warrant entitles the holder to purchase one common share of the Company. A summary of warrants outstanding is as follows:
| Warrants |
Weighted average exercise price | |||
| # | $ | |||
| Balance, June 30, 2019 | 23,785,874 | 7.98 | ||
| Issued | 164,467 | 9.67 | ||
| Exercised | (11,826 | ) | 6.15 | |
| Expired | (2,187,393 | ) | 6.94 | |
| Balance, December 31, 2019 | 21,751,122 | 8.09 | ||
The following table summarizes the warrants that remain outstanding as at December 31, 2019:
| Exercise Price ($) | Expiry Date | Warrants (#) | |
| 3.00 | November 2, 2020 | 5,685,187 | |
| 9.37 - 9.67 | January 31, 2020 to August 22, 2024 | 16,065,935 | |
| 21,751,122 | |||
Note 16 Share-Based Compensation
| (a) | Stock Options |
A summary of stock-options outstanding is as follows:
|
Stock Options |
Weighted Average Exercise Price | |||
| # | $ | |||
| Balance, June 30, 2019 | 68,320,763 | 7.99 | ||
| Granted | 6,453,961 | 7.88 | ||
| Exercised (1) | (938,264 | ) | 2.80 | |
| Expired | (51,389 | ) | 3.98 | |
| Forfeited | (3,016,965 | ) | 8.56 | |
| Balance, December 31, 2019 | 70,768,106 | 8.02 | ||
| (1) | The weighted average share price during the three and six months ended December 31, 2019 was $3.89 and $5.22, respectively (three and six months ended December 31, 2018 - $10.31 and $9.83). |
The following table summarizes the stock options that remain outstanding as at December 31, 2019:
| Exercise Price ($) | Expiry Date | Weighted Average Remaining Life | Options Outstanding (#) | Options Exercisable (#) | |||
| 0.30 - 6.99 | May 23, 2020 - December 16, 2024 | 2.66 | 18,294,164 | 12,722,248 | |||
| 7.00 - 9.99 | February 23, 2022 - September 19, 2024 | 3.87 | 21,816,506 | 6,455,980 | |||
| 10.00 - 10.99 | January 15, 2023 - March 13, 2026 | 5.70 | 23,837,213 | 6,002,517 | |||
| 11.00 - 16.86 | January 3, 2020 - May 28, 2024 | 3.86 | 6,820,223 | 1,644,731 | |||
| 4.06 | 70,768,106 | 26,825,476 | |||||
During the three and six months ended December 31, 2019, the Company recorded aggregate share-based compensation expense of $15.7 million and $33.7 million (three and six months ended December 31, 2018 - $18.0 million and $37.4 million) for all stock options granted and vested during the period. This expense is reflected in the share-based compensation line on the statement of comprehensive loss.
Included in the $15.7 million and $33.7 million share-based compensation expense for the three and six months ended December 31, 2019 is $0.8 million and $3.8 million (three and six months ended December 31, 2018 - nil and nil), respectively, related to 19,961,754 stock options granted to the company of Aurora’s strategic advisor, Nelson Peltz. These stock options are exercisable at $10.34 per share over seven years and vest ratably over a four-year period on a quarterly basis, subject to accelerated vesting based on the occurrence of certain events. The Company has rebutted the presumption that the fair value of the services received can be estimated reliably due to the unique nature of the strategic advisor’s services. As such, in accordance with IFRS 2 for share-based payments granted to non-employees, the Company has measured the fair value of the options indirectly by reference to the fair value of the equity instruments granted. The Company will continue to fair value the unvested options at each period until they are fully vested.
26
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Stock options granted during the respective periods highlighted below were fair valued based on the following weighted average assumptions:
| Three months ended December 31, | Six months ended December 31, | |||||||
| 2019 | 2018 | 2019 | 2018 | |||||
| Risk-free annual interest rate (1) | 1.59 | % | 2.17 | % | 1.56 | % | 1.60 | % |
| Expected annual dividend yield | 0 | % | 0 | % | 0 | % | 0 | % |
| Expected stock price volatility (2) | 81.37 | % | 81.58 | % | 79.27 | % | 81.02 | % |
| Expected life of options (years) (3) | 2.34 | 3.00 | 2.31 | 2.97 | ||||
| Forfeiture rate | 10.67 | % | 5.00 | % | 10.05 | % | 4.29 | % |
| (1) | The risk-free rate is based on Canada government bonds with a remaining term equal to the expected life of the options. |
| (2) | Volatility was estimated by using the average historical volatility of the Company. |
| (3) | The expected life in years represents the period of time that options granted are expected to be outstanding. |
The weighted average fair value of stock options granted during the three and six months ended December 31, 2019 was $2.03 and $3.57 (three and six months ended December 31, 2018 - $4.72 and $3.25) per option.
| (b) | Restricted Share Units (“RSU”) and Deferred Share Units (“DSU”) |
A summary of the RSUs and DSUs outstanding are as follows:
| RSUs and DSUs | Weighted Average Issue Price of RSUs and DSUs | |||
| # | $ | |||
| Balance, June 30, 2019 | 2,030,337 | 4.94 | ||
| Issued | 642,890 | 7.32 | ||
| Vested, released and issued | (218,332 | ) | 4.22 | |
| Forfeited | (18,509 | ) | 0.79 | |
| Balance, December 31, 2019 | 2,436,386 | 5.65 | ||
During the three and six months ended December 31, 2019, the Company recorded share-based compensation of $1.9 million and $3.0 million (three and six months ended December 31, 2018 - $1.2 million and $2.9 million), respectively, for RSUs and DSUs granted and vested during the period. This expense is included in the share-based compensation line on the statement of comprehensive loss.
The following table summarizes the RSUs and DSUs that remain outstanding as at December 31, 2019:
| Weighted Average Issue Price ($) | Expiry Date | Outstanding (#) | Vested (#) | ||
| 2.76 - 3.47 | September 29, 2020 - December 16, 2022 | 1,136,940 | 758,332 | ||
| 4.81 - 7.91 | August 3, 2021 - October 21, 2022 | 931,445 | 186,830 | ||
| 8.54 - 10.32 | July 12, 2021 - January 15, 2023 | 368,001 | 63,639 | ||
| 2,436,386 | 1,008,801 | ||||
Note 17 Loss Per Share
The following is a reconciliation of basic and diluted loss per share:
Basic and diluted loss per share
| Three months ended December 31, | Six months ended December 31, | |||||||
| 2019 | 2018 | 2019 | 2018 | |||||
| Net loss attributable to Aurora shareholders | ($1,286,129 | ) | ($237,752 | ) | ($1,273,373 | ) | ($132,290 | ) |
| Weighted average number of common shares outstanding | 1,089,447,709 | 968,950,642 | 1,086,057,191 | 914,441,307 | ||||
| Basic and diluted loss per share | ($1.18 | ) | ($0.25 | ) | ($1.17 | ) | ($0.14 | ) |
Diluted loss per share is the same as basic loss per share as the issuance of shares on the exercise of convertible debentures, restricted share units, warrants and share options is anti-dilutive.
27
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Note 18 Other (Expense) Income, Net
| Three months ended December 31, |
Six months ended December 31, | ||||||||
| Note | 2019 | 2018 | 2019 | 2018 | |||||
| $ | $ | $ | $ | ||||||
| Share of loss from investment in associates | 6 | (1,930 | ) | (894 | ) | (4,322 | ) | (3,009 | ) |
| Gain on deemed disposal of significant influence investment | - | - | - | 144,368 | |||||
| Loss on induced conversion of debenture | 13 | (172,291 | ) | - | (172,291 | ) | - | ||
| Unrealized loss on derivative investments | 5(b) | (20,113 | ) | (119,872 | ) | (34,231 | ) | (32,327 | ) |
| Unrealized gain on derivative liability | 13(ii) | 25,111 | - | 168,925 | - | ||||
| Unrealized gain (loss) on changes in contingent consideration fair value | 23 | 778 | (692 | ) | 715 | (2,065 | ) | ||
| (Loss) gain on debt modification | 14(a) | (362 | ) | 1,774 | 53 | 1,774 | |||
| (Loss) gain on loss of control of subsidiary | - | (12 | ) | - | 398 | ||||
| Total other (expense) income, net | (168,807 | ) | (119,696 | ) | (41,151 | ) | 109,139 | ||
Note 19 Supplemental Cash Flow Information
The changes in non-cash working capital are as follows:
| Six months ended December 31, 2019 | Six months ended December 31, 2018 | |||
| $ | $ | |||
| Sales tax recoverable | (305 | ) | (11,256 | ) |
| Accounts receivable | 21,534 | (8,311 | ) | |
| Biological assets | (24,633 | ) | (9,475 | ) |
| Inventory | (42,746 | ) | (4,134 | ) |
| Prepaid and other current assets | (11,557 | ) | (17,127 | ) |
| Accounts payable and accrued liabilities | (38,296 | ) | 27,388 | |
| Income taxes payable | 3,432 | (7,140 | ) | |
| Deferred revenue | 5,402 | (1,433 | ) | |
| Provisions | (4,200 | ) | - | |
| Changes in operating assets and liabilities | (91,369 | ) | (31,488 | ) |
Additional supplementary cash flow information is as follows:
| Six months ended December 31, 2019 | Six months ended December 31, 2018 | |||
| $ | $ | |||
| Property, plant and equipment in accounts payable | 45,248 | 18,451 | ||
| Capitalized borrowing costs | 13,804 | 1,452 | ||
| Interest paid | 28,408 | 5,809 | ||
| Interest received | 1,004 | 239 | ||
Note 20 Commitments and Contingencies
| (a) | Claims and Litigation |
From time to time, the Company and/or its subsidiaries may become defendants in legal actions and the Company intends to take appropriate action with respect to any such legal actions, including by defending itself against such legal claims as necessary. Other than the claims described below, as of the date of this report, Aurora is not aware of any other material or significant claims against the Company.
On November 29, 2017, a claim was commenced against the Company regarding 300,000 stock options with an exercise price of $0.39 per share issued to a consultant pursuant to an agreement dated March 16, 2015. The agreement was terminated on March 8, 2016, and in accordance with the Company’s stock option plan, the unexercised options expired 90 days from the date of the termination of the agreement. The option holder is attempting to enforce exercise rights which the Company believes do not exist. The Company believes the action to be without merit and intends to defend this claim. Examinations for discovery were completed in January 2019 and the matter is currently scheduled for court in early March 2020. Due to the uncertainty of the timing and the amount of estimated future cash outflows relating to this claim, no provision has been recognized as at December 31, 2019.
28
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
On October 3, 2018, a claim was commenced against the Company regarding the failure to supply product under a recently acquired subsidiary’s supply agreement. The plaintiff is seeking specific performance of the supply agreement and damages for breach of contract for approximately $21.0 million (€14.7 million) plus legal costs. In accordance with the terms of the agreement, the Company had terminated the contract due to a breach by the plaintiff. The Company intends to defend this claim. The parties are currently engaged in the document discovery process. Due to the uncertainty of timing and the amount of estimated future cash outflows relating to this claim, no provision has been recognized as at December 31, 2019.
In connection with the acquisition of MedReleaf, the Company assumed a contingent liability associated with a formerly terminated MedReleaf employee. The claimant was seeking performance under the terms of his employment agreement related to a severance obligation. The Company recognized a provision of $4.2 million as part of the purchase price allocation in the prior year and the amount was fully settled during the six months ended December 31, 2019.
The Company and certain of its directors and officers are subject to two separate class action proceedings in the United States District Court for the District of New Jersey on behalf of persons or entities who purchased, or otherwise acquired, publicly traded Aurora securities between September 11, 2019 and November 14, 2019 and between October 23, 2018 and January 6, 2020. The complaints allege, inter alia, that we and certain of our current officers and directors violated the federal securities laws by making false or misleading statements, materially overstated the demand and potential market for our consumer cannabis products; that our ability to sell products had been materially impaired by extraordinary market oversupply, that our spending growth and capital commitments were slated to exceed our revenue growth; that we had violated German law mandating that companies receive special permission to distribute medical products exposed to regulated irradiation techniques, and that the foregoing, among others, had negatively impacted the Company’s business, operations, and prospects and impaired the Company’s ability to achieve profitability. We dispute the allegations in the complaints and intend to vigorously defend against the claims. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we are currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from the matters described above. As such, no provision has been recognized as at December 31, 2019.
| (b) | Commitments |
| (i) | The Company has various lease commitments related to various office space, production equipment, vehicles, facilities and warehouses expiring between January 2020 and June 2033. The Company has certain operating leases with optional renewal terms that the Company may exercise at its option. The Company also has an option to purchase lands located in Cremona, Alberta which are currently being leased. |
| (ii) | In connection with the acquisition of MedReleaf, the Company has an obligation to purchase certain intangible assets on December 8, 2019 and December 8, 2020 through the issuance of common shares contingent upon the seller meeting specified revenue targets. The agreed upon purchase price of each intangible asset is $3.3 million and $3.0 million, respectively. As at December 31, 2019, the Company had not purchased the December 2019 intangible asset as the seller had not met the specified revenue targets. |
In addition to lease liability commitments disclosed in Note 24(b), the Company has the following future capital commitments and license and sponsorship fee payments, which are due in the next five years:
| $ | ||
| Remainder of 2020 | 133,552 | |
| 2021 | 18,835 | |
| 2022 | 19,777 | |
| 2023 | 20,766 | |
| 2024 | 21,804 | |
| Thereafter | 46,934 | |
| 261,668 | ||
29
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Note 21 Revenue
The Company generates revenue from the transfer of goods and services over time and at a point-in-time from the revenue streams below. Net revenue from sale of goods reflects actual returns and estimated variable consideration for future returns and price adjustments of $10.6 million for the three and six months ended December 31, 2019 (three and six months ended December 31, 2018 - nil). The estimated variable consideration is based on historical experience and Management’s expectation of future returns and price adjustments. As of December 31, 2019, the return liability for the estimated variable revenue consideration was $4.5 million (June 30, 2019 - nil) and is included in deferred revenue on the condensed consolidated interim statements of financial position.
| Three months ended December 31, 2019 | Point-in-time | Over-time | Total | |||
| $ | $ | $ | ||||
| Cannabis | ||||||
| Revenue from sale of goods | 63,302 | - | 63,302 | |||
| Revenue from provision of services | - | 1,355 | 1,355 | |||
| Other | ||||||
| Revenue from sale of goods | 365 | - | 365 | |||
| Excise taxes | (8,995 | ) | - | (8,995 | ) | |
| Net Revenue | 54,672 | 1,355 | 56,027 | |||
| Three months ended December 31, 2018 | Point-in-time | Over-time | Total | |||
| $ | $ | $ | ||||
| Cannabis | ||||||
| Revenue from sale of goods | 58,685 | - | 58,685 | |||
| Revenue from provision of services | - | 2,589 | 2,589 | |||
| Other | ||||||
| Revenue from sale of goods | 726 | - | 726 | |||
| Excise taxes | (7,822 | ) | - | (7,822 | ) | |
| Net Revenue | 51,589 | 2,589 | 54,178 | |||
| Six months ended December 31, 2019 | Point-in-time | Over-time | Total | |||
| $ | $ | $ | ||||
| Cannabis | ||||||
| Revenue from sale of goods | 146,185 | - | 146,185 | |||
| Revenue from provision of services | - | 3,199 | 3,199 | |||
| Other | ||||||
| Revenue from sale of goods | 795 | - | 795 | |||
| Excise taxes | (18,907 | ) | - | (18,907 | ) | |
| Net Revenue | 128,073 | 3,199 | 131,272 | |||
| Six months ended December 31, 2018 | Point-in-time | Over-time | Total | |||
| $ | $ | $ | ||||
| Cannabis | ||||||
| Revenue from sale of goods | 84,628 | - | 84,628 | |||
| Revenue from provision of services | - | 5,805 | 5,805 | |||
| Other | ||||||
| Revenue from sale of goods | 1,241 | - | 1,241 | |||
| Excise taxes | (7,822 | ) | - | (7,822 | ) | |
| Net Revenue | 78,047 | 5,805 | 83,852 | |||
30
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Note 22 Segmented Information
| Operating Segments | Cannabis | Horizontally Integrated Businesses | Corporate |
Total | ||||
| $ | $ | $ | $ | |||||
| Three months ended December 31, 2019 | ||||||||
| Net revenue | 55,662 | 365 | - | 56,027 | ||||
| Gross profit (loss) | 30,034 | (119 | ) | - | 29,915 | |||
| Net loss | (1,015,869 | ) | (1,320 | ) | (288,709 | ) | (1,305,898 | ) |
| Three months ended December 31, 2018 | ||||||||
| Net revenue | 53,453 | 725 | - | 54,178 | ||||
| Gross profit | 31,703 | 439 | - | 32,142 | ||||
| Net loss | (22,471 | ) | (157 | ) | (217,014 | ) | (239,642 | ) |
| Six months ended December 31, 2019 | ||||||||
| Net Revenue | 130,477 | 795 | - | 131,272 | ||||
| Gross profit | 83,329 | 294 | - | 83,623 | ||||
| Net loss | (1,080,241 | ) | (1,530 | ) | (213,757 | ) | (1,295,528 | ) |
| Six months ended December 31, 2018 | ||||||||
| Net Revenue | 82,612 | 1,240 | - | 83,852 | ||||
| Gross profit | 39,617 | 575 | - | 40,192 | ||||
| Net loss | (48,440 | ) | (382 | ) | (86,639 | ) | (135,461 | ) |
| Geographical Segments | Canada | EU | Other | Total | ||||
| $ | $ | $ | $ | |||||
| Non-current assets other than financial instruments | ||||||||
| December 31, 2019 | 3,883,142 | 76,614 | 82,297 | 4,042,053 | ||||
| June 30, 2019 | 4,442,849 | 82,922 | 226,483 | 4,752,254 | ||||
| Three months ended December 31, 2019 | ||||||||
| Net revenue | 53,289 | 2,375 | 363 | 56,027 | ||||
| Gross profit | 28,311 | 1,363 | 241 | 29,915 | ||||
| Three months ended December 31, 2018 | ||||||||
| Net revenue | 49,772 | 3,266 | 1,140 | 54,178 | ||||
| Gross profit | 30,901 | 1,140 | 101 | 32,142 | ||||
| Six months ended December 31, 2019 | ||||||||
| Net revenue | 122,358 | 7,995 | 919 | 131,272 | ||||
| Gross profit | 77,000 | 6,477 | 146 | 83,623 | ||||
| Six months ended December 31, 2018 | ||||||||
| Net revenue | 75,637 | 6,732 | 1,483 | 83,852 | ||||
| Gross profit | 37,628 | 2,442 | 122 | 40,192 | ||||
Included in net revenues arising from the Canadian cannabis operating segment for the three months ended December 31, 2019 are net revenues of approximately $9.0 million, $8.6 million and $7.1 million (three months ended December 31, 2018 - $7.3 million and $6.2 million) which arose from sales to the Company’s major customers. Included in net revenues arising from the Canadian cannabis operating segment for the six months ended December 31, 2019 are net revenues of approximately $17.8 million and $14.6 million (six months ended December 31, 2018 - none) which arose from sales to the Company’s major customers. No other single customers contributed 10 per cent or more to the Company’s net revenue during the three and six months ended December 31, 2019.
