Organigram Global Inc 6-K, filed Nov 30, 2020
Organigram Global Inc. (OGI)
About this 6-K
Organigram Global Inc filed this 6-K on November 30, 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 November 2020
Commission File No. 001-38885
ORGANIGRAM HOLDINGS INC.
(Translation of registrant's name into English)
35 English Drive
Moncton, New Brunswick, Canada E1E 3X3
(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 [X]
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) [ ]
INCORPORATION BY REFERENCE
Exhibit 99.1 to this report on Form 6-K furnished to the SEC is expressly incorporated by reference into the Registration Statement on Form F-10 of ORGANIGRAM HOLDINGS INC. (File No. 333-234564), as amended and supplemented.
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.
ORGANIGRAM HOLDINGS INC.
/s/ Derrick West
Derrick West
Chief Financial Officer
Date: November 30, 2020
FORM 51-102F3
MATERIAL CHANGE REPORT
Item One - Name and Address of Company
Organigram Holdings Inc.
35 English Drive
Moncton, NB E1E 3X3
Item Two - Date of Material Change
November 27, 2020
Item Three - News Release
The news release reporting the material change described in this report was issued in Moncton, New Brunswick on November 30, 2020 (the "News Release").
The News Release was distributed through Business Wire and filed with each of the relevant Canadian securities regulatory authorities via SEDAR. The News Release is attached hereto as Schedule "A" and incorporated by reference herein.
Item Four - Summary of Material Change
On November 30, 2020, Organigram Holdings Inc. (the "Company") announced that it amended and restated its credit agreement dated May 31, 2019, as amended, with Bank of Montreal as lead arranger and agent as well as a syndicate including three other lenders (the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement modified certain terms of the $115 million term loan (the "Term Loan") and $25 million revolving credit facility (the "Revolver", together with the Term Loan, the "Facilities") to: (i) reduce the Term Loan amount from $115 million to $60 million based on a repayment of $55 million to be made on December 1, 2020 of the outstanding Term Loan balance; (ii) have repayments on the balance of the Term Loan commence on February 28, 2021 in an amount equal to $1.5 million per quarter; (iii) reduce the Revolver commitment to $2 million from up to $25 million; (iv) adjust the minimum quarterly EBITDA covenants to be maintained by the Company commencing on February 28, 2021 and continuing through to maturity, thereby removing this covenant for the fiscal period ended November 30, 2020 and eliminating the reversion of the financial covenants to that of the original structure on November 30, 2021; (v) modify the applicable margin pricing and standby fee terms to reflect current market conditions; and (vi) reduce the minimum unrestricted cash balance requirement to $20 million, which is already inclusive of the $8 million restricted investment currently outstanding. The interest rate margin will be fixed from November 27, 2020 through to maturity on May 31, 2021.
Item Five - Full Description of Material Change
For a full description of the material change, please see the News Release attached hereto as Schedule "A" which News Release forms an integral part of this material change report.
Item Six - Reliance on subsection 7.1(2) of National Instrument 51-102
Not Applicable.
Item Seven - Omitted Information
Not Applicable.
Item Eight - Executive Officer
Greg Engel, Chief Executive Officer (855) 961-9420
Item Nine - Date of Report
November 30, 2020
Forward-looking Information
This report contains "forward-looking information" and "forward-looking statements" within the meaning of applicable securities legislation (collectively, "forward-looking information"). Often, but not always, forward-looking information can be identified by the use of words such as "plans", "expects", "estimates", "intends", "anticipates", "believes" or variations of such words and phrases or state that certain actions, events, or results "may", "could", "would", "might" or "will" be taken, occur or be achieved, which includes, without limitation, statements regarding the Company's ability to draw additional funds from the Term Loan and the expected interest rate payable.
Forward-looking information involves known and unknown risks, uncertainties and other factors that may cause actual results, events, performance or achievements of Organigram to differ materially from current expectations or future results, performance or achievements expressed or implied by the forward-looking information contained in this report. Risks, uncertainties and other factors involved with forward-looking information which could cause actual events, results, performance, prospects and opportunities to differ materially from those expressed or implied by such forward-looking information include factors that could change the availability of the Facilities from time to time and the applicable terms thereof, including market and credit conditions, general risks related to COVID-19, and risks as disclosed in the Company's most recent annual information form, management's discussion and analysis and other Company documents filed from time to time on SEDAR (see www.sedar.com), or the Company's annual report on Form 40-F and its reports on Form 6-K filed or furnished to the Securities and Exchange Commission (the "SEC") on EDGAR (see www.sec.gov), and such other continuous disclosure materials as may be filed from time to time by the Company with Canadian securities regulatory authorities and the SEC. Although the Company believes that the assumptions and factors used in preparing the forward-looking information in this report are reasonable, undue reliance should not be placed on such information and no assurance can be given that such events will occur in the disclosed time frames or at all. The forward-looking information included in this report is given as of the date of this report and the Company disclaims any intention or obligation, except to the extent required by law, to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.