31
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Note 23 Fair Value of Financial Instruments
Financial instruments are measured either at fair value or at amortized cost. The table below lists the valuation methods used to determine the fair value of each financial instrument.
| Fair Value Method | |
| Financial Instruments Measured at Fair Value | |
| Marketable securities | Closing market price of common shares as of the measurement date (Level 1) |
| Derivatives | Closing market price (Level 1) or Black-Scholes, Binomial, Monte-Carlo & FINCAD valuation model (Level 2 or 3) |
| Contingent consideration payable | Discounted cash flow model (Level 3) |
| Derivative liability | Kynex valuation model (Level 2) |
| Financial Instruments Measured at Amortized Cost | |
| Cash and cash equivalents, restricted cash, accounts receivable, loans receivable | Carrying amount (approximates fair value due to short-term nature) |
| Accounts payable and accrued liabilities | Carrying amount (approximates fair value due to short-term nature) |
| Convertible debentures, loans and borrowings | Carrying value discounted at the effective interest rate which approximates fair value |
The carrying values of the financial instruments at December 31, 2019 are summarized in the following table:
| Amortized cost | FVTPL |
Designated FVTOCI |
Total | |||||
| $ | $ | $ | $ | |||||
| Financial Assets | ||||||||
| Cash and cash equivalents | 156,334 | - | - | 156,334 | ||||
| Restricted cash | 45,002 | - | - | 45,002 | ||||
| Accounts receivable, excluding sales taxes receivable | 63,698 | - | - | 63,698 | ||||
| Marketable securities | - | - | 26,148 | 26,148 | ||||
| Derivatives | - | 53,469 | - | 53,469 | ||||
| Loans receivable | 3,312 | - | - | 3,312 | ||||
| Financial Liabilities | ||||||||
| Accounts payable and accrued liabilities | 125,432 | - | - | 125,432 | ||||
| Convertible debentures (1) | 301,754 | - | - | 301,754 | ||||
| Contingent consideration payable | - | 24,633 | - | 24,633 | ||||
| Loans and borrowings | 300,369 | - | - | 300,369 | ||||
| Derivative liability | - | 8,470 | - | 8,470 | ||||
| (1) | The fair value of convertible notes includes both the debt and equity components. |
The following is a summary of financial instruments measured at fair value segregated based on the various levels of inputs:
| Note | Level 1 | Level 2 | Level 3 | Total | |||||
| $ | $ | $ | $ | ||||||
| As at December 31, 2019 | |||||||||
| Marketable securities | 25,148 | - | 1,000 | 26,148 | |||||
| Derivative assets | 5(b) | - | 38,814 | 14,655 | 53,469 | ||||
| Contingent consideration payable | - | - | 24,633 | 24,633 | |||||
| Derivative liability | - | 8,470 | - | 8,470 | |||||
| As at June 30, 2019 | |||||||||
| Marketable securities | 142,248 | - | 1,000 | 143,248 | |||||
| Derivative assets | 5(b) | - | 64,001 | 22,408 | 86,409 | ||||
| Contingent consideration payable | - | - | 28,137 | 28,137 | |||||
| Derivative liability | - | 177,395 | - | 177,395 | |||||
There have been no transfers between fair value categories during the period.
32
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
The following is a continuity schedule of contingent consideration payable:
| Note | CanvasRx | H2 | Whistler | Immaterial transactions | Total | ||||||
| Balance, June 30, 2019 | 1,985 | 1,231 | 24,771 | 150 | 28,137 | ||||||
|
Unrealized gain (loss) on changes in contingent consideration fair value
|
18 | 8 | (49 | ) | (674 | ) | - | (715 | ) | ||
| Payments | (1,607 | ) | (1,182 | ) | - | - | (2,789 | ) | |||
| Balance, December 31, 2019 | 386 | - | 24,097 | 150 | 24,633 | ||||||
The Company’s contingent consideration payable is measured at fair value based on unobservable inputs and is considered a Level 3 financial instrument. The determination of the fair value of these liabilities is primarily driven by the Company’s expectations of the respective subsidiaries achieving certain milestones. The expected milestones were assigned probabilities and the expected related cash flows were discounted to derive the fair value of the contingent consideration. At December 31, 2019, the probability of achieving all milestones was estimated to be 100% and the discount rates were estimated to be 3.83%. If the probabilities of achieving the milestones decreased by 10%, the estimated fair value of the contingent consideration would decrease by approximately $2.4 million (June 30, 2019 - $2.8 million). If the discount rates increased or decreased by 5%, the estimated fair value of contingent consideration would increase or decrease by approximately $0.2 million (June 30, 2019 - $0.3 million). If the expected timing of the achievement is delayed by six months, the estimated fair value of contingent consideration would decrease by approximately $0.4 million (June 30, 2019 - $0.4 million).
Note 24 Financial Instruments Risk
The Company is exposed to a variety of financial instrument related risks. The Board mitigates these risks by assessing, monitoring and approving the Company’s risk management processes.
| (a) | Credit risk |
Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company is moderately exposed to credit risk from its cash and cash equivalents, restricted cash, accounts receivable and loans receivable. The risk exposure is limited to their carrying amounts reflected on the statement of financial position. The risk for cash and cash equivalents and restricted cash is mitigated by holding these instruments with highly rated Canadian financial institutions. As the Company does not invest in asset-backed deposits or investments, it does not expect any credit losses. The Company periodically assesses the quality of its investments and is satisfied with the credit rating of the financial institutions and the investment grade of its GICs. The Company mitigates the credit risk associated with the loans receivable by managing and monitoring the underlying business relationship.
Accounts receivable primarily consist of trade accounts receivable and sales tax receivable. The Company provides credit to certain customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. Credit risk is generally limited for receivables from government bodies, which generally have low default risk, and medical sales direct to patients, where payment is required prior to the delivery of goods. Credit risk for non-government wholesale customers is assessed on a case-by-case basis and a provision is recorded where required. As of December 31, 2019, $11.4 million of accounts receivable are from non-government wholesale customers. As of December 31, 2019, the Company recognized a $1.9 million provision for expected credit losses.
The Company’s aging of receivables was as follows:
| December 31, 2019 | June 30, 2019 | |||
| $ | $ | |||
| 0 - 60 days | 46,899 | 59,725 | ||
| 61+ days | 35,365 | 43,768 | ||
| 82,264 | 103,493 | |||
| (b) | Liquidity risk |
The composition of the Company’s accounts payable and accrued liabilities was as follows:
| December 31, 2019 | June 30, 2019 | |||
| $ | $ | |||
| Trade payables | 28,734 | 38,671 | ||
| Accrued liabilities | 69,232 | 79,933 | ||
| Payroll liabilities | 21,297 | 17,727 | ||
| Excise tax payable | 3,104 | 10,040 | ||
| Other payables | 3,065 | 6,513 | ||
| 125,432 | 152,884 | |||
33
AURORA CANNABIS INC.
Notes to the Condensed Consolidated Interim Financial Statements
Three and six months ended December 31, 2019 and 2018
(Unaudited – Amounts reflected in thousands of Canadian dollars, except share and per share amounts)
Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with its financial liabilities when they are due. The Company manages liquidity risk through the management of its capital structure and resources to ensure that it has sufficient liquidity to settle obligations and liabilities when they are due. As at December 31, 2019, the Company has a $360.0 million Credit Facility with BMO, of which $1.8 million letters of credit are outstanding under Facility A, $142.5 million is outstanding under Facility B, and $64.4 million is outstanding under Facility C (Note 14(a)). On April 2, 2019, the Company filed a Shelf Prospectus and a corresponding Registration Statement with the SEC, which allows Aurora to make offerings of common shares, debt securities, subscription receipts, units, warrants or any combination thereof up to US$750.0 million during the 25-month period that the Shelf Prospectus is effective. In connection with the Shelf Prospectus, the Company also filed an ATM supplement which provides for US$400.0 million in common shares to be sold by registered dealers on behalf of Aurora in the United States through the NYSE at prevailing market prices at the time of sale. As at December 31, 2019, the Company had raised $325.2 million (US$245.3 million) gross proceeds under its ATM program.
In addition to the commitments outlined in Note 20, the Company has the following undiscounted contractual obligations as at December 31, 2019, which are expected to be payable in the following respective periods:
| Total | ≤1 year | 1.01 - 3 years | 3.01 - 5 years | > 5 years | ||||||
| $ | $ | $ | $ | $ | ||||||
| Accounts payable and accrued liabilities | 125,432 | 125,432 | - | - | - | |||||
| Convertible notes and interest (1) | 561,411 | 26,977 | 49,298 | 485,136 | - | |||||
| Lease liabilities (2) | 189,969 | 12,352 | 35,731 | 30,697 | 111,189 | |||||
| Loans and borrowings excluding lease liabilities (2) | 223,009 | 33,843 | 189,166 | - | - | |||||
| Contingent consideration payable | 51,744 | 41,487 | 10,257 | - | - | |||||
| 1,151,565 | 240,091 | 284,452 | 515,833 | 111,189 | ||||||
| (1) | Assumes the principal balance of the notes outstanding at December 31, 2019 remains unconverted and includes the estimated interest payable until the maturity date. |
| (2) | Includes interest payable until maturity date. |
Note 25 Subsequent Events
Amendment to Credit Facilities
Subsequent to December 31, 2019, the Company amended the terms under the BMO Credit Facility (Note 14(a)).
Equity Financing
Subsequent to December 31, 2019, the Company issued 3,607,641 common shares under the ATM (Note 24(b)) for gross proceeds of $7.5 million (US$5.7 million).
RSU and Option Grants
Subsequent to December 31, 2019, the Company granted 1,818,663 RSUs, 201,680 stock options exercisable at $4.71, and 282,710 stock options exercisable at $2.08 to senior officers of the Company related to recent promotions and retention incentives. The options vest annually and expire on February 10, 2025 while the RSUs vest periodically tied to certain events.
| 34 |
Exhibit 99.2
AURORA CANNABIS INC.
Management’s Discussion & Analysis
(Unaudited)
For the three and six months ended December 31, 2019 and 2018
(in Canadian Dollars)
Management’s Discussion & Analysis
Table of Contents
| Business Overview | 3 |
| Condensed Statement of Comprehensive (Loss) Income | 4 |
| Key Quarterly Financial and Operating Results | 4 |
| Financial Highlights | 5 |
| Key Developments During the Three Month Period Ended December 31, 2019 | 6 |
| Key Developments Subsequent to December 31, 2019 | 7 |
| Financial Review | 8 |
| Liquidity and Capital Resources | 15 |
| Related Party Transactions | 18 |
| Critical Accounting Estimates | 19 |
| New or Amended Standards Effective July 1, 2019 | 19 |
| Recent Accounting Pronouncements | 20 |
| Financial Instruments | 21 |
| Financial Instruments Risk | 22 |
| Summary of Outstanding Share Data | 23 |
| Historical Quarterly Results | 24 |
| Risk Factors | 25 |
| Internal Controls Over Financial Reporting | 26 |
| Cautionary Statement Regarding Forward-Looking Statements | 26 |
| Cautionary Statement Regarding Certain Non-GAAP Performance Measures | 27 |
| 2 | AURORA CANNABIS INC. Q2 2020 MD&A |
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Six Months Ended December 31, 2019
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) of Aurora Cannabis Inc. (“Aurora” or the “Company”) should be read in conjunction with the Company’s condensed consolidated interim financial statements as at and for the three and six months ended December 31, 2019 and the accompanying notes thereto (the “Financial Statements”), which have been prepared in accordance with International Accounting Standards 34 - Interim Financial Reporting (“IAS 34”) of International Financial Reporting Standards (“IFRS”). The MD&A has been prepared as of February 13, 2020 pursuant to the disclosure requirements under National Instrument 51-102 - Continuous Disclosure Obligations (“NI 51-102”) of the Canadian Securities Administrators (“CSA”). Under the United States (“U.S.”) / Canada Multijurisdictional Disclosure System, we are permitted to prepare the MD&A in accordance with Canadian disclosure requirements which may differ from U.S. disclosure requirements.
Due to the ongoing expansion of the Company’s business, this MD&A provides additional comparative disclosures related to the second quarter ended December 31, 2019 (“Q2 2020”) and the first quarter ended September 30, 2019 (“Q1 2020”) given that management believes this provides more relevant and current information. The Company has also reclassified certain items, which are not material, on the condensed consolidated interim statement of comprehensive loss to conform with the current period’s presentation and improve comparability.
All dollar amounts are expressed in thousands of Canadian dollars, except for share and per share amounts, and where otherwise indicated.
This MD&A contains forward-looking information within the meaning of Canadian securities laws, and the use of non-GAAP measures. Refer to “Cautionary Statement Regarding Forward-Looking Statements” and “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” included within this MD&A.
This MD&A, condensed consolidated interim financial statements and the Company’s most recent annual audited consolidated financial statements, annual information form (“AIF”) and press releases have been filed in Canada on SEDAR at www.sedar.com and in the U.S. on EDGAR at www.sec.gov/edgar. Additional information can also be found on the Company’s website at www.auroramj.com.
Business Overview
Aurora was incorporated under the Business Corporations Act (British Columbia) on December 21, 2006 as Milk Capital Corp. Effective October 2, 2014, the Company changed its name to Aurora Cannabis Inc. The Company’s shares are listed on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”) under the trading symbol “ACB”, and on the Frankfurt Stock Exchange (“FSE”) under the trading symbol “21P”.
The Company’s head office and principal address is Suite 500 - 10355 Jasper Avenue, Edmonton, Alberta, Canada, T5J 1Y6. The Company’s registered and records office address is Suite 1500 - 1055 West Georgia Street, Vancouver, BC V6E 4N7.
Aurora is one of the world’s largest cannabis companies by cannabis production. The Company has grown both organically and via strategic acquisitions with the vision of creating a world-class cultivation platform producing consistent high-quality cannabis for both the global medical and the Canadian consumer use markets. Underpinning this vision is Aurora’s differentiated, purpose-built growing facilities, which we believe are the most technologically advanced indoor agricultural growing facilities in the world. These facilities consistently produce high-quality cannabis at scale, with lower risk of crop failure which allows the Company to achieve industry-leading cash costs to produce per gram of cannabis sold. We also recognize the need for robust research into the myriad of potential medical uses of cannabis, and as such, have built a leading plant and human science team.
The Company’s principal strategic business lines are focused on the production, distribution and sale of cannabis and hemp products in Canada and internationally. Aurora currently views its primary market opportunities as follows:
| • | Global Medical Cannabis Market: Production, distribution and sale of pharmaceutical-grade cannabis products in countries around the world where permitted by government legislation. Currently, there are 50 countries around the world which have implemented some form of access to cannabis for medical purposes, and Aurora’s current principal markets include Canada and Germany, and to a lesser degree Denmark, Italy, Poland and Australia; |
| • | Global Consumer Use Cannabis Market: Currently, only Canada and Uruguay have approved regulated consumer use of cannabis. Aurora has operations in both countries, but development of the Urugay market is expected to be over a longer time period. However, the Company believes that the increasing popularity of medical cannabis globally may eventually lead to increased legalization of adult-use consumer markets. Aurora expects to continue to evaluate international opportunities, but will be prudent in allocating capital to these emerging markets; and |
| • | Global Hemp and Hemp-Derived Cannabidiol (“CBD”) Market: The Company expects consumer demand for products including hemp or CBD derived from hemp plants to be a potential growth opportunity in the coming years. The Company continues to explore potential investment in a hemp-market infrastructure in the U.S. |
The U.S. represents the largest cannabis and hemp-derived CBD market globally and as such, Aurora continues to evaluate its alternatives to establishing an operating footprint in the U.S. As part of the U.S. market strategy, we are considering how various state and federal regulations will affect the Company’s business prospects. The Company is committed to only engage in activities which are permissible under both state and federal laws.
| 3 | AURORA CANNABIS INC. Q2 2020 MD&A |
Condensed Statement of Comprehensive (Loss) Income
| Three months ended | Six months ended | |||||||||
| ($ thousands) | December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||
| Net revenue (1) | $56,027 | $75,245 | $54,178 | $131,272 | $83,852 | |||||
| Gross profit before fair value (“FV”) adjustments | $22,813 | $42,506 | $28,378 | $65,319 | $44,090 | |||||
| Gross profit | $29,915 | $53,708 | $32,142 | $83,623 | $40,192 | |||||
| Operating expenses | $149,526 | $131,110 | $112,332 | $280,636 | $232,255 | |||||
| Loss from operations | ($119,611 | ) | ($77,402 | ) | ($80,190 | ) | ($197,013 | ) | ($192,063 | ) |
| Other (expense) income (2) | ($1,210,566 | ) | $107,013 | ($199,770 | ) | ($1,103,553 | ) | $20,817 | ||
| Net (loss) income | ($1,305,898 | ) | $10,370 | ($239,642 | ) | ($1,295,528 | ) | ($135,461 | ) | |
| Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) (3) | ($80,246 | ) | ($39,667 | ) | ($44,717 | ) | ($119,913 | ) | ($112,290 | ) |
| (1) | Net revenue represents our total revenue exclusive of excise taxes levied by the Canada Revenue Agency (“CRA”) on the sale of medical and consumer cannabis products effective October 17, 2018. Management records actual and expected product returns and price adjustments against Net revenue (three and six months ended December 31, 2019 - $10.6 million; three and six months ended December 31, 2018 - nil). |
| (2) | Other (expense) income includes an impairment of $51.9 million to property plant and equipment, $46.2 million to investment in associate, $158.7 million to intangible assets and $762.2 million to good will. Refer to Notes 9, 6 and 12, respectively, of the Financial Statements for the three and six months ended December 31, 2019. |
| (3) | This term is defined in the “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A. Refer to the “Adjusted EBITDA” section for reconciliation to the IFRS equivalent. |
Key Quarterly Financial and Operating Results
| ($ thousands, except Operational Results) | Q2 2020 | Q1 2020 | $ Change | % Change | ||||
| Financial Results | ||||||||
| Total net revenue(4) | $56,027 | $75,245 | ($19,218 | ) | (26 | )% | ||
| Cannabis net revenue (1)(2a)(4) | $52,676 | $70,776 | ($18,100 | ) | (26 | )% | ||
| Canadian and international medical cannabis net revenue (1)(2a) | $27,386 | $30,450 | ($3,064 | ) | (10 | )% | ||
| Consumer cannabis net revenue (1)(2a) | $22,906 | $30,022 | ($7,116 | ) | (24 | )% | ||
| Wholesale bulk cannabis net revenue (1)(2a) | $2,384 | $10,304 | ($7,920 | ) | (77 | )% | ||
| Gross margin before FV adjustments on cannabis net revenue (1)(2b) | 44 | % | 58 | % | N/A | (14 | )% | |
| Gross margin before FV adjustments on medical cannabis net revenue (1)(2b) | 54 | % | 63 | % | N/A | (9 | )% | |
| Gross margin before FV adjustments on consumer cannabis net revenue (1)(2b) | 32 | % | 53 | % | N/A | (21 | )% | |
| Gross margin before FV adjustments on wholesale bulk cannabis net revenue (1)(2b) | 45 | % | 58 | % | N/A | (13 | )% | |
| Adjusted gross margin before FV adjustments on cannabis net revenue (1)(2b) | 55 | % | 67 | % | N/A | (12 | )% | |
| Selling, general and administration expense | $99,882 | $81,132 | $18,750 | 23 | % | |||
| Balance Sheet | ||||||||
| Working capital | $415,936 | $123,750 | $292,186 | 236 | % | |||
| Cannabis inventory and biological assets (1)(3) | $216,735 | $178,748 | $37,987 | 21 | % | |||
| Total assets | $4,671,912 | $5,606,799 | ($934,887 | ) | (17 | )% | ||
| Operational Results - Cannabis | ||||||||
| Cash cost to produce per gram sold (1)(2c) | $0.88 | $0.85 | $0.03 | 4 | % | |||
| Active registered patients | 90,307 | 91,116 | (809 | ) | (1 | )% | ||
| Average net selling price of medical cannabis (1) | $7.99 | $8.00 | ($0.01 | ) | 0 | % | ||
| Average net selling price of consumer cannabis (1) | $4.76 | $5.28 | ($0.52 | ) | (10 | )% | ||
| Average net selling price of wholesale bulk cannabis (1) | $1.90 | $3.46 | ($1.56 | ) | (45 | )% | ||
| Kilograms produced | 30,691 | 41,436 | (10,745 | ) | (26 | )% | ||
| Kilograms sold | 9,501 | 12,463 | (2,962 | ) | (24 | )% | ||
| (1) | These terms are defined in the “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A. |
| (2) | Refer to the following sections for reconciliation of non-GAAP measures to the IFRS equivalent measure: |
| a. | Refer to the “Revenue” section for a reconciliation of cannabis net revenue to the IFRS equivalent. |
| b. | Refer to the “Gross Margin” section for reconciliation to the IFRS equivalent. |
| c. | Refer to the “Cash Cost of Sales of Dried Cannabis and Cash Cost to Produce Dried Cannabis Sold - Aurora Produced Cannabis” section for reconciliation to the IFRS equivalent. |
| (3) | Represents total biological assets and cannabis inventory, exclusive of merchandise, accessories, supplies and consumables. |
| (4) | Includes impact of actual and expected product returns and price adjustments (three and six months ended December 31, 2019 - $10.6 million; three and six months ended December 31, 2018 - nil) |
| 4 | AURORA CANNABIS INC. Q2 2020 MD&A |
Financial Highlights
Revenue
Medical Cannabis Net Revenue
During Q2 2020, our Canadian medical cannabis net revenues remained relatively flat at $25.6 million in Q2 2020 as compared to $25.5 million in Q1 2020. However, during Q2 2020, our international medical cannabis sales decreased by 64% to $1.8 million due to a temporary sales suspension on certain products in Germany. Since then, the Company has received approvals from regulators and sales of our medical cannabis products in Germany have resumed.
Our Canadian medical cannabis sales and gross margins continue to be negatively impacted by excise taxes levied on the sale of cannabis products in Canada. Given our patient-first commitment and belief that medical cannabis should not be subject to excise tax, we do not pass the cost of these excise taxes onto our medical cannabis patients. As a result, excise taxes negatively impacted our Canadian medical cannabis net revenue and gross margin by $3.3 million and 5%, respectively ($3.1 million and 4% for Q1 2020). Excluding the impact of excise taxes, Canadian medical cannabis net revenue and gross margin would have been $28.9 million and 61%, respectively for Q2 2020 as compared to $28.6 million and 67%, respectively for Q1 2020.
Consumer Cannabis Net Revenue
Consumer cannabis revenue decreased by $7.1 million, or 24%, from $30.0 million in Q1 2020 to $22.9 million in Q2 2020. The current quarter’s consumer cannabis net revenue figure is presented net of $6.1 million of actual returns and price adjustments and a $4.5 million provision for future returns and price adjustments. Before the impact of returns, price adjustments and the recognition of the revenue provision, consumer cannabis net revenue would have increased by $3.4 million or 11% as compared to Q1 2020. Management continues to work closely with provincial government bodies to monitor inventory levels and related sell-through rates to manage the level of future product returns. The Company has also made certain decisions to pivot towards cultivation of strains that are in greater demand. Overall, the roll-out of retail stores across Canada has been slower than expected, thus adversely impacting the pace of growth in consumer revenue. The consumer cannabis infrastructure is expected to further develop and expand throughout calendar 2020 with the launch of new retail stores across Canada, with certain key province announcing changes which if effectively implemented may facilitate growth in consumer demand. For Q2 2020, consumer cannabis revenue comprises 41% of our total consolidated net revenue.
Effective October 17, 2019, the sale of cannabis derivative products was legalized in Canada (“Cannabis 2.0”). On December 23, 2019, we commenced shipments of initial orders for Cannabis 2.0 products to Canada’s provincial regulators. However, given that most major markets did not begin selling until early January 2020, these product sales had limited impact on our quarterly net revenues. During Q2 2020, the Company recognized consumer cannabis net revenues of $3.0 million on its Cannabis 2.0 products.
Wholesale Bulk Cannabis Net Revenue
During Q2 2020, the Company generated $2.4 million in wholesale bulk revenue as compared to $10.3 million in Q1 2020. The decline in wholesale bulk revenue was primarily due to a decrease in the overall volume of product sold as well as an increase in the sale of trim, which has a lower potency and therefore commands a lower average selling price per gram.
Production
During Q2 2020, Aurora produced 30,691 kilograms of cannabis as compared to 41,436 kilograms in Q1 2020. The 26% decrease in output was temporary as management pivoted certain production to the cultivation of certain strains to align production capacity with evolving consumer preferences. Management continues to monitor the forecast balance of supply and demand in the Canadian and international cannabis markets in order to time the scale-up of further Aurora production capacity as needed.
Aurora’s current operating facilities production capacity is approximately 150,000 kilograms annually. Aurora continues to be the leader in producing a consistent supply of high-quality, low-cost product to meet evolving market demands. Our design philosophy allows us to respond to market conditions quickly with shorter lead times, consistent production volumes and potencies, and increased harvest cycles, which allows us to be more flexible in our facilities and reactive to changes in demand.
Cash Cost to Produce
Cash cost to produce per gram of dried cannabis sold increased to $0.88 per gram and gram equivalent, up 4% or $0.03 from Q1 2020. The increase in cash cost to produce per gram was primarily due to lower production volume, thus resulting in lower overhead absorption, as compared to Q1 2020. As described above, our production volumes decreased by 26%, and will likely remain at current levels, in connection with initiatives to optimize cultivation of certain strains and realign our production capacity with evolving consumer preferences and market demand.
Gross Margins
Gross margin before fair value adjustments on cannabis net revenue decreased to 44% in Q2 2020 as compared to 58% in Q1 2020. The decline in gross margin is primarily attributable to (i) returns, price adjustments and provisions for future returns and price adjustments as described above; (ii) a decrease in average net selling price for consumer sales due to pricing constraints with provincial wholesale bodies; and (iii) the temporary suspension of European Union (“EU”) sales which yield higher average selling prices and margins in that market. Before the $10.6 million cumulative impact of returns, price adjustments and the revenue provision, gross margin on cannabis net revenue would have been 48% in Q2 2020.
| 5 | AURORA CANNABIS INC. Q2 2020 MD&A |
Selling, General and Administration (“SG&A”)
During Q2 2020, SG&A increased by $18.8 million, or 23%, as compared to prior quarter. The increase was primarily due to (i) an increase in salaries and benefits due to an increase in corporate headcount, and (ii) an increase in marketing and campaign expenses relating to the launch of Cannabis 2.0, consumer education and the Aurora Drift brand.
Aurora has implemented changes, announced on February 6, 2020 to reset our business operations and reduce SG&A costs. Refer to the “Liquidity and Capital Resources” and the “Key Developments Subsequent to December 31, 2019 - Business Transformation Plan” section for further discussion.
Impairment
During Q2 2020, the Company recorded a $762.2 million impairment charge to goodwill, a $158.7 million impairment charge to definite life and indefinite life intangible assets, and a $51.9 million impairment charge to property, plant and equipment. The impairment charges are allocated to the Company’s cannabis operating segment. Impairment charges recognized during the period were primarily attributable to changes in the timing of accessing market demand and the resulting slower revenue ramp and growth than originally forecasted by management. In addition, management has undertaken certain strategic initiatives to realign the Company’s footprint to meet market demand, thus making certain assumptions used to derive goodwill from prior acquisitions no longer relevant to the Company’s current and future operating plans.
Refer to Note 9, Note 11 and Note 12 of the Condensed Consolidated Interim Financial Statements for the three and six months ended December 31, 2019 and 2018 for a description of key assumptions used in the Company’s Q2 2020 goodwill and asset impairment test, as well as impairment charges allocated by cash generating unit and asset classes.
Net (Loss) Income
Net loss for the three months ended Q2 2020 was $1.3 billion, as compared to a net income of $10.4 million for the three months ended Q1 2020. The quarter-over-quarter changes in net (loss) income are due to the changes described above.
Adjusted EBITDA
The Company defines adjusted EBITDA as net (loss) income excluding interest income (expense), accretion, income taxes, depreciation, amortization, changes in fair value of inventory sold, changes in fair value of biological assets, share-based compensation, foreign exchange, changes in fair value of financial instruments, gains and losses on deemed disposal, and non-cash impairment of intangibles, goodwill, and other assets.
The adjusted EBITDA loss for Q2 2020 was $80.2 million as compared to a $39.7 million loss in the prior quarter. The decline in our adjusted EBITDA loss is primarily due to the quarter over quarter decrease in revenue, an increase in production costs relating to the ramp up for the legalization of Cannabis 2.0, and the increase in SG&A expenses.
Other
Given the level of volatility in cannabis sector valuations, Aurora’s derivative assets and liabilities are subject to non-cash impacts and swings in their fair values. During the three months ended Q2 2020 and in connection with the decline in Aurora’s stock price, Aurora recognized unrealized fair value gains on its derivative financial instruments of $5.0 million as compared to unrealized fair value gains of $129.7 million in the prior quarter.
Key Developments During the Three Month Period Ended December 31, 2019
Financing Activities
In November 2019, the Company provided notice to all holders of Aurora’s $230.0 million 5% unsecured, convertible debentures due March 9, 2020 (the “Debentures”) of an opportunity to voluntarily convert their Debentures at a temporarily amended early conversion price of $3.2837 (the “Amended Early Conversion Price”) calculated based on a 6% discount to the average daily volume weighted average price (“VWAP”) of Aurora’s common shares on both the Canadian and U.S. stock exchanges.
On November 25, 2019, $227.0 million principal amount, or approximately 99%, of the Debentures were converted under the Amended Early Conversion Price into 69,135,117 common shares of Aurora. Debenture holders that elected to convert also received a total of $7.9 million of interest paid in cash comprised of: (i) accrued and unpaid interest from the last interest payment date, being June 30, 2019, to, but excluding, November 25, 2019, and (ii) future unpaid interest from November 25, 2019, to, but excluding, the date of maturity of the Debentures, being March 9, 2020. The remaining Debentures continue to be governed under the terms of the original indenture dated March 8, 2018, as supplemented by a first supplemental indenture between the Company and Computershare Trust Company of Canada.
Product Line Expansion
On December 23, 2019, we commenced shipments of initial orders received to 10 of Canada's provincial regulators of Cannabis 2.0 products. Most major markets did not begin selling Cannabis 2.0 products until early January 2020. We are currently producing a variety of CBD and tetrahydrocannabinol (“THC”) vape and edible products, such as gummies, chocolates, baked goods and mints.
| 6 | AURORA CANNABIS INC. Q2 2020 MD&A |
Key Developments Subsequent to December 31, 2019
Facility Update
On February 3, 2020, we announced that our Aurora River production facility, located in Bradford, Ontario, has received its EU GMP certification. Aurora River has a cultivation capacity of 28,000 kilograms per year across its 17 fully-planted, independently climate-controlled grow rooms. The EU GMP certification of Aurora River enables the Company to allocate both a greater quantity of dried and extracted product to international markets as well as introduce new products grown and produced in the facility.
CEO Succession and Board Expansion
On February 6, 2020, the Company announced the succession of Micheal Singer as Interim Chief Executive Officer (“CEO”), effective immediately. As part of the succession plan, Terry Booth, former CEO, has become a Senior Strategic Advisor to the Board of Directors and has also retained a Director position with the Company. Additionally, the Company announced the appointment of two new independent Directors, Lance Friedmann and Michael Detlefsen, to join the Company’s Board of Directors.
Business Transformation Plan
On February 6, 2020, we announced a business plan to align SG&A and capital expenditures with current market conditions. It is our intention to manage the business to a target SG&A range of $40.0 million to $45.0 million per quarter by the end of the fiscal fourth quarter of 2020. To achieve this, management plans to focus the business on its core areas: (i) Canadian consumer market; (ii) Canadian medical market; (iii) established international medical markets; and (iv) U.S. market initiatives. In addition, the Company has eliminated close to 500 full-time equivalent staff across the company, including approximately 25% of corporate positions. The associated severance costs associated with the restructuring plan are estimated to be $2 million to $4 million which are anticipated to impact the Company’s fiscal third quarter ending March 31, 2020. Additionally, management is restructuring spending plans on information technology projects, sales and marketing initiatives, travel and entertainment, professional services, and other non-revenue-generating third party costs, which do not provide an immediate impact to earnings.
We also intend to reduce capital expenditures for the second half of fiscal 2020 to bring capital expenditures below $100.0 million in total. Management is evaluating all capital projects underway and is making decisions with respect to continuing or terminating further investment in each. Future capital allocation decisions will be scrutinized through a lens of optimizing near-term investor returns.
Financing Activities
On February 6, 2020, we announced a number of amendments to our secured credit facilities which are designed to better align the Company's balance sheet and cash flow expectations with current market conditions and to provide financial flexibility over the near term. Refer to the “Liquidity and Capital Resources” section for an outline of the amendments.
Subsequent to December 31, 2019, the Company issued 3,607,641 common shares under the prospectus At-the-Market (“ATM”) supplement for gross proceeds of $7.5 million (US$5.7 million). The ATM provides for the sale of up to US$400 million of common shares by registered dealers on behalf of Aurora through the NYSE stock exchange at prevailing market prices at the time of sale.
Launch of Value Brand
In response to growing consumer demand for lower priced dried flower in the Canadian consumer market, Aurora is launching a new brand, Daily Special. Targeting the value segment of the consumer market with a variety of package sizes at competitive price points, shipments of Daily Special are expected to begin in fiscal Q3 2020.
RSU and Option Grants
Subsequent to December 31, 2019, the Company granted 1,818,663 RSUs, 201,680 stock options exercisable at $4.71, and 282,710 stock options exercisable at $2.08 to senior officers of the Company related to recent promotions and retention incentives. The options vest annually and expire on February 10, 2025 while the RSUs vest periodically tied to certain events.
| 7 | AURORA CANNABIS INC. Q2 2020 MD&A |
Financial Review
Revenue
The Company primarily operates in the cannabis market. Effective October 17, 2018, the Cannabis Act took effect in Canada and Aurora began selling cannabis to the consumer market across Canada. Aurora also derives revenues from auxiliary support functions, which include patient counseling services; design, engineering and construction services; and cannabis analytical product testing services. The table below outlines the reconciliation from the Company’s total net revenue to its cannabis net revenue metric.
| ($ thousands) | Three months ended | Six months ended | ||||||
| December 31, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||
| Net revenue | 56,027 | 54,178 | 131,272 | 83,852 | ||||
| Design, engineering and construction services | - | - | - | (1,489 | ) | |||
| Patient counseling services | (695 | ) | (2,334 | ) | (1,750 | ) | (3,576 | ) |
| Analytical testing services | (637 | ) | (1,367 | ) | (1,453 | ) | (1,814 | ) |
| Other cannabis segment revenues (accessories, hemp, other) | (1,655 | ) | (2,174 | ) | (3,823 | ) | (3,559 | ) |
| Horizontally integrated business revenue | (364 | ) | (726 | ) | (794 | ) | (1,241 | ) |
| Cannabis net revenue | 52,676 | 47,577 | 123,452 | 72,173 | ||||
During the three months ended December 31, 2019, cannabis net revenue increased by $5.1 million or 11% as compared to the same period in the prior year. The increase was due to an increase in medical cannabis net revenue of $1.4 million, an increase in wholesale bulk cannabis net revenue of $2.4 million and an increase in consumer cannabis net revenue of $1.3 million as compared to the previous period. Net revenue from sale of consumer cannabis is presented after recognizing the impact of $6.1 million of actual returns and price adjustments and a $4.5 million provision for future returns and price adjustments (three months ended December 31, 2018 - nil). The $4.5 million provision is based on historical experience and management’s estimate of future returns and price adjustments. Before considering the cumulative $10.6 million impact of the product returns, price adjustments and the revenue provision, total cannabis net revenue in the three months ended December 31, 2019 would have increased by $15.7 million or 33% as compared to the three months ended December 31, 2018.