SCHEDULE "A"
(see attached)
Organigram Reports Fourth Quarter 2020 Results
- Q4 2020 net revenue increased 25% to $20.4 million from $16.3 million in Q4 2019
- Q4 2020 gross revenue increased 32% to $25.4 million from $19.2 million in Q4 2019
- Launched 40 new stock keeping units ("SKUs") since July 2020, including new high THC strains, and further value segment offerings and expect to launch up to 18 more new SKUs in Q2 2021 as part of the Company's product portfolio revitalization
- Subsequent to quarter-end, invested an additional $2.5 million in Hyasynth Biologicals Inc. as the biotech partner completed a milestone linked to the first commercial sale of cannabinoids produced via biosynthesis
- Subsequent to quarter-end, raised ~$69 million in gross proceeds from an underwritten public offering including the exercise in full of the over-allotment option
MONCTON, NB, November 30, 2020 - Organigram Holdings Inc. (NASDAQ: OGI) (TSX: OGI), the parent company of Organigram Inc. (together, the "Company" or "Organigram"), a leading licensed producer of cannabis, announced its results for the fourth quarter ended August 31, 2020 ("Q4" or "Q4 2020").
|
Select Key Financial Metrics (in $000s) |
Q4 2020 |
Q4 2019 |
% Change |
|
Gross revenue |
25,389 |
19,235 |
32% |
|
Excise taxes |
(4,989) |
(2,945) |
69% |
|
Net revenue |
20,400 |
16,290 |
25% |
|
Cost of sales |
29,007 |
15,543 |
87% |
|
Gross margin before fair value changes to biological assets & inventories sold |
(8,607) |
747 |
-1252% |
|
Fair value changes to biological assets & inventories sold |
(20,149) |
(11,806) |
71% |
|
Gross margin |
(28,756) |
(11,059) |
160% |
|
Adjusted gross margin1 |
6,156 |
1,491 |
313% |
|
Adjusted gross margin %1 |
30% |
9% |
21% |
|
SG&A2 |
10,830 |
13,883 |
-22% |
|
Net loss |
(38,590) |
(22,456) |
72% |
|
Adjusted EBITDA1 |
(2,663) |
(7,163) |
-63% |
|
Net cash used in operating activities3 |
(10,128) |
(15,722) |
-36% |
1 Adjusted gross margin, adjusted gross margin % and adjusted EBITDA are non-IFRS financial measures not defined by and do not have any standardized meaning under IFRS; please refer to the Company's Q4 2020 MD&A for definitions and a reconciliation to IFRS.
2 Sales and marketing and general and administrative expenses ("SG&A") excluding share-based compensation
3 Q4 2020 net cash used in operating activities has been calculated based on a correction of a presentation error of Q1 to Q3 Fiscal 2020 net cash used in operating activities.
|
Select Balance Sheet Metrics (in $000s) |
31-Aug-20 |
31-Aug-19 |
% Change |
|
Cash & short-term investments |
74,728 |
47,935 |
56% |
|
Biological assets & inventories |
71,759 |
113,796 |
-37% |
|
Other current assets |
23,717 |
34,550 |
-31% |
|
Accounts payable & other current liabilities |
29,081 |
43,864 |
-34% |
|
Working capital |
141,123 |
152,417 |
-7% |
|
Property, plant & equipment |
247,420 |
218,470 |
13% |
|
Long-term debt |
103,671 |
46,067 |
125% |
|
Total assets |
435,127 |
428,525 |
2% |
|
Total liabilities |
135,600 |
101,519 |
34% |
|
Shareholders' equity |
299,527 |
327,006 |
-8% |
"We are excited about Organigram's prospects as we continue to reinvigorate and diversify our product portfolio with new offerings aimed at delivering the attributes that matter most to consumers," said Greg Engel, CEO. "Overall, we are very encouraged by the initial responses to our new products and the increased awareness and traction they are receiving against a backdrop of national retail store growth and a growing legal market that continues to displace the illicit market. Our team is more focused than ever on enhancing our agility and execution to capture top-line growth and we believe we have the capital resources and liquidity to support us. We have always operated with financial discipline to pursue profitable growth which is again reflected in positive adjusted EBITDA in full-year fiscal 2020 for the second year in a row."