During the six months ended December 31, 2019, cannabis net revenues increased by $51.3 million as compared to the same period in the prior year. The increase is primarily attributable to (i) a $30.8 million increase in consumer cannabis net revenue related to the launch and legalization of medical and consumer cannabis sales in Canada in October 2018; (ii) a $12.7 million increase in wholesale bulk revenues, which were not present in the comparative period; and (iii) a $7.8 million increase in medical cannabis net revenue primarily driven by an increase in extract sales. Included in total cannabis net revenues for the six months ended December 31, 2019 is $2.9 million of cannabis net revenue generated from the acquisition of Whistler which occurred in March 2019.
The table below outlines the breakdown of cannabis net revenue between our medical, consumer and wholesale bulk markets, as well as our dried cannabis and cannabis extracts for the three months ended December 31, 2019 and September 30, 2019 and six months ended December 31, 2019 and 2018.
| ($ thousands) | Three months ended | Six months ended | ||||||
| December 31, 2019 | September 30, 2019 | December 31, 2019 | December 31, 2018 | |||||
| Medical cannabis net revenue | ||||||||
| Canada dried cannabis | 14,803 | 14,882 | 29,685 | 29,162 | ||||
| Canada cannabis extracts (1) | 10,791 | 10,606 | 21,397 | 15,219 | ||||
| International dried cannabis | 1,758 | 4,553 | 6,311 | 5,656 | ||||
| International cannabis extracts (1) | 34 | 409 | 443 | - | ||||
| Total medical cannabis net revenue | 27,386 | 30,450 | 57,836 | 50,037 | ||||
| Consumer cannabis net revenue | ||||||||
| Dried cannabis | 28,980 | 26,889 | 55,869 | 19,329 | ||||
| Cannabis extracts (1) | 4,491 | 3,133 | 7,624 | 2,807 | ||||
| Revenue provisions (2) | (10,565 | ) | - | (10,565 | ) | - | ||
| Total consumer cannabis net revenue | 22,906 | 30,022 | 52,928 | 22,136 | ||||
| Wholesale bulk cannabis net revenue | ||||||||
| Dried cannabis | 2,352 | 7,432 | 9,784 | - | ||||
| Cannabis extracts (1) | 32 | 2,872 | 2,904 | - | ||||
| Wholesale bulk cannabis net revenue | 2,384 | 10,304 | 12,688 | - | ||||
| Total cannabis net revenue | 52,676 | 70,776 | 123,452 | 72,173 | ||||
| (1) | Cannabis extracts revenue includes cannabis oils, capsules, softgels, sprays and topical revenue. |
| (2) | Net revenue provisions consists of actual returns and price adjustments of $6.1 million and a $4.5 million revenue provision for estimated future returns and price adjustments. |
| 8 | AURORA CANNABIS INC. Q2 2020 MD&A |
Medical Cannabis Net Revenue
During the three months ended December 31, 2019, the Company’s medical cannabis net revenues decreased $3.1 million, or 10%, compared to the prior quarter. The decrease in medical cannabis net revenue for the current quarter was primarily due to a $3.2 million drop in international cannabis sales over the prior quarter, caused by a temporary suspension in European sales on certain products in December 2019. As of February 2019, the Company has received necessary approvals from German regulators and sales of our medical cannabis products in the EU have resumed. The Company continues to maintain stable Canadian medical dried cannabis and cannabis extract sales as compared to the prior quarter.
For the six months ended December 31, 2019, medical cannabis net revenue increased by $7.8 million, or 16%, as compared to the same period in prior year. The increase was primarily due to the addition of $2.9 million of revenue from the March 2019 acquisition of Whistler, an increase in European sales of $1.1 million, and an increase in active registered patients of 16,728 driving an increase in cannabis extract sales.
Consumer Cannabis Net Revenue
During the three months ended December 31, 2019, consumer cannabis net revenue decreased by $7.1 million, or 24% compared to the prior quarter. The Q2 2020 consumer cannabis net revenue figure incorporates a $6.1 million revenue adjustment for actual returns and price adjustments as well as a $4.5 million revenue provision for estimated future returns and price adjustments (three months ended September 30, 2019 - nil). Before considering the $10.6 million impact of the actual returns, actual price adjustments and the revenue provision, consumer cannabis net revenue would have increased by $3.4 million or 11% as compared to the prior quarter. Consumer cannabis net revenue is generated through sales under a wholesale model through provincial government bodies. Management continues to work closely with the provincial government bodies to monitor inventory levels and related sell-through rates to manage the level of future product returns. Additionally, as previously discussed the Company has also made certain decisions to pivot towards cultivation of strains that are in greater demand.
During the three months ended December 31, 2019, the Company recognized revenues of $3.0 million on its Cannabis 2.0 products which launched in December 2019. In October 2019, the sale of cannabis derivative products was legalized in Canada. On December 23, 2019, we commenced shipments of initial orders for Cannabis 2.0 products to Canada’s provincial regulators. However, given that most major markets did not begin selling until early January 2020, these product sales had limited impact on our quarterly net revenues. As the consumer cannabis infrastructure continues to develop and expand throughout calendar 2020 with the launch of new retail stores across Canada, we expect demand to increase through further access to consumers.
For the six months ended December 31, 2019, consumer cannabis net revenue increased by $30.8 million, or 139% compared to the same period in prior year. The increase was primarily due the recognition of a full six months of consumer cannabis sales over the comparative period as legalization through the Cannabis Act came into effect on October 17, 2018.
Wholesale Bulk Cannabis Net Revenue
During Q2 2020, the Company generated $2.4 million in wholesale bulk net revenue as compared to $10.3 million in the prior quarter. The decline in wholesale bulk net revenue was primarily due to a decrease in the overall volume of product sold as well as lower potency of product sold during the period, which generally commands a lower average selling price per gram.
During the six months ended December 31, 2019, the Company’s wholesale bulk net revenue increased by $12.7 million as compared to the same period in prior year as the Company had not performed any wholesale transactions in the prior year period.
Gross Margin
| Three months ended | Six months ended | |||||||||
| ($ thousands) | December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||
| Net revenue | 56,027 | 75,245 | 54,178 | 131,272 | 83,852 | |||||
| Cost of sales | (33,214 | ) | (32,739 | ) | (25,800 | ) | (65,953 | ) | (39,762 | ) |
| Gross profit before FV adjustments (1) | 22,813 | 42,506 | 28,378 | 65,319 | 44,090 | |||||
| Changes in fair value of inventory sold | (22,778 | ) | (18,534 | ) | (21,620 | ) | (41,312 | ) | (31,561 | ) |
| Unrealized gain on changes in fair value of biological assets | 29,880 | 29,736 | 25,384 | 59,616 | 27,663 | |||||
| Gross profit | 29,915 | 53,708 | 32,142 | 83,623 | 40,192 | |||||
| Gross margin | 53 | % | 71 | % | 59 | % | 64 | % | 48 | % |
| (1) | Gross profit before fair value adjustments is a non-GAAP measures. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined term. |
| 9 | AURORA CANNABIS INC. Q2 2020 MD&A |
The table below outlines adjusted gross profit and margin before FV adjustments on cannabis net revenue for December 31, 2019, September 30, 2019, and December 31, 2018.
| Three months ended | Six months ended | |||||||||
| ($ thousands) | December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||
| Gross profit before FV adjustments (1) | 22,813 | 42,506 | 28,378 | 65,319 | 44,090 | |||||
| Adjustments: | ||||||||||
| Gross profit from non-cannabis auxiliary support functions | 296 | (1,164 | ) | (2,866 | ) | (868 | ) | (5,888 | ) | |
| Depreciation | 5,657 | 5,971 | 770 | 11,628 | 1,214 | |||||
| Adjusted gross profit before FV adjustments on cannabis net revenue (1) | 28,766 | 47,313 | 26,282 | 76,079 | 39,416 | |||||
| Cannabis net revenue (1) | 52,676 | 70,776 | 47,577 | 123,452 | 72,173 | |||||
| Adjusted gross margin before FV adjustments on cannabis net revenue (1) | 55 | % | 67 | % | 55 | % | 62 | % | 55 | % |
| (1) | These terms are defined in the “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A |
The table below outlines gross profit and margin before fair value adjustments for December 31, 2019, September 30, 2019, and December 31, 2018.
| ($ thousands) | Medical Cannabis | Consumer Cannabis | Wholesale Bulk | Auxiliary Support Functions | Total | |||||
| Three months ended December 31, 2019 | ||||||||||
| Revenue before excise taxes | 30,665 | 28,622 | 2,384 | 3,351 | 65,022 | |||||
| Excise taxes | (3,279 | ) | (5,716 | ) | - | - | (8,995 | ) | ||
| Net revenue | 27,386 | 22,906 | 2,384 | 3,351 | 56,027 | |||||
| Cost of sales | (12,722 | ) | (15,541 | ) | (1,304 | ) | (3,647 | ) | (33,214 | ) |
| Gross profit before FV adjustments (1) | 14,664 | 7,365 | 1,080 | (296 | ) | 22,813 | ||||
| Gross margin before FV adjustments (1) | 54 | % | 32 | % | 45 | % | (9 | )% | 41 | % |
| Three months ended September 30, 2019 | ||||||||||
| Revenue before excise taxes | 33,588 | 36,796 | 10,304 | 4,469 | 85,157 | |||||
| Excise taxes | (3,138 | ) | (6,774 | ) | - | - | (9,912 | ) | ||
| Net revenue | 30,450 | 30,022 | 10,304 | 4,469 | 75,245 | |||||
| Cost of sales | (11,137 | ) | (13,996 | ) | (4,301 | ) | (3,305 | ) | (32,739 | ) |
| Gross profit before FV adjustments (1) | 19,313 | 16,026 | 6,003 | 1,164 | 42,506 | |||||
| Gross margin before FV adjustments (1) | 63 | % | 53 | % | 58 | % | 26 | % | 56 | % |
| Three months ended December 31, 2018 | ||||||||||
| Revenue before excise taxes | 28,900 | 26,499 | - | 6,601 | 62,000 | |||||
| Excise taxes | (2,906 | ) | (4,916 | ) | - | - | (7,822 | ) | ||
| Net revenue | 25,994 | 21,583 | - | 6,601 | 54,178 | |||||
| Cost of sales | (10,706 | ) | (11,359 | ) | - | (3,735 | ) | (25,800 | ) | |
| Gross profit before FV adjustments (1) | 15,288 | 10,224 | - | 2,866 | 28,378 | |||||
| Gross margin before FV adjustments (1) | 59 | % | 47 | % | - | % | 43 | % | 52 | % |
| (1) | Gross profit and gross margin before fair value adjustments are both non-GAAP measures. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined terms. |
Medical Cannabis Gross Margin
Gross margin before fair value adjustments on medical cannabis sales was 54% in Q2 2020 as compared to 63% in Q1 2020. The decrease in gross margin was a result of:
| (i) | a $3.2 million, or 64%, decline in international medical sales due to a temporary suspension of EU cannabis sales. As of February 2020, EU sales have resumed with the receipt of necessary approvals from regulators. Sales generated in the EU are at higher average selling prices and yields higher margins; and |
| (ii) | an increase in cash cost to produce related to lower production volumes and lower overhead absorption. |
Gross margin before fair value adjustments on medical cannabis sales in Q2 2019 was 59%. The decrease in Q2 2020 as compared to Q2 2019 was primarily attributable to the decline in international medical sales described above.
| 10 | AURORA CANNABIS INC. Q2 2020 MD&A |
The Company does not pass the cost of excise taxes onto medical patients. Of the $9.0 million excise taxes incurred during the three months ended Q2 2020, $3.3 million relates to excise taxes levied on cannabis products that we sold to medical patients in Canada. As such, these excise taxes on medical sales directly impacted our bottom line and decreased our gross margin by 5%. Excluding the impact of excise taxes on medical sales, our gross margin would have been 59% and 67% for the three months ended Q2 2020 and Q1 2020, respectively (three months ended Q2 2019 - 63%).
Consumer Cannabis Gross Margin
Gross margin before fair value adjustments on consumer cannabis sales decreased to 32% in Q2 2020 as compared to 53% in Q1 2020. The decrease was a result of:
| (i) | $6.1 million in actual returns and price adjustments for the period and a revenue provision of $4.5 million for future returns and price adjustments. Before the impact of these adjustments, our gross margin before fair value adjustments on consumer cannabis sales would have been 43%; |
| (ii) | a decrease in the average net selling price of consumer cannabis from $5.28 per gram in Q1 2020 to $4.76 per gram in Q2 2020. The decrease is due to pricing constraints with provincial wholesale bodies as their purchasing patterns evolve; |
| (iii) | an increase in cash cost of sales related to manufacturing inefficiencies and lower overhead absorption associated with the initial scale-up of production volumes for Cannabis 2.0 products; and |
| (iv) | an increase in cash cost of sales due to overall lower cannabis production volumes, 30,691 kilograms in Q2 2020 versus 41,436 kilograms in Q1 2020. |
Gross margin before fair value adjustments on consumer cannabis sales for Q2 2019 was 47% as compared to 32% in Q2 2020. The 15% decrease from Q2 2019 is primarily due to the impact of actual returns, price adjustments and the revenue provision described above and a decline in the average net selling price of consumer cannabis from $5.67 in Q2 2019 to $4.76 in Q2 2020.
Wholesale Bulk Gross Margin
Gross margin before fair value adjustments on wholesale bulk sales decreased to 45% during Q2 2020 as compared to 58% in the prior quarter. The decrease was primarily attributable to a $1.56 decrease in the average net selling price per gram resulting from the sales of cannabis trim. Cannabis trim generally contains lower quantities of cannabinoids and are thus sold at a lower average net selling price. Additionally, extract sales, which yield higher margins than dried cannabis, decreased by $2.8 million over the prior quarter.
The table below outlines gross profit and margin before fair value adjustments for the six months ended Q2 2020 and Q2 2019.
| ($ thousands) | Medical Cannabis | Consumer Cannabis | Wholesale Bulk | Auxiliary Support Functions | Total | |||||
| Six months ended Q2 2020 | ||||||||||
| Revenue before excise taxes | 64,253 | 65,418 | 12,688 | 7,820 | 150,179 | |||||
| Excise taxes | (6,417 | ) | (12,490 | ) | - | - | (18,907 | ) | ||
| Net revenue | 57,836 | 52,928 | 12,688 | 7,820 | 131,272 | |||||
| Cost of sales | (23,859 | ) | (29,537 | ) | (5,605 | ) | (6,952 | ) | (65,953 | ) |
| Gross profit before FV adjustments (1) | 33,977 | 23,391 | 7,083 | 868 | 65,319 | |||||
| Gross margin before FV adjustments (1) | 59 | % | 44 | % | 56 | % | 11 | % | 50 | % |
| Six months ended Q2 2019 | ||||||||||
| Revenue before excise taxes | 52,943 | 27,052 | - | 11,679 | 91,674 | |||||
| Excise taxes | (2,906 | ) | (4,916 | ) | - | - | (7,822 | ) | ||
| Net revenue | 50,037 | 22,136 | - | 11,679 | 83,852 | |||||
| Cost of sales | (22,436 | ) | (11,534 | ) | - | (5,792 | ) | (39,762 | ) | |
| Gross profit before FV adjustments (1) | 27,601 | 10,602 | - | 5,887 | 44,090 | |||||
| Gross margin before FV adjustments (1) | 55 | % | 48 | % | - | % | 50 | % | 53 | % |
| (1) | Gross profit and gross margin before fair value adjustments are both non-GAAP measures. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined terms. |
Medical Cannabis Gross Margin
Gross margin before fair value adjustments on medical sales for the six months ended Q2 2020 was 59% compared to 55% for the same period ended Q2 2019. The increase in our medical cannabis gross margin was driven by our ability to significantly reduce our production costs through the increase of production capacity and realization of economies of scale at our Sky, River and Ridge facilities. For the six months ended Q2 2020, we produced 72,127 kilograms of cannabis as compared to 12,818 kilograms in the six months ended Q2 2019.
Consumer Cannabis Gross Margin
Gross margin before fair value adjustments on consumer cannabis sales decreased to 44% for the six months ended Q2 2020 compared to the same period ended Q2 2019. The decrease is primarily due to the impact of price adjustments, product returns and revenue provisions related to sales to our provincial wholesale customers described above. Before the impact of these adjustments, our gross margin before fair value adjustments on consumer market sales would have remained steady at 48%.
| 11 | AURORA CANNABIS INC. Q2 2020 MD&A |
Cash Cost of Sales of Dried Cannabis and Cash Cost to Produce Dried Cannabis Sold - Aurora Produced Cannabis
| ($ thousands) | Three months ended | Six months ended | ||||||||
| December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | ||||||
| Total cost of sales | 33,214 | 32,739 | 25,800 | 65,953 | 39,762 | |||||
| Adjustments: | ||||||||||
| Non-cannabis segment and non-cannabis cost of sales (1) | (4,373 | ) | (3,529 | ) | (3,920 | ) | (7,902 | ) | (10,396 | ) |
| Cash cost of sales for cannabis extracts | (7,405 | ) | (8,458 | ) | (4,151 | ) | (15,863 | ) | (6,091 | ) |
| Cost of cannabis purchased from other licensed producers | (304 | ) | (345 | ) | (1,424 | ) | (649 | ) | (2,649 | ) |
| Depreciation | (5,657 | ) | (5,971 | ) | (770 | ) | (11,628 | ) | (1,214 | ) |
| Cost of accessories (2) | (347 | ) | (55 | ) | (748 | ) | (402 | ) | (823 | ) |
| Cash cost of sales of dried cannabis sold (3) | 15,128 | 14,381 | 14,787 | 29,509 | 18,589 | |||||
| Packaging costs | (6,818 | ) | (3,850 | ) | (3,839 | ) | (10,668 | ) | (4,740 | ) |
| Cash cost to produce dried cannabis sold (3) | 8,310 | 10,531 | 10,948 | 18,841 | 13,849 | |||||
| Kilogram equivalents of cannabis sold produced by Aurora (4) | 9,450 | 12,463 | 5,697 | 21,913 | 7,699 | |||||
| Cash cost of sales per gram of dried cannabis sold (3) | $1.60 | $1.15 | $2.60 | $1.35 | $2.41 | |||||
| Cash cost to produce per gram of dried cannabis sold(3) | $0.88 | $0.85 | $1.92 | $0.86 | $1.80 | |||||
| (1) | Non-cannabis segment cost of sales consists of cost of sales from the production and sale of indoor cultivation systems. Non-cannabis cost of sales consists of cost of sales from patient counseling services, hemp products, design, engineering and construction services, and analytical product testing. These were removed from consolidated cost of sales to determine cash costs solely related to the sales of dried cannabis produced by Aurora. |
| (2) | Cost of accessories includes cost of sales from vaporizers, grinders, and capsule fillers. |
| (3) | Cash cost of sales per gram of dried cannabis sold and cash cost to produce per gram of dried cannabis sold are non-GAAP financial measures and are not recognized, defined, or subject to standardized measurement under IFRS. These respective metrics represent the blended and consolidated cash costs for dried cannabis produced and sold by our Aurora, CanniMed, MedReleaf and ICC operations during the three and six months ended December 31, 2018. However, due to the acquisitions completed and growth achieved in fiscal 2019, the metrics for the periods ended December 31, 2019 and September 30, 2019, reflect the blended and consolidated cash costs of dried cannabis produced and sold by our Aurora, CanniMed, MedReleaf, ICC and Whistler operations. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined terms. |
| (4) | Kilograms of dried cannabis sold includes dried kilograms sold by our Aurora, CanniMed, MedReleaf, ICC and Whistler operations, but excludes the dried kilograms sold that were purchased from other Licensed Producers. |
Cash cost to produce per gram of dried cannabis sold increased to $0.88 per gram and gram equivalent, up 4%, or $0.03, from Q1 2020. The increase in cash cost to produce per gram was primarily due to lower production volumes, thus resulting in lower overhead absorption, as compared to Q1 2020. As described above, our production volume decreased by 26% in connection with initiatives to optimize cultivation of certain strains and realign our production capacity with evolving consumer preferences and market demand.
Cash cost of sales per gram of dried cannabis sold increased by $0.45, or 39%, as compared to Q1 2020. The increase was primarily attributable to (i) a higher cash cost to produce related to lower production volumes and lower overhead absorption, (ii) a reduction in the volume of wholesale bulk sales which have lower conversion and packaging costs relative to the multi-gram dried cannabis products, and (iii) an increase in packaging costs related to the sale of the Cannabis 2.0 products.
Cash cost of sales per gram of dried cannabis sold decreased by $1.00 and $1.06 for the three and six months ended Q2 2020, respectively, as compared to the same periods in prior year. In Q2 2019, we incurred higher inventory management, infrastructure and distribution costs to meet demand with the legalization of the consumer cannabis sales in Canada which came into effect on October 17, 2018. In addition during Q2 2019, we also incurred increased packaging costs resulting from new excise tax stamping, packaging and regulatory requirements mandated under the Cannabis Act. Cash cost to produce per gram of dried cannabis sold decreased by $1.04 and $0.94 for the three and six months ended Q2 2020, respectively, due to the integration of Aurora’s yield expertise at acquired production facilities and the realization of economies of scale with the ramp up of Aurora Sky, which were partially offset by higher labor and logistics costs incurred in preparation for the legalization of the consumer market. The Company achieved a 292% increase in the volume produced, from 7,822 kilograms in Q2 2019 to 30,691 kilograms in Q1 2020. For the six months ended Q2 2020, the Company produced 72,127 kilograms compared to 12,818 kilograms for the six months ended Q2 2019.
Grams of Dried Cannabis and Grams Equivalent of Extracts Produced
Grams of dried cannabis produced refers to the grams of dried cannabis harvested from plants during the period. The Company calculates grams produced based on the final recorded weight of dried harvested buds that have completed the drying stage net of any weight loss during the drying process for the period.
Grams equivalent of cannabis extracts produced represents the equivalent number of dried grams used to produce the cannabis extract product. Dried cannabis is first extracted into a bulk concentrate, which is then diluted into cannabis oil, or further processed into a cannabis capsule product. The “grams equivalent” measure is used to disclose the volume in grams, of extracts sold and/or produced in the period as opposed to milliliters, or number of capsules, as the case may be. The actual grams used in the production of cannabis oils and cannabis capsules can vary depending on the strain of dried cannabis used, which can yield different potencies and strengths. The Company estimates and converts its cannabis extract inventory to equivalent grams based on the THC and CBD content in the cannabis extract product. On average, for the three months ended December 31, 2019, September 30, 2019, and December 31, 2018, one bottle of cannabis oil was equivalent to 8.3, 8.3 and 8.7 gram equivalents of dried cannabis, respectively. On average, for the three months ended December 31, 2019, September 30, 2019, and December 31, 2018, one bottle of cannabis capsules was equivalent to 3.4, 2.7, 3.1 gram equivalents of dried cannabis, respectively.
| 12 | AURORA CANNABIS INC. Q2 2020 MD&A |
Operating Expenses
| Three months ended | Six months ended | |||||||||
| ($ thousands) | December 31, 2019 | September 30, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||
| General and administration | 70,751 | 59,121 | 43,621 | 129,872 | 79,564 | |||||
| Sales and marketing | 29,131 | 22,011 | 22,741 | 51,142 | 52,117 | |||||
| Research and development | 6,775 | 6,048 | 1,811 | 12,823 | 5,237 | |||||
| Depreciation and amortization | 20,847 | 18,209 | 19,263 | 39,056 | 34,385 | |||||
| Share-based compensation | 19,963 | 24,757 | 19,204 | 44,720 | 40,280 | |||||
General and administration (“G&A”)
During Q2 2020, G&A increased by $11.6 million, or 20%, as compared to prior quarter. The increase was primarily due to an increase in salary, wage and benefit costs due to annual merit increases, targeted headcount increases, severance costs related to the departure of two senior executives in December 2019, and an increase in IT expenditures and ramp-up costs related to preparatory activities for the launch of Cannabis 2.0 products.
During the three and six months ended Q2 2020, G&A expenses increased by $27.1 million and $50.3 million, respectively, as compared to the same periods in the prior year. The increase was primarily attributable to an increase in salaries, wages and benefit costs associated with the increase in headcount from organic growth as well as acquisitions. Other increases include higher professional and consulting fees related to general corporate matters, and corporate office charges related to the expansion of domestic and international operations and business functions.
Sales and marketing (“S&M”)
During Q2 2020, S&M increased by $7.1 million, or 32%, as compared to prior quarter. The increase was primarily due to ramp up costs and campaign expenses for the launch of Cannabis 2.0, and marketing expenses for a multi-brand media program including costs relating to consumer education on product safety and the launch of the Aurora Drift brand.
During the three months ended Q2 2020, S&M costs increased by $6.4 million, as compared to the same period in the prior year. The increase was primarily driven by expenses related to the launch of Cannabis 2.0 and the Aurora Drift brand in Q2 2020, while majority of the ramp up and promotional costs related to the October 2018 launch of consumer cannabis legalization occurred in Q1 2019. For the six months ended Q2 2020, S&M costs were consistent as compared to prior year. S&M costs for both six month periods primarily relate to promotional and preparation costs incurred in connection with the Q2 2019 ramp-up to legalization of consumer cannabis in Canada, and the development and launch of Cannabis 2.0 and Aurora Drift brand in Q2 2020.
Research and development (“R&D”)
R&D expenses for the three months ended Q2 2020 remained consistent with prior quarter as the product development of vaporizers, edibles and encapsulated cannabis oils continued. During the three and six months ended Q2 2020, R&D expenses increased by $5.0 million and $7.6 million, respectively, as compared to the same periods in the prior year. The increase was primarily due to product development costs related to clinical studies focused on the management of pain, epilepsy, post-traumatic stress disorder, anxiety, opioid sparing, cancer, and neurodegeneration as well as our multi-year global partnership with the Ultimate Fighting Championship (“UFC”).
Depreciation and amortization
Depreciation and amortization expense increased by $2.6 million as compared to the previous quarter. The increase is mainly due to net additions of $58.6 million of real estate in Q2 2020, of which $26.0 million was reclassified and commenced deprecation in the period.
During the three and six months ended Q2 2020, depreciation and amortization expense increased by $1.6 million and $4.7 million, respectively, as compared to the same periods in the prior year. The increase was primarily due to (i) the depreciation of right-of-use assets capitalized as a result of the adoption of IFRS 16 effective July 1, 2019 (see “New or Amended Standards Effective July 1, 2019” for discussion of transitional impact), (ii) the depreciation of construction costs related to the retrofitting and completion of new grow facilities, such as Aurora Sky, and (iii) additions to software and licensing intangible assets.
Share-based compensation
During the three months ended Q2 2020, share-based compensation expense decreased by $4.8 million as compared to Q1 2020. The decrease is primarily due to a reduction in the fair value of options issued to a non related strategic advisor, as well as a decrease in the grant date fair value of new options granted, both of which are attributable to the decline in the Company’s stock price.
During the three and six months ended Q2 2020, share-based compensation expense increased by $0.8 million and $4.4 million, respectively, as compared to the same periods in the prior year. The increase was primarily due to post-combination contingent consideration share-based payments relating to business combinations completed in the prior year, offset by a decrease in the grant date fair value of options attributable to the decline in the Company’s stock price.
| 13 | AURORA CANNABIS INC. Q2 2020 MD&A |
Other (expense) income, net
For the three months ended Q2 2020, other expense was $1.2 billion and was primarily attributable to (i) a $762.2 million impairment loss on goodwill, (ii) $158.7 million impairment loss on intangible assets, (iii) $46.2 million impairment loss on investment in associates, (iv) $51.9 million impairment loss on property, plant and equipment, (v) $172.3 million loss on the induced conversion of the March 2018 convertible debentures, (vi) a $20.1 million non-cash unrealized FV loss on derivative investments, offset by (vii) a $25.1 million non-cash unrealized FV gain on the derivative liability related to the $345 million U.S. dollar denominated convertible senior notes.
For the six months ended Q2 2020, other expense was $1.1 billion and was primarily attributable to (i) a $762.2 million impairment loss on goodwill, (ii) $158.7 million impairment loss on intangible assets, (iii) $46.2 million impairment loss on investment in associates, (iv) $51.9 million impairment loss on property, plant and equipment, (v) $172.3 million loss on the induced conversion of the March 2018 convertible debentures, (vi) a $34.2 million non-cash unrealized FV loss on derivative investments, offset by (vii) a $168.9 million non-cash unrealized FV gain on the derivative liability related to the $345 million U.S. dollar denominated convertible senior notes.
Refer to Note 5(b) and Note 13 of the Financial Statements for the three and six months ended December 31, 2019 for a summary of the Company’s derivative investments and convertible debentures.
Adjusted EBITDA
The following is the Company’s adjusted EBITDA:
| ($ thousands) | Three months ended | Six months ended | ||||||||
| Q2 2020 | Q1 2020 | Q2 2019 | Q2 2020 | Q2 2019 | ||||||
| Net income (loss) | (1,305,898 | ) | 10,370 | (239,642 | ) | (1,295,528 | ) | (135,461 | ) | |
| Finance costs | 23,877 | 17,911 | 10,208 | 41,788 | 18,735 | |||||
| Interest income | (2,194 | ) | (977 | ) | (128 | ) | (3,171 | ) | (878 | ) |
| Income tax (expense) recovery | (24,279 | ) | 19,241 | (40,318 | ) | (5,038 | ) | (35,785 | ) | |
| Depreciation and amortization | 26,504 | 24,180 | 20,033 | 50,684 | 35,595 | |||||
| EBITDA | (1,281,990 | ) | 70,725 | (249,847 | ) | (1,211,265 | ) | (117,794 | ) | |
| Changes in fair value of inventory sold | 22,778 | 18,534 | 21,620 | 41,312 | 31,561 | |||||
| Unrealized gain on changes in fair value of biological assets | (29,880 | ) | (29,736 | ) | (25,384 | ) | (59,616 | ) | (27,663 | ) |
| Share-based compensation | 19,963 | 24,757 | 19,204 | 44,720 | 40,280 | |||||
| Foreign exchange loss (gain) | 999 | 3,709 | 37 | 4,708 | (92 | ) | ||||
| Share of loss from investment in associates | 1,930 | 2,392 | 894 | 4,322 | 3,009 | |||||
| Gain on loss of control of subsidiary | - | - | 12 | - | (398 | ) | ||||
| Fair value changes in contingent consideration | (778 | ) | 63 | 692 | (715 | ) | 2,065 | |||
| Fair value changes on derivative investments | 20,113 | 14,118 | 119,872 | 34,231 | 32,927 | |||||
| Fair value changes on derivative liabilities | (25,111 | ) | (143,814 | ) | - | (168,925 | ) | - | ||
| Fair value changes on marketable securities | - | - | - | - | - | |||||
| Loss on induced conversion of debenture | 172,291 | - | - | 172,291 | - | |||||
| (Gain) loss on debt modification | 362 | (415 | ) | (1,774 | ) | (53 | ) | (1,774 | ) | |
| Gain on deemed disposal of significant influence investment | - | - | - | - | (144,368 | ) | ||||
| Impairment of property, plant and equipment | 51,925 | - | - | 51,925 | - | |||||
| Impairment of investment in associates | 46,226 | - | 69,957 | 46,226 | 69,957 | |||||
| Impairment of intangible assets | 158,695 | - | - | 158,695 | - | |||||
| Impairment of goodwill | 762,231 | - | - | 762,231 | - | |||||
| Adjusted EBITDA(1) | (80,246 | ) | (39,667 | ) | (44,717 | ) | (119,913 | ) | (112,290 | ) |
| (1) | Adjusted EBITDA is a non-GAAP financial measure and is not a recognized, defined, or standardized measure under IFRS. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of the MD&A. |
Aurora’s adjusted EBITDA loss increased by $40.6 million, or 102%, during Q2 2020 as compared to Q1 2020. The increase was primarily due to the quarter over quarter decrease in revenue, an increase in production costs relating to the ramp up for the legalization of Cannabis 2.0, and the increase in SG&A described above.
Aurora’s adjusted EBITDA loss increased by $35.5 million, or 79%, during Q2 2020 as compared to the three months ended Q2 2019. The increase was primarily due to the increase in SG&A described above
Adjusted EBITDA loss increased by $7.6 million, or 7%, for the six months ended Q2 2020 as compared to the same period in prior year. The decrease was primarily attributable to a $31.6 million increase in gross profit before fair value adjustments, excluding the impact of depreciation allocated to cost of sales, offset by a $49.3 million increase in SG&A.
| 14 | AURORA CANNABIS INC. Q2 2020 MD&A |
Liquidity and Capital Resources
| ($ thousands) | December 31, 2019 | June 30, 2019 | ||
| Cash and cash equivalents | 156,334 | 172,727 | ||
| Restricted cash | 45,002 | 46,066 | ||
| Marketable securities | 26,148 | 143,248 | ||
| Working capital | 415,936 | 227,802 | ||
| Total assets | 4,671,912 | 5,502,830 | ||
| Total non-current liabilities | 634,189 | 676,418 | ||
| Capitalization | ||||
| Convertible notes | 301,754 | 503,581 | ||
| Loans and borrowings | 300,369 | 141,244 | ||
| Total debt | 602,123 | 644,825 | ||
| Total equity | 3,823,800 | 4,390,047 | ||
| Total capitalization | 4,425,923 | 5,034,872 | ||
During the three and six months ended December 31, 2019, the Company primarily financed its operations, capital construction projects and growth initiatives through the generation of net revenue, and the assumption of debt and equity financing. For more information on key cash flows related to operations, investing and financing activities during the quarter, refer to the “Cash Flow Highlights” discussion below.
The Company’s objective when managing its liquidity and capital resources is to maintain sufficient liquidity to support financial obligations when they come due, while executing operating and strategic plans. The Company manages liquidity risk by monitoring its operating requirements and preparing budgets and cash flow forecasts to identify cash flow needs for general corporate and working capital purposes, as well as for expansion initiatives. Our ability to fund our operating requirements depend on future operating performance and cash flows, which are subject to economic, financial, competitive, business and regulatory conditions, and other factors, some which are beyond our control. Our primary short-term liquidity needs are to fund our operating expenses, investments, capital expenditures to maintain existing facilities, diversification of product offerings, debt repayments, and lease payments. Our medium-term liquidity needs primarily relate to debt repayments and lease payments. Our long-term liquidity needs primarily relate to potential future acquisitions and strategic plans.