Key Financial Results for the Fourth Quarter Fiscal 2020
- Net revenue:
- Q4 2020 net revenue of $20.4 million compared to $16.3 million in Q4 2019 primarily due to:
- Higher flower sales on higher volumes due to the large format, value segment growing and the Company having a number of offerings in this segment
- Adult-use recreational derivative and edible ("Rec 2.0") product sales that were not yet legal in Q4 2019 and a significant increase in international sales largely due to the supply agreement with Canndoc Ltd., leading Israeli medical cannabis producer, that did not exist in Q4 2019; and
- A lower sales provision for returns and price adjustments in Q4 2020 compared to Q4 2019.
- Q4 2020 net revenue of $20.4 million compared to $16.3 million in Q4 2019 primarily due to:
- Gross revenue:
- Q4 2020 gross revenue of $25.4 million compared to $19.2 million in Q4 2019 primarily due to similar factors impacting net revenue described above.
- Q4 2020 gross revenue increased 32% from the prior year period compared to the 25% increase in net revenue reflecting more shipments and the increase in excise taxes as a percentage of gross revenue in Q4 2020.
- Cost of sales:
- Q4 2020 cost of sales of $29.0 million compared to Q4 2019 cost of sales of $15.5 million.
- Higher cost of sales in Q4 2020 was primarily due to:
- Increased sales volumes in Q4 2020;
- Q4 2020 write-offs of excess and unsaleable inventories of $11.1 million, of which $8.3 million related to excess trim and concentrate; and $2.8 million of write-downs and adjustments to net realizable value and
- $3.5 million in unabsorbed fixed overhead as a result of lower production volumes, and $0.2 million related to lump-sum payments paid to temporarily laid-off workers in Q4 2020.
- Gross margin before fair value changes to biological assets and inventories sold:
- Q4 2020 negative gross margin before fair value changes to biological assets and inventories sold of $8.6 million compared to positive $0.7 million in Q4 2019.
- Negative and lower gross margin in Q4 2020 was largely due to higher cost of sales as described above.
- Adjusted gross margin1:
- Q4 2020 adjusted gross margin increased to $6.2 million from $1.5 million in Q4 2019 primarily due to a lower sales provision for returns and price adjustments in Q4 2020 compared to Q4 2019 as discussed above.
- Gross margin:
- Q4 2020 negative gross margin of $28.8 million compared to Q4 2019 negative gross margin of $11.1 million, largely due to negative Q4 2020 gross margin before fair value changes to biological assets and inventories sold as described above as well as greater net non-cash negative fair value changes to biological assets and inventories sold of $20.1 million in Q4 2020 versus $11.8 million in Q4 2019.
- Selling, general & administrative (SG&A) expenses:
- Q4 2020 SG&A of $10.8 million decreased 22% from Q4 2019's amount of $13.9 million and Q4 2020 SG&A as a percentage of net revenue was 53% compared to 85% in Q4 2019.
- Q4 2019 SG&A included approximately $2.0M of licensing and professional fees that were not expected to recur at the same level and Q4 2020 SG&A reflected the Company's reduced spending during the ongoing COVID-19 pandemic.
- Q4 2020 SG&A was largely in line with Q3 2020 SG&A of 10.3 million and declined from Q3 SG&A as a percentage of net revenue of 57%.
- Adjusted EBITDA1:
- Q4 2020 negative adjusted EBITDA of $2.7 million improved from Q4 2019 negative adjusted EBITDA of $7.2 million primarily due to higher adjusted gross margin in Q4 2020 as discussed above.
1 Adjusted gross margin, adjusted gross margin % and adjusted EBITDA are non-IFRS financial measures not defined by and do not have any standardized meaning under IFRS; please refer to the Company's Q4 2020 MD&A for definitions and a reconciliation to IFRS.
- Net Loss:
- Q4 2020 net loss of $38.6 million, or ($0.199) per share on a diluted basis, compared to Q4 2019 net loss of $22.5 million, or $(0.144) per share, largely due to greater negative gross margin in Q4 2020 as described above.