In an effort to rationalize capital expenditures to align with market demand, reduce near term debt and bolster liquidity, the Company has taken the following steps to re-position Aurora for long term success:
| • | In November 2019, the Company announced that it had ceased construction of its Aurora Nordic 2 facility in Denmark and deferred spending on construction and commission costs for its Aurora Sun facility. These initiatives are expected to conserve approximately $200.0 million of cash in the near term. |
| • | On November 25, 2019, the Company reduced its near term debt obligations when holders of $227.0 million principal amount, or approximately 99%, of the Company’s Debentures voluntarily elected to convert their Debentures pursuant to the Early Amended Conversion Privilege (the “Elected Debentures”). Under the terms of the Supplemental Indenture, the Elected Debentures were converted into common shares of the Company (the "Common Shares") at the Amended Early Conversion Price (as defined in the Supplemental Indenture) of $3.2837 resulting in the issuance of an aggregate of 69,135,117 Common Shares. As of December 31, 2019, $2.3 million principal amount of these Debentures remain outstanding, subject to the original terms and conditions. For more information, refer to Note 13(i) of the Financial Statements for the three and six months ended December 31, 2019. |
| • | In November 2019, the Company listed its Exeter property for sale for $19.0 million through Cushman & Wakefield. |
| • | In February 2020, the Company announced a restructuring plan that includes plans to reduce operating expenses and further streamline capital investments. These actions are expected to reset SG&A expenses to approximately $40 million to $45 million by the end of the Company’s fiscal fourth quarter ending June 30, 2020. |
These initiatives are expected to provide the Company with increased liquidity and flexibility to meet its financial commitments, including its near- term obligations of $373.6 million (see “Contractual Obligations” table below). In addition, as at December 31, 2019 the Company had cash and cash equivalents of $156.3 million excluding restricted cash of $45.0 million as compared to $172.7 million excluding restricted cash of $46.1 million as at June 30, 2019. Other sources of capital include ATM Program, Shelf Prospectus and marketable securities as described below.
As at December 31, 2019, the Company had a $360.0 million amended Credit Facility (the “Credit Facility”) with Bank of Montreal (“BMO”), of which $1.8 million letters of credit are outstanding under Facility A, $142.5 million principal is outstanding under Facility B, and $64.4 million principal is outstanding under Facility C. Subsequent to quarter end, the Company entered into a binding commitment with BMO and its syndicate of lenders to amend certain material terms of its amended Credit Facility to better align its capital structure with current market conditions. As part of the amendments agreed to in February 2020 (the “February Amendment”) the Company has agreed to the following:
| i. | the complete removal of a senior funded debt to EBITDA of 3.00:1 covenant and a total funded debt to EBITDA of 4.00:1 covenant; |
| ii. | the complete removal of a 1.25:1 minimum fixed charge coverage ratio; |
| iii. | an adjustment to the total funded debt to adjusted shareholders’ equity ratio not to exceed 0.25:1 prior to September 30, 2020 to 0.20:1 effective March 31, 2020; |
| iv. | an elimination of Facility D representing $96.5 million of capital committed for construction costs at Aurora Sun, use of $45 million of restricted cash to be used to repay and permanently reduce the outstanding term loan balance under Facility B and Facility C on a pro-rata basis; |
| v. | the introduction of a minimum liquidity covenant of $35.0 million; and |
| 15 | AURORA CANNABIS INC. Q2 2020 MD&A |
| vi. | the introduction of minimum EBITDA thresholds to be met beginning in the quarter ending September 30, 2020. |
For more information about the amended Credit Facility, refer to Note 14 of the Financial Statements for the three and six months ended December 31, 2019.
On April 2, 2019, the Company filed a Shelf Prospectus with the securities regulators in each province of Canada, except for the Province of Quebec, and a corresponding shelf registration statement on Form F-10 (the “Registration Statement”) with the U.S. Securities and Exchange Commission (the “SEC”). The Shelf Prospectus and the Registration Statement was declared effective on May 9, 2019 and May 10, 2019, respectively. The Shelf Prospectus and Registration Statement allows the Company to make offerings of common shares, debt securities, subscription receipts, units, warrants or any combination thereof of up to US$750.0 million during the 25-month period that the Shelf Prospectus is effective. Whenever the Company raises financing under the Shelf Prospectus, the specific terms, including the use of proceeds from any offering, will be set forth in a related prospectus supplement, which will be filed with the applicable Canadian securities regulatory authorities and the SEC. The Company also filed a prospectus ATM supplement which provides for the sale of up to US$400 million of common shares by registered dealers on behalf of Aurora through the NYSE stock exchange at prevailing market prices at the time of sale. As at December 31, 2019, the Company had raised $325.2 million (US$245.3 million) under its ATM program. As at December 31, 2019, the Company has US$154.7 million and US$350.0 million of available room for future financings under the ATM program and Shelf Prospectus, respectively.
We intend to use the net proceeds from any offerings under the ATM program and/or Shelf Prospectus to support our short-term liquidity needs, new product initiatives, debt repayments, general corporate purposes and working capital requirements.
From time-to-time, management may also consider the sale of its marketable securities to help support near term cash and liquidity needs. As at December 31, 2019, the fair value of the Company’s marketable securities was $26.1 million.
Based on all of the aforementioned factors, the Company believes that its reduction of operating costs, current liquidity position, and access to the ATM are adequate to fund operating activities and cash commitments for investing and financing activities for the foreseeable future.
Total assets decreased by $830.9 million from June 30, 2019 primarily due to a $762.2 million impairment write-down of goodwill, a $158.7 million impairment write-down of intangible assets, a $51.9 million impairment write-down of property, plant and equipment, a $46.2 million impairment loss in investment in associates, a $30.6 million decrease in the fair value of marketable securities and a $20.1 million decrease in the fair value of derivative assets. These asset decreases were offset by a $236.4 million increase in property, plant and equipment of which $96.0 million related to the capitalization of leases upon adoption of IFRS 16 Leases effective July 1, 2019 (refer to “New or Amended Standards Effective July 1, 2019” below for discussion of transitional impact). As at the date of this report, the fair value of shares held in marketable securities and investments in associates was $93.3 million and the intrinsic value of derivative investments was $17.8 million.
As at December 31, 2019, total capitalization decreased by $608.9 million as compared to June 30, 2019. The decrease was primarily due to (i) the $1.3 billion net loss incurred during the six months ended December 31, 2019, of which $1.0 billion related to impairment of property, plant and equipment, intangible assets, goodwill and investments in associates, and (ii) the $201.8 million decrease in convertible debentures predominantly related to the early conversion of the convertible debentures described in Note 13(i) to the financial statements. These decreases were offset by (i) a $345.5 million increase in equity related to the issuance of shares for equity financing and the acquisition of the remaining interest in Hempco, (ii) a $433.2 million increase in equity related to the issuance of common shares upon conversion of the convertible debentures described above, and (iii) a $159.1 million increase in loans and borrowings. Loans and borrowings increased from June 30, 2019 as a result from an additional $64.4 million draw on the BMO Credit Facility and $95.5 million lease liability additions upon adoption of IFRS 16 Leases effective July 1, 2019 (refer to “New or Amended Standards Effective July 1, 2019” below for discussion of transitional impact), offset by accretion and repayments made on the loans.
Cash Flow Highlights
The table below summarizes the Company’s cash flows for the three and six months ended Q2 2020 and Q2 2019:
($ thousands) |
Three months ended | Six months ended | ||||||
| Q2 2020 | Q2 2019 | Q2 2020 | Q2 2019 | |||||
| Cash used in operating activities | (134,707 | ) | (292,120 | ) | (229,615 | ) | (132,952 | ) |
| Cash used in investing activities | (131,608 | ) | (68,284 | ) | (161,071 | ) | (44,780 | ) |
| Cash provided by financing activities | 271,217 | 45,974 | 375,055 | 151,401 | ||||
| Effect of foreign exchange | (1,094 | ) | (1,429 | ) | (762 | ) | (2,439 | ) |
| Increase (decrease) in cash and cash equivalents | 3,808 | (315,859 | ) | (16,393 | ) | (28,770 | ) | |
Cash used in operating activities for Q2 2020 decreased by $157.4 million as compared to Q2 2019. This was primarily attributable to an increase in operational spending in Q2 2019 as the Company began integrating newly acquired subsidiaries. This was offset by a $20.9 million increase in changes in non-cash working capital over the prior period driven by a $35.8 million decrease in accounts payable and accrued liabilities, a $35.7 million increase in inventory and biological assets, a $18.3 million decrease in accounts receivable, and a $15.0 million decrease in prepaids and other current assets.
Cash used in operating activities for the six months ended Q2 2020 increased by $96.7 million compared to the six months ended Q2 2019. The increase was primarily due to a $59.9 million increase in non-cash working capital over the prior quarter driven by a $65.7 million decrease in accounts payable and accrued liabilities, a $53.8 million increase in inventory and biological assets, offset by a $40.8 million decrease in accounts receivable over the prior period.
| 16 | AURORA CANNABIS INC. Q2 2020 MD&A |
Cash used in investing activities for Q2 2020 increased by $63.3 million as compared to Q2 2019. The increase was primarily attributable to a $50.4 million increase in property, plant and equipment expenses, a $35.6 million decrease in cash generated from the disposal of marketable securities, and offset by a decrease of $27.5 million invested in marketable securities, derivatives and convertible debenture investments as compared to prior period.
Cash used in investing activities for the six months ended Q2 2020 increased by $116.3 million compared to the six months ended Q2 2019. The increase was primarily attributable to a decrease of $119.6 million of cash acquired from business combinations in prior year, an increase of $87.0 million in property, plant and equipment expenses, offset by a $49.2 million increase in proceeds generated from the disposal of marketable securities, and a decrease of $47.3 million invested in marketable securities, derivatives and convertible debenture investments as compared to prior year.
Cash provided by financing activities for Q2 2020 increased by $225.2 million as compared to Q2 2019. The increase was primarily attributable to an increase of $251.3 million cash generated from share issuances mainly from equity financing, a $28.0 million decrease in funds segregated as restricted cash, and offset by a $47.2 million decrease in proceeds drawn under long term loans through the BMO Credit Facility.
Cash provided by financing activities for the six months ended Q2 2020 increased by $223.7 million as compared to the six months ended Q2 2019. The increase was mainly due to $282.3 million cash generated from share issuances primarily from equity financing, $29.1 million increase in restricted cash in the prior period, offset by a $86.6 million decrease in proceeds drawn under long term loans through the BMO Credit Facility.
Capital Expenditures
The Company’s major capital expenditures for the six months ended December 31, 2019 mainly consisted of equipment purchases and construction activities at Aurora Nordic 2, Aurora Sun and Aurora Polaris. However, during the three months ended December 31, 2019, the Company decided to defer construction activities related to new production facilities, Aurora Nordic 2 and Aurora Sun, in an effort to align with global demand. Remaining major capital construction consists of certain initiatives designed to reduce operating costs or reduce production risks.
Contractual Obligations
As at December 31, 2019, the Company had the following contractual obligations:
| ($ thousands) | Total | < 1 year | 2 to 3 years | 4 to 5 years | > 5 years | |||||
| Accounts payable and accrued liabilities | 125,432 | 125,432 | - | - | - | |||||
| Convertible notes and interest (1) | 561,411 | 26,977 | 49,298 | 485,136 | - | |||||
| Lease liabilities (2) | 189,969 | 12,352 | 35,731 | 30,697 | 111,189 | |||||
| Loans and borrowings excluding lease liabilities (2) | 223,009 | 33,843 | 189,166 | - | - | |||||
| Contingent consideration payable | 51,744 | 41,487 | 10,257 | - | - | |||||
| Capital commitments (3) | 123,160 | 123,160 | - | - | - | |||||
| License and sponsorship fees | 138,508 | 10,392 | 38,612 | 42,570 | 46,934 | |||||
| Total contractual obligations | 1,413,233 | 373,643 | 323,064 | 558,403 | 158,123 | |||||
| (1) | Assumes the principal balance outstanding at December 31, 2019 remains unconverted and includes the estimated interest payable until the maturity date. |
| (2) | Includes interest payable until maturity date. |
| (3) | Relates to commitments that the Company has made to vendors for equipment purchases and capital projects pertaining to on-going expansion and construction. |
Contingencies
From time to time, the Company and/or its subsidiaries may become defendants in legal actions and the Company intends to take appropriate action with respect to any such legal actions, including by defending itself against such legal claims as necessary. Other than the claims described below, as of the date of this report, Aurora is not aware of any other material or significant claims against the Company.
On November 29, 2017, a claim was commenced against the Company regarding 300,000 stock options with an exercise price of $0.39 per share issued to a consultant pursuant to an agreement dated March 16, 2015. The agreement was terminated on March 8, 2016, and in accordance with the Company’s stock option plan, the unexercised options expired 90 days after the date of the termination of the agreement. The option holder is attempting to enforce exercise rights, which the Company believes do not exist. The Company believes the action to be without merit and intends to defend this claim. Examinations for discovery were completed in January 2019 and the parties are currently scheduled for court in early March 2020. Due to the uncertainty of the timing and the amount of estimated future cash outflows relating to this claim, no provision has been recognized as at December 31, 2019.
On October 3, 2018, a claim was commenced against the Company regarding the failure to supply product under a recently acquired subsidiary’s supply agreement. The plaintiff is seeking specific performance of the supply agreement and damages for breach of contract for approximately $21.0 million (€14.7 million) plus legal costs. In accordance with the terms of the agreement, the Company had terminated the contract due to a breach by the plaintiff. The Company intends to defend this claim. The parties are currently engaged in the document discovery process. Due to the uncertainty of timing and the amount of estimated future cash outflows relating to this claim, no provision has been recognized as at December 31, 2019.
In connection with the acquisition of MedReleaf, the Company assumed a contingent liability associated with a formerly terminated MedReleaf employee. The claimant was seeking performance under the terms of his employment agreement related to a severance obligation. The Company recognized a provision of $4.2 million as part of the purchase price allocation in the prior year and the amount was fully settled during the six months ended December 31, 2019.
| 17 | AURORA CANNABIS INC. Q2 2020 MD&A |
The Company and certain of its directors and officers are subject to two separate class action proceedings in the United States District Court for the District of New Jersey on behalf of persons or entities who purchased, or otherwise acquired, publicly traded Aurora securities between September 11, 2019 and November 14, 2019 and between October 23, 2018 and January 6, 2020. The complaints allege, inter alia, that we and certain of our current officers and directors violated the federal securities laws by making false or misleading statements, materially overstated the demand and potential market for our consumer cannabis products; that our ability to sell products had been materially impaired by extraordinary market oversupply, that our spending growth and capital commitments were slated to exceed our revenue growth; that we had violated German law mandating that companies receive special permission to distribute medical products exposed to regulated irradiation techniques, and that the foregoing, among others, had negatively impacted the Company’s business, operations, and prospects and impaired the Company’s ability to achieve profitability. We dispute the allegations in the complaints and intend to vigorously defend against the claims. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we are currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from the matters described above.
Off-balance sheet arrangements
As at the date of this MD&A, the Company has $1.8 million letters of credit outstanding under Facility A of its BMO Credit Facility. There are no other material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the financial performance or financial condition of the Company
Related Party Transactions
The Company’s key management personnel have the authority and responsibility for planning, directing and controlling the activities of the Company and consists of the Company’s executive management team and management directors. Compensation expense for key management personnel was as follows:
| Three months ended | Six months ended | |||||||
| ($ thousands) | December 31, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | ||||
| $ | $ | $ | $ | |||||
| Management compensation | 2,274 | 1,422 | 5,195 | 2,519 | ||||
| Termination benefits | 900 | - | 900 | - | ||||
| Directors’ fees (1) | 128 | 72 | 255 | 218 | ||||
| Share-based compensation (2) | 6,574 | 3,384 | 11,203 | 8,473 | ||||
| Total management compensation (3) | 9,876 | 4,878 | 17,553 | 11,210 | ||||
| (1) | Includes meeting fees and committee chair fees. |
| (2) | Share-based compensation represent the contingent consideration, and the fair value of options, restricted share units, and deferred share units granted and vested to key management personnel and directors of the Company under the Company’s share-based compensation plans (Note 16). |
| (3) | As of December 31, 2019, $2.6 million is payable or accrued for key management compensation (June 30, 2019 - $2.6 million). |
The following is a summary of the significant transactions with related parties:
| Three months ended | Six months ended | |||||||
|
($ thousands)
|
December 31, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | ||||
| $ | $ | $ | $ | |||||
| Operational, administrative and service fees (1) | - | 2,329 | - | 4,553 | ||||
| Marketing fees (2) | - | 2,484 | - | 3,292 | ||||
| Production costs (3) | 1,510 | - | 3,168 | - | ||||
| 1,510 | 4,813 | 3,168 | 7,845 | |||||
| (1) | Operational, administrative and service fees paid or accrued pursuant to an agreement between CanvasRx and a company having a former director in common with the Company. |
| (2) | Marketing fees paid to a company partially owned by a former officer of the Company |
| (3) | Production costs incurred with associates of the Company. |
The following amounts were receivable from (payable to) related parties:
|
($ thousands)
|
December 31, 2019 | June 30, 2019 | ||
| $ | $ | |||
| Loan receivable from investments in associates (1) | 2,909 | - | ||
| Production costs with investments in associates (2) | (1,821 | ) | - | |
| 1,088 | - | |||
| (1) | Business transactions carried out with associates and joint arrangements. The loan bears interest at 5% per annum, payable monthly. The loan is to be repaid in installments on an annual basis in an amount equal to 50% of the associate’s EBITDA. The unpaid balance of the loan matures 10 years from the funding date. |
| (2) | Amounts are due upon the issuance or receipt of invoices, are unsecured and non-interest bearing. |
These transactions are in the normal course of operations and are measured at the exchange value being the amounts agreed to by the parties.
| 18 | AURORA CANNABIS INC. Q2 2020 MD&A |
Critical Accounting Estimates
The preparation of the Company’s Financial Statements under IFRS requires management to make judgments, estimates, and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods.
Other than the estimates used in the adoption of IFRS 16 (refer to Note 2(c)(i) in the Financial Statements) and assets-held-for-sale (refer to Note 11 in the Financial Statements), there have been no changes in Aurora's critical accounting estimates during the six months ended December 31, 2019. For more information on the Company’s accounting policies and key estimates, refer to the note disclosures in the annual consolidated financial statements and MD&A as at and for the year ended June 30, 2019.
New or Amended Standards Effective July 1, 2019
The Company has adopted the following new or amended IFRS standards for the period beginning July 1, 2019.
| (i) | IFRS 16 Leases |
In January 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), which replaces IAS 17, Leases (“IAS 17”) and related interpretations. The standard introduces a single lessee accounting model and requires lessees to recognize assets and liabilities for all leases with a term exceeding 12 months, unless the underlying asset is insignificant. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. Lessors continue to classify leases as operating or finance, with lessor accounting remaining substantially unchanged from the preceding guidance under IAS 17. The Company adopted the standard on July 1, 2019 using the modified retrospective method, with the cumulative effect initially recognized in retained earnings, and no restatement of prior comparative periods.
The majority of our property leases, which were previously treated as operating leases, were impacted by IFRS 16. The adoption of IFRS 16 has resulted in:
| i) | higher non-current assets related to the initial recognition of the present value of our unavoidable future lease payments as right-of-use assets under property, plant and equipment, adjusted by the amount of any prepaid or accrued lease payments relating to the lease recognized in the balance sheet as at July 1, 2019; |
| ii) | higher current and non-current liabilities related to the concurrent recognition of lease liabilities, which are measured at the present value of the remaining fixed lease payments, discounted by our weighted average incremental borrowing rate of 5.62% as of July 1, 2019; |
| iii) | replacement of rent expense previously recorded in costs of goods sold, general and administration, and sales and marketing expenses with depreciation expense of these right-of-use assets and higher finance costs related to the accretion and interest expense of the corresponding lease liabilities; and |
| iv) | variable lease payments and non-lease components are expensed as incurred. |
The new standard does not change the amount of cash transferred between the lessor and lessee but impacts the presentation of the operating and financing cash flows presented on the Company’s consolidated statement of cash flows by decreasing operating cash flows and increasing financing cash flows.
The Company elected to apply the following recognition exemptions and practical expedients, as described under IFRS 16:
| i) | recognition exemption of short-term leases; |
| ii) | recognition exemption of low-value leases; |
| iii) | application of a single discount rate to a portfolio of leases with similar characteristics on transition; |
| iv) | exclusion of initial direct costs from the measurement of the right-of-use assets upon transition; |
| v) | application of hindsight in determining the applicable lease term at the date of transition; and |
| vi) | election to not separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component. |
The following table summarizes the adjustments to opening balances resulting from the initial adoption of IFRS 16 on July 1, 2019, with the effects on transition being recognized directly to retained earnings:
| ($ thousands) | As previously reported under IAS 17 | IFRS 16 transition adjustments | As restated under IFRS 16 | |||
| Prepaid deposits | 24,323 | (585 | ) | 23,738 | ||
| Property, plant and equipment | 765,567 | 96,049 | 861,616 | |||
| Current loans and borrowings | (13,758 | ) | (6,630 | ) | (20,388 | ) |
| Non-current loans and borrowings | (127,486 | ) | (88,834 | ) | (216,320 | ) |
| Accumulated deficit | 283,638 | - | 283,638 | |||
| 19 | AURORA CANNABIS INC. Q2 2020 MD&A |
The following table reconciles the operating lease commitments as at June 30, 2019 to the opening balance of lease liabilities as at July 1, 2019:
| ($ thousands) | $ | |
| Operating lease commitments as at June 30, 2019 | 94,780 | |
| Add: finance lease liabilities recognized as at June 30, 2019 | 1,318 | |
| Add: adjustments as a result of a different treatment for extension and termination options | 94,829 | |
| Effect of discounting using the lessee’s incremental borrowing rate | (88,767 | ) |
| Less: leases commitments not yet in effect | (4,068 | ) |
| Less: short-term, low-value asset leases and others | (1,310 | ) |
| Lease liabilities recognized as at July 1, 2019 | 96,782 | |
As a result of adopting IFRS 16, the Company updated its lease accounting policies as follows:
The Company assesses whether a contract is or contains a lease at inception of the contract. A lease is recognized as a right-of-use asset and corresponding liability at the commencement date. Each lease payment included in the lease liability is apportioned between the repayment of the liability and a finance cost. The finance cost is recognized in “finance and other costs” in the condensed consolidated interim statement of comprehensive (loss) income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability. Lease liabilities represent the net present value of fixed lease payments (including in-substance fixed payments); variable lease payments based on an index, rate, or subject to a fair market value renewal condition; amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if it is probable that the lessee will exercise that option.
The Company’s lease liability is recognized net of lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate. The period over which the lease payments are discounted is the expected lease term, including renewal and termination options that the Company is reasonably certain to exercise.
Payments associated with short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis in general and administration and sales and marketing expense in the condensed consolidated interim statement of comprehensive (loss) income. Short-term leases are defined as leases with a lease term of 12 months or less. Variable lease payments that do not depend on an index, rate, or subject to a fair market value renewal condition are expensed as incurred and recognized in costs of goods sold, general and administration and sales and marketing expense, as appropriate given how the underlying leased asset is used, in the consolidated statement of comprehensive income.
Right-of-use assets are measured at cost, which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the commencement date, any initial direct costs and related restoration costs. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the useful life of the underlying asset. The depreciation is recognized from the commencement date of the lease.
| (ii) | IFRIC 23 Uncertainty Over Income Tax Treatments |
IFRIC 23 provides guidance that adds to the requirements in IAS 12, Income Taxes by specifying how to reflect the effects of uncertainty in accounting for income taxes. IFRIC 23 requires an entity to determine whether uncertain tax positions are assessed separately or as a group; and assess whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used, by an entity in its income tax filings. If yes, the entity should determine its accounting tax position consistently with the tax treatment used or planned to be used in its income tax filings. If no, the entity should reflect the effect of uncertainty in determining its accounting tax position. The Company adopted IFRIC 23 effective July 1, 2019 and was applied using the modified retrospective approach without restatement of comparative information. There was no material impact on the Company’s consolidated financial statements.
Recent Accounting Pronouncements
The following IFRS standards have been recently issued by the IASB. Pronouncements that are not applicable or where it has been determined do not have a significant impact to the Company have been excluded herein.
IFRS 3 Definition of a Business
In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)”. The amendments clarify the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendment provides an assessment framework to determine when a series of integrated activities is not a business. The amendments are effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.
| 20 | AURORA CANNABIS INC. Q2 2020 MD&A |
Financial Instruments
Financial instruments are measured either at fair value or at amortized cost. The table below lists the valuation methods used to determine the fair value of each financial instrument.
| Fair Value Method | |
| Financial Instruments Measured at Fair Value | |
| Marketable securities | Closing market price of common shares as of the measurement date (Level 1) |
| Derivatives | Closing market price (Level 1) or Black-Scholes, Binomial, Monte-Carlo & FINCAD valuation model (Level 2 or 3) |
| Contingent consideration payable | Discounted cash flow model (Level 3) |
| Derivative liability | Kynex valuation model (Level 2) |
| Financial Instruments Measured at Amortized Cost | |
| Cash and cash equivalents, restricted cash, accounts receivable, loans receivable | Carrying amount (approximates fair value due to short-term nature) |
| Accounts payable and accrued liabilities | Carrying amount (approximates fair value due to short-term nature) |
| Convertible debentures, loans and borrowings | Carrying value discounted at the effective interest rate which approximates fair value |
Summary of Financial Instruments
The following is a summary of the carrying value of financial instruments as at December 31, 2019:
| ($ thousands) | Amortized Cost | FVTPL | Designated FVTOCI | Total | ||||
| Financial Assets | ||||||||
| Cash and cash equivalents | 156,334 | - | - | 156,334 | ||||
| Restricted cash | 45,002 | - | - | 45,002 | ||||
| Accounts receivable excluding sales taxes receivable | 63,698 | - | - | 63,698 | ||||
| Marketable securities | - | - | 26,148 | 26,148 | ||||
| Derivatives | - | 53,469 | - | 53,469 | ||||
| Loans receivable | 3,312 | - | - | 3,312 | ||||
| Financial Liabilities | ||||||||
| Accounts payable and accrued liabilities | 125,432 | - | - | 125,432 | ||||
| Convertible debentures (1) | 301,754 | - | - | 301,754 | ||||
| Contingent consideration payable | - | 24,633 | - | 24,633 | ||||
| Loans and borrowings | 300,369 | - | - | 300,369 | ||||
| Derivative liability | - | 8,470 | - | 8,470 | ||||
| (1) | The fair value of convertible notes includes both the debt and equity components. |
Fair Value Hierarchy
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities; |
| Level 2 | Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and |
| Level 3 | Inputs for the asset or liability that are not based on observable market data. |
| 21 | AURORA CANNABIS INC. Q2 2020 MD&A |
The following is a summary of financial instruments measured at fair value segregated based on the various levels of inputs as at December 31, 2019:
| ($ thousands) | Level 1 | Level 2 | Level 3 | Total | ||||
| As at December 31, 2019 | ||||||||
| Marketable securities (1) | 25,148 | - | 1,000 | 26,148 | ||||
| Derivative assets (1) | - | 38,814 | 14,655 | 53,469 | ||||
| Contingent consideration payable (2) | - | - | 24,633 | 24,633 | ||||
| Derivative liability (2) | - | 8,470 | - | 8,470 | ||||
| As at June 30, 2019 | ||||||||
| Marketable securities | 142,248 | - | 1,000 | 143,248 | ||||
| Derivative assets | - | 64,001 | 22,408 | 86,409 | ||||
| Contingent consideration payable | - | - | 28,137 | 28,137 | ||||
| Derivative liability (2) | - | 177,395 | - | 177,395 | ||||
| (1) | For a reconciliation of realized and unrealized gains and losses applicable to financial assets measured at fair value for the year ended December 31, 2019, refer to Notes 5(a) and (b) in the Financial Statements. |
| (2) | For a reconciliation of unrealized gains and losses applicable to financial liabilities measured at fair value for the year ended December 31, 2019, please refer to Note 13(ii) and Note 23 in the Financial Statements. |
There have been no transfers between fair value levels during the period.
Financial Instruments Risk
The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board mitigates these risks by assessing, monitoring and approving the Company’s risk management processes.
Credit risk
Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company is moderately exposed to credit risk from its cash and cash equivalents, restricted cash, accounts receivable and loans receivable. The risk exposure is limited to their carrying amounts reflected on the statement of financial position. The risk for cash and cash equivalents and restricted cash is mitigated by holding these instruments with highly rated Canadian financial institutions. As the Company does not invest in asset-backed deposits or investments, it does not expect any credit losses. The Company periodically assesses the quality of its investments and is satisfied with the credit rating of the financial institutions and the investment grade of its GICs. The Company mitigates the credit risk associated with the loans receivable by managing and monitoring the underlying business relationship.
Accounts receivable primarily consist of trade accounts receivable and sales tax receivable. The Company provides credit to certain customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. Credit risk is generally limited for receivables from government bodies, which generally have low default risk, and medical sales direct to patients, where payment is required prior to the delivery of goods. Credit risk for non-government wholesale customers is assessed on a case-by-case basis and a provision is recorded where required. As of December 31, 2019, $11.4 million of accounts receivable are from non-government wholesale customers. As of December 31, 2019, the Company recognized a $1.9 million provision for expected credit losses.
The Company’s aging of receivables was as follows:
| ($ thousands) | December 31, 2019 | June 30, 2019 | ||
| 0 - 60 days | 46,899 | 59,725 | ||
| 61+ days | 35,365 | 43,768 | ||
| 82,264 | 103,493 | |||
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with its financial liabilities when they are due. The Company manages liquidity risk through the management of its capital structure and resources to ensure that it has sufficient liquidity to settle obligations and liabilities when they are due. As at December 31, 2019, the Company has a $360.0 million amended Credit Facility with BMO, of which $1.8 million letters of credit are outstanding under Facility A, $142.5 million principal is outstanding under Facility B, and $64.4 million principal is outstanding under Facility C. On April 2, 2019, the Company filed a Shelf Prospectus and a corresponding Registration Statement with the SEC, which allows Aurora to make offerings of common shares, debt securities, subscription receipts, units, warrants or any combination thereof up to US$750.0 million during the 25-month period that the Shelf Prospectus is effective. In connection with the Shelf Prospectus, the Company also filed an ATM supplement which provides for US$400.0 million in common shares to be sold by registered dealers on behalf of Aurora in the U.S. through the NYSE at prevailing market prices at the time of sale. As at December 31, 2019, the Company had raised $325.2 million (US$245.3 million) of gross proceeds under its ATM program.
| 22 | AURORA CANNABIS INC. Q2 2020 MD&A |
Summary of Outstanding Share Data
The Company had the following securities issued and outstanding as at January 31, 2020:
| Securities (1) | Units Outstanding | |
| Issued and outstanding common shares | 1,168,974,993 | |
| Stock options | 70,325,648 | |
| Warrants | 21,751,122 | |
| Restricted share units | 2,388,933 | |
| Deferred share units | 62,185 | |
| Convertible debentures | 47,914,355 | |
| (1) | Refer to Note 13 “Convertible Debentures”, Note 15 “Share Capital” and Note 16 “Share-Based Compensation” in the Company’s Financial Statements for a detailed description of these securities. |
| 23 | AURORA CANNABIS INC. Q2 2020 MD&A |
Historical Quarterly Results
| ($ thousands, except earnings per share and Operational Results) | Q2 2020 | Q1 2020 | Q4 2019 (6) | Q3 2019 | ||||
| Financial Results | ||||||||
| Net revenue (1) | $56,027 | $75,245 | $98,942 | $65,145 | ||||
| Gross margin on cannabis net revenue (2) | 44 | % | 58 | % | 58 | % | 55 | % |
| Adjusted gross margin before FV adjustments on cannabis net revenue (3) | 55 | % | 67 | % | 64 | % | 63 | % |
| Earnings (loss) attributable to common shareholders | ($1,286,129 | ) | $12,756 | ($182 | ) | ($158,354 | ) | |
| Basic and dilutive earnings (loss) per share | ($1.18 | ) | $0.01 | $0.00 | ($0.16 | ) | ||
| Balance Sheet | ||||||||
| Working capital | $415,936 | $123,750 | $227,802 | $469,729 | ||||
| Cannabis inventory and biological assets (4) | $216,735 | $178,748 | $144,275 | $118,023 | ||||
| Total assets | $4,671,912 | $5,606,799 | $5,502,830 | $5,549,780 | ||||
| Operational Results - Cannabis | ||||||||
| Cash cost of sales per gram sold (5) | $1.60 | $1.15 | $1.47 | $2.05 | ||||
| Cash cost to produce per gram sold (5) | $0.88 | $0.85 | $1.14 | $1.42 | ||||
| Active registered patients | 90,307 | 91,116 | 84,729 | 77,136 | ||||
| Average net selling price of dried cannabis (3) | $4.69 | $4.90 | $4.91 | $5.86 | ||||
| Average net selling price of cannabis extracts (3) | $9.97 | $11.21 | $10.37 | $11.01 | ||||
| Kilograms produced | 30,691 | 41,436 | 29,034 | 15,590 | ||||
| Kilograms sold | 9,501 | 12,463 | 17,793 | 9,160 | ||||
| Q2 2019 | Q1 2019 | Q4 2018 | Q3 2018 | |||||
| Financial Results | ||||||||
| Net revenue (1) | $54,178 | $29,674 | $19,147 | $16,100 | ||||
| Gross margin on cannabis net revenue (2) | 54 | % | 70 | % | 74 | % | 59 | % |
| Adjusted gross margin before FV adjustments on cannabis net revenue (3) | 55 | % | 53 | % | 76 | % | 62 | % |
| Earnings (loss) attributable to common shareholders | ($237,752 | ) | $105,451 | $79,868 | ($19,215 | ) | ||
| Basic and dilutive earnings (loss) per share | ($0.25 | ) | $0.12 | $0.13 | ($0.04 | ) | ||
| Balance Sheet | ||||||||
| Working capital | $274,629 | $548,446 | $144,533 | $338,476 | ||||
| Cannabis inventory and biological assets (4) | $79,924 | $75,944 | $39,602 | $28,478 | ||||
| Total assets | $4,875,884 | $4,955,361 | $1,886,510 | $1,671,400 | ||||
| Operational Results - Cannabis | ||||||||
| Cash cost of sales per gram sold (5) | $2.60 | $1.90 | $1.87 | $1.80 | ||||
| Cash cost to produce per gram sold (5) | $1.92 | $1.45 | $1.70 | $1.53 | ||||
| Active registered patients | 73,579 | 67,484 | 43,308 | 45,776 | ||||
| Average net selling price of dried cannabis (3) | $6.23 | $8.39 | $8.02 | $7.30 | ||||
| Average net selling price of cannabis extracts (3) | $10.00 | $12.12 | $13.52 | $12.83 | ||||
| Kilograms produced | 7,822 | 4,996 | 2,212 | 1,206 | ||||
| Kilograms sold | 6,999 | 2,676 | 1,617 | 1,353 | ||||
| (1) | Net revenues represent our total gross revenues net of excise taxes levied by the CRA effective October 17, 2018, on the sale of medical and consumer use cannabis products. Given that our gross revenue figures exclude excise taxes that were levied and billed back to customers, as reflected in accordance with IFRS 15, we believe that the presentation of net revenue more accurately reflects the level of revenue earned during the relevant period. |
| (2) | Gross margin on cannabis net revenue is a non-GAAP measure. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined term. Gross margin on cannabis net revenue for Q2 2019 and subsequent periods were comprised of revenues from both medical and consumer markets, while gross margin on cannabis net revenues for the periods prior to Q2 2019 were comprised of revenues from medical cannabis only. Given that our gross revenue from the sale of goods figure excludes excise taxes, we believe that the presentation of gross margin on cannabis net revenue more accurately reflects the level of gross profit earned from cannabis products during the relevant period. |
| (3) | Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined terms. |
| (4) | Represents total biological assets and cannabis inventory, exclusive of merchandise, accessories, supplies and consumables. |
| (5) | Cash cost of sales per gram of dried cannabis sold and cash cost to produce per gram of dried cannabis sold are non-GAAP financial measures and are not a recognized, defined, or standardized measure under IFRS. These respective metrics represents the blended and consolidated cash costs for dried cannabis produced and sold by our Aurora and CanniMed operations during the year ended June 30, 2018. However, due to the acquisitions completed and growth achieved in fiscal 2019, the metrics for fiscal 2019 and Q1 of fiscal 2020 reflect the blended and consolidated cash costs of dried cannabis produced and sold by our Aurora, CanniMed, MedReleaf, ICC and Whistler operations. Refer to “Cautionary Statement Regarding Certain Non-GAAP Performance Measures” section of this MD&A for the defined terms. |
| (6) | During the three months ended June 30, 2019, the Company recorded non-material year end corrections to: (i) capitalize certain payroll, share-based compensation and borrowing costs, related to the construction of our production facilities that were incorrectly expensed in prior periods; and (ii) reverse items that had been over-accrued in prior periods. The net impact of these adjustments to the three months ended June 30, 2019 Adjusted EBITDA was a $14.9 million reduction in reported operating expenses. |
| 24 | AURORA CANNABIS INC. Q2 2020 MD&A |
Risk Factors
In addition to the other information included in this report, readers should consider carefully the following factors, which describe the risks, uncertainties and other factors that may materially and adversely affect our business, products, financial condition and operating results. There are many factors that affect our business and our results of operations, some of which are beyond our control. The following is a description of important factors that may cause our actual results of operations in future periods to differ materially from those currently expected or discussed in the forward-looking statements (“FLS”) set forth in this report relating to our financial results, operations and business prospects. Except as required by law, we undertake no obligation to update any such FLS to reflect events or circumstances after the date of this MD&A.