- Net cash used in operating activities:
- Q4 2020 net cash used in operating activities of $10.1 million decreased from $15.7 million used in Q4 2019 largely due to the prior period's increase to working capital assets as the Company scaled operations ahead of Rec 2.0 legalization.
Canadian Adult-Use Recreational Market
The Company has been revitalizing its product portfolio with the launch of 40 new SKUs since July 2020 since July 2020, including new high THC strains and additional value segment offerings. Further, the Company expects to launch up to 18 new SKUs in Q2 2021.
Rec 1.0
Value Segment Offerings
- Dried flower remains the largest category in the Canadian adult-use recreational market of all product form factors and the Company believes this category will continue to dominate for the foreseeable future based on the sales history in mature adult use recreational legal markets in the U.S. (California, Colorado, etc.).
- The Company has noted the significant growth in the dried flower value category of the market with intensifying competition including recent entries of lower priced offerings which have caused significant market share shifts within dried flower to the value segment. In response, the Company launched "Buds"2 in Q3 2020 along with a number of other dried flower offerings in larger format sizes of 7g and 15g under the Trailblazer value brand in early Q4 2020. The Company believes Buds is a differentiated single-strain value product and it has been well-received by consumers since it is at an affordable price point but does not have to compete on price alone since it is indoor-grown, whole dried flower and strain specific.
- Further, the Company's value segment strategy also includes dried flower offerings that were launched in larger format sizes of 7g and 15g under our Trailblazer brand in July 2020.
- Subsequent to quarter-end in mid-September 2020, Organigram expanded its strong value portfolio with the launch of SHRED, a high quality, high potency and affordable dried flower blend that is pre-shredded for consumer convenience. SHRED offers three pre-milled varieties, all with THC of 18% or higher. It is made from whole flower, does not contain any shake or trim and is milled to the same specifications as the Company's existing pre-roll products. SHRED is currently Organigram's most affordable dried flower option (on a per gram basis).
2 In Q3 Fiscal 2020, the Company launched its first value offering of dried flower in a large size format of 28g under Trailer Park Buds (TPB) brand. In early Q4 Fiscal 2020, the Company announced it is making changes to the TPB brand and logo but in the immediate terms has moved to a modified version of TPB, "Buds".
New High THC Strains
- Cannabis consumers continue to gravitate towards both high THC dried flower products and cultivar diversity and novelty as supported by available sales data. In early August 2020, the Company announced the launch of three new strains of Edison Cannabis Co. ("Edison") dried flower products, with higher THC: The General (Grapefruit GG4), Chemdog and limited time offering, Samurai Spy (Ninja Fruit). Going forward, the Company has decided to change naming conventions for many of its offerings to align with the street genetic names for dried flower products as it believes these names will better resonate with consumers.
Rec 2.0
Cannabis-Infused Chocolates
- At the end of July 2020, the Company announced the launch of Trailblazer Snax, a value-priced, cannabis-infused chocolate bar which is made with premium quality ingredients including cocoa butter, all-natural flavors and distillate, while remaining an affordable cannabis-infused option. It is available in either mint or mocha flavours in a 42g bar with 10mg of THC. Each bar can be broken into five sections and is suited for both micro-dosing and full consumption.
- Organigram's investment in state-of-the art chocolate equipment and manufacturing processes means that each of the five sections of the Trailblazer Snax bar are filled separately, allowing for higher accuracy of infusion. The Company's chocolate portfolio also consists of Edison Bytes truffles which are available in both milk and dark chocolate formulations. These products are available as single chocolates containing 10 mg of THC each or sets of two truffles containing 5 mg each.
- In addition to a seasonal offering of Trailblazer Kushmas Stix, the Company is also offering Canadian cannabis consumers delicately spiced gingerbread flavours mingled with Edison Bytes' signature rich milk chocolate. These limited time offerings are available in a two-per-pack format, with each truffle containing 5 mg THC for a total of 10 mg total in the box.
Vape Portfolio
- The Company expects to launch Trailblazer Spark, Flicker and Glow 510-thread Torch vape cartridges in a new 1g format before the end of Q2 Fiscal 2021 which will extend Organigram's line up to a suite of trial-size 0.5 g and full-size 1 g cartridges for the 510 vaporizer. Trailblazer Torch offers customers 510 cartridges, high-quality CO2 extract and three unique terpene-infused flavours.
- In addition to the Trailblazer Torch value-segment offerings, the Company's vape portfolio also includes products for the mainstream and the premium segments: Edison + Feather ready-to-go distillate pens and Edison + PAX ERA® distillate cartridges.