These risks include, but are not limited to the following:
| • | ability to successfully obtain and renew Cannabis Act licenses, adhere to all regulatory requirements, and maintain the good standing of our licenses; |
| • | actions by governmental authorities, including changes in laws, regulations and guidelines, which may have adverse effects on the Company’s operations; |
| • | risk of failure or delay to acquire regulatory approvals required to produce and sell cannabis; |
| • | the Company has a limited operating history and no assurance of profitability; |
| • | risks related to negative public perception of cannabis consumption which may have an adverse effect on the Company’s operational results, consumer base, financial results, and the desire of third parties doing business with us; |
| • | competition in the Company’s industry where current and future competitors may have longer operating histories, more financial resources, and lower costs than the Company; |
| • | risk of whether the Company is able to realize its growth targets; |
| • | ability to execute the Company’s strategy without additional financing; |
| • | operating hazards and uninsured risks; |
| • | attracting and retaining key employees; |
| • | ability to expand operations into international jurisdictions; |
| • | availability of strategic alliances which complement or augment the Company’s existing business; |
| • | possibility of product liability claims against the Company; |
| • | risk of product recalls and returns; |
| • | ability to successfully develop new products and obtain required regulatory approvals; |
| • | conflicts of interest which may arise between the Company and its directors and officers; |
| • | potential for legal proceedings arising in the normal course of business; |
| • | risks related to agricultural operations, including disease, insect pests, and changes in climate; |
| • | the Company’s dependence on transportation services and the possibility of disruptions; |
| • | the price of production of cannabis will vary based on a number of factors outside of our control; |
| • | risks related to compliance with safety, health, and environmental regulations; |
| • | ability to protect and preserve intellectual property rights; |
| • | risk of political and economic instability in the jurisdictions in which the Company operates; |
| • | execution of the Company’s growth strategy; |
| • | ability to successfully identify and make attractive acquisitions, joint ventures or investments, or successfully integrate future acquisitions; |
| • | volatility in the Company’s common share price on the TSX and NYSE; |
| • | global economy risk, which may impact the Company’s ability to raise equity or obtain additional financing; |
| • | risks associated with foreign currency translation losses; |
| • | restrictions and covenants from the Company's loan facilities may limit the Company's ability to execute its plans; |
| • | future issuances of equity could decrease the value of the Company's shares; |
| • | the regulated nature of the industry could discourage any takeover offers; |
| • | risks associated with the absence of dividends paid to shareholders; |
| • | misappropriation of assets and security breaches; |
| • | risks associated with breaches of security at our facilities or in respect of electronic documents and data storage and risks related to breaches of applicable privacy laws; |
| • | cyber security risks, loss of information and computer systems; |
| • | no assurance we will continue to meet listing standards of the NYSE and TSX; |
| • | risk that the Company will not be able to develop and maintain strong internal controls and be SOX compliant by the mandated deadline |
| • | risks associated with the Company’s holding company status; and |
| • | the Company’s ability to effectively and efficiently integrate MedReleaf and realize all operational synergies. |
For additional information regarding the risks that the Company is exposed to, see the disclosure provided under the heading “Risk Factors” in the Company’s AIF dated September 10, 2019, which is available on the SEDAR website at www.sedar.com.
| 25 | AURORA CANNABIS INC. Q2 2020 MD&A |
Internal Controls over Financial Reporting
In accordance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, management is responsible for establishing and maintaining Disclosure Controls and Procedures (“DCP”) and Internal Control Over Financial Reporting (“ICFR”). The Company’s management, including the CEO and the Chief Financial Officer (“CFO”), has designed the DCP and ICFR based on the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.
An effective DCP and ICFR system can only provide reasonable assurance that the Company will achieve its objectives in providing reliable financial reporting in accordance with IFRS. As stated within COSO, internal controls have inherent limitations and include, but are not limited to, human error, uncertainties inherent in judgment, and circumvention of controls. As such, there can be no assurance that the DCP or ICFR will prevent or detect all misstatements due to errors or fraud, if any.
An evaluation of the effectiveness of the Company’s disclosure controls and procedures was conducted under the supervision of the Company’s management, including the CEO and the CFO. Based on this evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures were effective in providing reasonable assurance that material information relating to the Company is made known to them and information required to be disclosed by the Company is recorded, processed, summarized and reported within the time periods specified in such legislation.
There were no significant changes in Aurora’s ICFR during the period covered by this MD&A that materially affected, or are reasonably likely to materially affect, the Company’s ICFR, except to the extent they relate to internal controls of acquired entities. However, management has also performed additional account reconciliations and other analytical and substantive procedures to ensure reliable financial reporting and the preparation of financial statements in accordance with IFRS.
Aurora has limited the scope of the design of disclosure controls and procedures and ICFR to exclude controls, policies, and procedures over entities that were acquired by the Company not more than 365 days before the end of the financial period. The entities controlled by Aurora but were scoped out of the design of controls and procedures and ICFR include:
| • | Whistler (acquired March 1, 2019); and |
| • | Chemi Pharmaceuticals Inc. (acquired April 24, 2019). |
Excluding goodwill and intangible assets generated from these entities, on a combined basis these entities constitute approximately $5.6 million of the Company’s current assets, $41.0 million of total assets, $1.8 million of current liabilities, and $3.4 million of total liabilities. These entities contribute $2.6 million of revenue and $30.0 million of losses to the Company’s net loss for the six months ended December 31, 2019.
Cautionary Statement Regarding Forward-Looking Statements
This MD&A contains certain statements which may constitute “forward-looking information” and “forward-looking statements” within the meaning of Canadian securities law requirements (collectively, “forward-looking statements” or “FLS”). These forward-looking statements are made as of the date of this MD&A and the Company does not intend, and does not assume any obligation, to update these FLS, except as required under applicable securities legislation. FLS relate to future events or future performance and reflect Company management’s expectations or beliefs regarding future events. In certain cases, FLS can be identified by the use of words such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or statements that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be achieved” or the negative of these terms or comparable terminology. In this document, certain forward-looking statements are identified by words including “may”, “future”, “expected”, “intends” and “estimates”. By their very nature FLS involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the FLS. The Company provides no assurance that FLS will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on FLS. Certain FLS in this MD&A include, but are not limited to the following:
| • | pro forma measures including revenue, registered medical patients and grams produced; |
| • | the completion of construction of production facilities, associated costs, and receipt of licenses from Health Canada to produce and sell cannabis and cannabis related products from these facilities; |
| • | the successful integration of CanniMed and MedReleaf and other subsidiaries into Aurora’s operations; |
| • | strategic investments and capital expenditures, and related benefits; |
| • | future growth expansion plans; |
| • | expectations regarding production capacity, costs and yields; and |
| • | product sales expectations and corresponding forecasted increases in revenues. |
The above and other aspects of the Company’s anticipated future operations are forward-looking in nature and, as a result, are subject to certain risks and uncertainties. Although the Company believes that the expectations reflected in these FLS are reasonable, undue reliance should not be placed on them as actual results may differ materially from the forward-looking statements. Such FLS are estimates reflecting the Company’s best judgment based upon current information and involve a number of risks and uncertainties, and there can be no assurance that other factors will not affect the accuracy of such forward-looking statements. These risks include, but are not limited to, the ability to retain key personnel, the ability to continue investing in infrastructure to support growth, the ability to obtain financing on acceptable terms, the continued quality of our products, customer experience and retention, the development of third party government and non-government consumer sales channels, management’s estimates of consumer demand in Canada and in jurisdictions where the Company exports, expectations of future results and expenses, the availability of additional capital to complete construction projects and facilities improvements, the risk of successful integration of acquired business and operations, management’s estimation that SG&A will grow only in proportion of revenue growth, the ability to expand and maintain distribution capabilities, the impact of competition, the general impact of financial market conditions, the yield from marijuana growing operations, product demand, changes in prices of required commodities, competition, and the possibility for changes in laws, rules, and regulations in the industry, the “Risk Factors” section of the MD&A, as well as updates provided herein.
| 26 | AURORA CANNABIS INC. Q2 2020 MD&A |
Cautionary Statement Regarding Certain Non-GAAP Performance Measures
This MD&A contains certain financial performance measures that are not recognized or defined under IFRS (termed “Non-GAAP Measures”). As a result, this data may not be comparable to data presented by other licensed producers and cannabis companies. For an explanation of these measures to related comparable financial information presented in the consolidated financial statements prepared in accordance with IFRS, refer to the discussion below. The Company believes that these Non-GAAP Measures are useful indicators of operating performance and are specifically used by management to assess the financial and operational performance of the Company. These Non-GAAP Measures include, but are not limited, to the following:
| • | Cash cost of sales of dried cannabis sold is calculated by taking the cost of sales, excluding the effect of changes in the FV of biological assets and inventory, and deducting non-cash production costs, cannabis extract conversion costs, cost of accessories, cost of products purchased from other Licensed Producers that were sold, and cost of sales from non-cannabis producing subsidiaries. Cash cost of sales per gram of dried cannabis sold is calculated by taking cash cost of sales of dried cannabis sold divided by total grams of dried cannabis sold in the period that was produced by Aurora. Management believes these measures provide useful information about the efficiency of production and fulfillment for our core cannabis operations. |
| • | Cash cost to produce dried cannabis sold is equal to cash cost of sales of dried cannabis sold less packaging costs (i.e. post-production costs). Cash cost to produce per gram of dried cannabis sold is calculated by taking cash cost to produce dried cannabis sold divided by total grams of dried cannabis sold in the period that was produced by Aurora. Management believes these measures provide useful information about the efficiency of our production of cannabis. |
| • | Cannabis net revenue represents revenue from the sale of cannabis products, excluding excise taxes and revenues from patient counseling services, design, engineering and construction services, and analytical testing services. Cannabis net revenue is further broken down as follows: |
| ◦ | Medical cannabis net revenue represents cannabis net revenue for medical cannabis sales only, excluding wholesale bulk cannabis net revenue. |
| ◦ | Consumer cannabis net revenue represents cannabis net revenue for consumer cannabis sales only. |
| ◦ | Wholesale bulk cannabis net revenue represents cannabis net revenue for wholesale bulk cannabis only. |
Management believes the cannabis net revenue measures provide more specific information about the net revenue purely generated from our core cannabis business and by market type.
| • | Average net selling price per gram and gram equivalent is calculated by taking cannabis net revenue divided by total grams and grams equivalent of cannabis sold in the period. Average net selling price per gram and gram equivalent is further broken down as follows: |
| ◦ | Average net selling price per gram of dried cannabis represents the average net selling price per gram for dried cannabis sales only, excluding wholesale bulk cannabis sold in the period. |
| ◦ | Average net selling price per gram equivalent of cannabis extracts represents the average net selling price per gram equivalent for cannabis extracts only, excluding wholesale bulk cannabis extracts sold in the period. |
| ◦ | Average net selling price per gram and gram equivalent of medical cannabis represents the average net selling price per gram and gram equivalent for dried cannabis and cannabis extracts sold in the medical market. |
| ◦ | Average net selling price per gram and gram equivalent of consumer cannabis represents the average net selling price per gram and gram equivalent for dried cannabis and cannabis extracts sold in the consumer market. |
| ◦ | Average net selling price per gram and gram equivalent of wholesale bulk cannabis represents the average net selling price per gram and gram equivalent of wholesale bulk cannabis and cannabis extracts sold in the period. Wholesale bulk cannabis sales are not subject to excise taxes. |
Management believes the average net selling price per gram or gram equivalent measures provide more specific information about the pricing trends over time by product and market type.
| • | Gross profit before FV adjustments on cannabis net revenue is calculated by subtracting (i) cost of sales, before the effects of changes in FV of biological assets and inventory, and (ii) cost of sales from non-cannabis auxiliary support functions, from total cannabis net revenue. Gross margin before FV adjustments on cannabis net revenue is calculated by dividing gross profit before FV adjustments on cannabis net revenue divided by cannabis net revenue. Gross profit and gross margin before FV adjustments on cannabis net revenue is further broken down as follows: |
| ◦ | Gross profit and gross margin before FV adjustments on medical cannabis net revenue represents gross profit and gross margin before FV adjustments on sales generated in the medical market only. |
| ◦ | Gross profit and gross margin before FV adjustments on consumer cannabis net revenue represents gross profit and gross margin before FV adjustments on sales generated in the consumer market only. |
| ◦ | Gross profit and gross margin before FV adjustments on wholesale bulk cannabis net revenue represents gross profit and gross margin before FV adjustments on sales generated from wholesale bulk cannabis only. |
Management believes that these measures provide useful information to assess the profitability of our cannabis operations as it excludes the effects of non-cash FV adjustments on inventory and biological assets, which are required by IFRS.
| • | Adjusted gross profit and adjusted gross margin before FV adjustments on cannabis net revenue represents cash gross profit and gross margin on cannabis net revenue and is calculated by (i) subtracting gross profit from non-cannabis auxiliary support functions, and (ii) adding back cost of sales depreciation, from total gross profit before fair value adjustments. Management believes adjusted gross profit and adjusted gross margin on cannabis net revenue provides useful information as it represents the cash gross profit and margin generated from cannabis operations. |
| 27 | AURORA CANNABIS INC. Q2 2020 MD&A |
| • | Adjusted EBITDA is calculated as net income (loss) excluding interest income (expense), accretion, income taxes, depreciation, amortization, changes in fair value of inventory sold, changes in fair value of biological assets, share-based compensation, foreign exchange, changes in fair value of financial instruments, gains and losses on deemed disposal, and non-cash impairment of equity investments, goodwill, and other assets. Adjusted EBITDA is intended to provide a proxy for the Company’s operating cash flow and is widely used by industry analysts to compare Aurora to its competitors, and derive expectations of future financial performance for Aurora. Adjusted EBITDA increases comparability between comparative companies by eliminating variability resulting from differences in capital structures, management decisions related to resource allocation, and the impact of FV adjustments on biological assets and inventory and financial instruments, which may be volatile and fluctuate significantly from period to period. |
Non-GAAP measures should be considered together with other data prepared accordance with IFRS to enable investors to evaluate the Company’s operating results, underlying performance and prospects in a manner similar to Aurora’s management. Accordingly, these non-GAAP measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.
| 28 | AURORA CANNABIS INC. Q2 2020 MD&A |
Exhibit 99.3
Form 52-109F2
Certification of Interim Filings
Full Certificate
I, Michael Singer, Chief Executive Officer of Aurora Cannabis Inc., certify the following:
| 1. | Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Aurora Cannabis Inc. (the “issuer”) for the interim period ended December 31, 2019. |
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
| 4. | Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. |
| 5. | Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings |
| (a) | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
| (i) | material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and |
| (ii) | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
| (b) | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
| 5.1 | Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control - Integrated Framework (COSO Framework 2013) published by The Committee of Sponsoring Organization of the Treadway Commission (COSO). |
| 5.2 | ICFR - material weakness relating to design: N/A |
| 5.3 | Limitation on scope of design: The issuer has disclosed in its interim MD&A |
| (a) | the fact that the issuer’s other certifying officer(s) and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of |
| (i) | N/A; |
| (ii) | N/A; |
| (iii) | a business that the issuer acquired not more than 365 days before the last day of the period covered by the interim filings; and |
| (b) | summary financial information about the proportionately consolidated entity, special purpose entity or business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer’s financial statements. |
| 6. | Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on October 1, 2019 and ended on December 31, 2019 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. |
Date: February 13, 2020
/s/ Michael Singer
Michael Singer
Chief Executive Officer
Exhibit 99.4
Form 52-109F2
Certification of Interim Filings
Full Certificate
I, Glen Ibbott, Chief Financial Officer of Aurora Cannabis Inc., certify the following:
| 1. | Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Aurora Cannabis Inc. (the “issuer”) for the interim period ended December 31, 2019. |
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
| 4. | Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. |
| 5. | Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings |
| (a) | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
| (i) | material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and |
| (ii) | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
| (b) | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
| 5.1 | Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the Internal Control - Integrated Framework (COSO Framework 2013) published by The Committee of Sponsoring Organization of the Treadway Commission (COSO). |
| 5.2 | ICFR - material weakness relating to design: N/A |
| 5.3 | Limitation on scope of design: The issuer has disclosed in its interim MD&A |
| (a) | the fact that the issuer’s other certifying officer(s) and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of |
| (i) | N/A; |
| (ii) | N/A; |
| (iii) | a business that the issuer acquired not more than 365 days before the last day of the period covered by the interim filings; and |
| (b) | summary financial information about the proportionately consolidated entity, special purpose entity or business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer’s financial statements. |
| 6. | Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on October 1, 2019 and ended on December 31, 2019 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. |
Date: February 13, 2020
/s/ Glen Ibbott
Glen Ibbott
Chief Financial Officer