Powdered Beverage Launch
- Subsequent to quarter-end in November 2020, Organigram launched Edison RE:MIX dissolvable cannabis powder. The pre-packaged powder format makes it easy to mix Edison RE:MIX into beverages quickly and discreetly, so the product can be enjoyed, based on the consumer's own preference, in a wide variety of settings and on occasions of their choosing.
- Edison RE:MIX is available in three formats: two sachets with 5 mg THC per sachet; two sachets with 5:5 mg THC:CBD per sachet; and five sachets with 10 mg CBD per sachet.
- The results of a recent Organigram survey suggest a significant majority of current cannabis consumers (74%) would prefer to add cannabinoids to their beverages by themselves (vs. a pre-mixed beverage). The discreet nature of the product also addresses consumer concerns related to open cannabis consumption.
- According to recent sales data in Colorado, cannabinoid-infused powders have rapidly risen to the top of the beverage category in popularity, representing 55% of the state's beverage market sales. In fact, 46% of cannabis consumers reported enjoying cannabinoid-infused beverages multiple times a day (Headset - Colorado Market Insights - July 2020). In Canada, estimates suggest the recreational cannabis beverage market represents a $467M category opportunity and it is expected to increase by 15x its current market size over the next five years (Brightfield Group - Canadian Market Size Insights - July 2020).
- As previously announced, Organigram's researchers have developed a proprietary nano-emulsification technology that generates nano-droplets which are very small and uniform; this provides improved absorption compared to traditional edibles and beverages, potentially allowing for a more reliable and controlled experience.
- With traditional edibles, beverages, and ingestible oil-based extracts, the body spends significant time breaking down fat soluble cannabinoid particles which are then absorbed and metabolized in the body before the effects are felt.
- The nanoemulsion technology is also anticipated to have increased stability to temperature variations, mechanical disturbance, salinity, pH, and sweeteners. The powdered formulation holds the potential to offer consumers a measured dose of cannabinoids which they can then add to liquid, such as a beverage of their choice, while also offering the discretion, portability and shelf life expected of a dried powder formulation.
Phase 4 Expansion
- As previously disclosed with Q3 2020 results, the Company decided to indefinitely defer final completion of Phase 4C for additional cultivation capacity (the final stage in Phase 4 cultivation expansion) as originally designed due to excess cultivation capacity versus the current demand in Canada.
- During the quarter, Phase 4C was substantially completed such that it can be occupied, and the Company retains the option to potentially use the space for other opportunities (if and when strategic and/or market factors dictate).
Phase 5 Refurbishment
- Phase 5, while already housing additional post-harvesting rooms (including drying rooms) and a dedicated derivatives and edibles facility, is expected to add additional functionality with expanded extraction capacity at the Moncton Campus.
- Phase 5 was substantially complete at year end. The Company is continuing to work on the installation and commissioning of certain equipment in its edibles and extraction area including its hydrocarbon extraction equipment.
Outlook
- Organigram remains positive on the cannabis market both in Canada and abroad. The most recent data available from Statistics Canada shows that Canadian adult use market sales (which represent the majority of legal cannabis sales in the country) tallied $256 million3 for just the month of September 2020. This represents an annualized run rate of approximately $3.1 billion, which is a record since adult use was legalized in October 2018. Month-over-month sequential growth rate was 5.2% and year-over-year growth for September was 108.5%.
- The Company believes there are a few factors that are providing tailwinds to further industry growth. First the legalization in October of 2019 of Rec 2.0 products has attracted consumers who were not interested in smoking or vaping. New categories such as vape pens, edibles (soft chews, chocolates), beverages to name a few have significantly expanded the addressable market. Second, the number of brick and mortar retail stores has increased significantly particularly in the back half of calendar 2020. Third, the industry as a whole has made a concerted effort to match or beat illicit market pricing which has helped accelerate the conversion of consumers from illicit to legal consumption.
3 Statistics Canada, Cannabis Stats Hub, Accessed: November 26, 2020, (https://www150.statcan.gc.ca/n1/pub/13-610-x/cannabis-eng.htm)
- Notwithstanding the above, the cannabis industry in Canada remains highly competitive and generally oversupplied versus the current market demand considering both regulated licensed producers and the still unfettered illicit market. In early July 2020, the Company announced it had reduced its workforce by 25% in an order to better align its production capacity to prevailing market conditions. After two years of adult-use recreational legalization in Canada, consumer trends and preferences continued to solidify, including significant growth in the large format value segment, a desire for higher THC potency particularly in dried flower as well as a penchant for newness including new genetic strains and novel products. Organigram began a product portfolio revitalization earlier this year in an effort to address what it believed to be some of the biggest trends in order to grow sales and capture market share.
- At the same time, the number of retail stores in Canada began to grow meaningfully for the first time since legalization and in September 2020, Ontario's cannabis retail regulator began doubling the number of licenses from 10 to 20 per month and is now on pace to add up to 40 stores per month, resulting in accelerated growth for Canada's largest adult-use cannabis market. Since July 2020, the number of retail stores in Canada's 10 provinces grew one-third and increased approximately 140% in Ontario alone.
- With a leaner workforce, the Company experienced some reductions in production, cultivation, processing and packaging capacity. At certain times, this contributed to delays in the product launches for its portfolio revamp and hindered consistent order fulfillment, particularly for high velocity items. The Company believes this resulted in some meaningful missed revenue opportunities in Q4 Fiscal 2020 and in Q1 Fiscal 2021. With substantial retail store growth in play, the Company is evaluating its processes and supply chain, including the benefit of gradually scaling up staffing, to help ensure improved order fulfillment rates and in turn, potentially realize greater sales opportunities. Further, as many of the Company's product launches are recent and some are still to come, the Company believes it will still take time for the new products to reach their full potential and gain market share to drive meaningful sales growth.
- Organigram also continues to make investments in new genetics and improved cultivation processes to increase THC potency and introduce new strains into the highly important dried flower and pre-roll categories. As discussed in the "Phase 4 Expansion" section of this press release, the Company intends to cultivate at less than its full cultivation capacity for the foreseeable future partly to help increase THC potency in its plant, which is anticipated to result in a negative non-cash adjustment to cost of sales for unabsorbed fixed overhead costs.
- In addition to Rec 1.0, the Company plans to continue to expand on Rec 2.0, which it believes will increasingly become a larger relative category in line with mature U.S. legal markets. As indicated in previous quarters, the Company expects some production inefficiencies to persist in the near term and impact gross margin while it continues to launch new Rec 2.0 products and optimize production. Outside of Canada, the Company continues to serve international markets (Israel and Australia) from Canada via export permits and looks to augment sales channels internationally over time. International sales increased significantly in Q4 Fiscal 2020 from the prior year period as Organigram shipped its first product to Canndoc Ltd. in August 2020 under its supply agreement with the Israeli cannabis medical producer. In early Q1 Fiscal 2021, the Israeli Ministry of Health Israel amended its quality standards for imported medical cannabis. The Company has identified a pathway for demonstrating compliance with these updated standards and has initiated a process which, if completed successfully, will allow it to continue to supply product into the Israeli market.
- Recent political changes and cannabis election ballot initiatives for both medical and recreational use in the United States suggest that the potential move to U.S. federal legalization of cannabis (THC) has increased momentum but the timing remains difficult to predict. As the Company continues to monitor and develop a potential U.S. THC strategy, it continues to evaluate CBD entry opportunities in the United States.
Liquidity and Capital Resources
- Organigram ended the quarter with $74.7 million in cash and short-term investments compared to $47.9 million at August 31, 2019, an increase of $26.8 million which is a result of the two at-the-market (ATM) equity offerings and draws against the Company's term loan facility, offset by investments in working capital and property, plant and equipment. During the quarter, the Company drew an additional $30 million under the term loan such that no available capacity remained at quarter-end.
- On November 12, 2020, the Company closed an underwritten public offering (the "Offering") of 37,375,000 units (the "Units") at a price of $1.85 per Unit, including the full exercise of the over-allotment option. Each Unit is comprised of one common share of the Company and one-half of one common share purchase warrant of the Company (each full common share purchase warrant, a "Warrant"). Each Warrant will be exercisable to acquire one common share of the Company (a "Warrant Share") for a period of three years following the closing date of the Offering at an exercise price of $2.50 per Warrant Share, subject to adjustment in certain events. The Company expects to use the net proceeds from the offering working capital and other general corporate purposes and to pay down its term loan balance as described below.
- On November 27, 2020, the Company amended its Facilities pursuant to an amended and restated credit agreement ("Amended and Restated Credit Agreement") with BMO and the syndicate of lenders to: (i) reduce the Term Loan amount from $115 million to $60 million based on a repayment of $55 million to be made on December 1, 2020 of the outstanding Term Loan balance of $115 million; (ii) have repayments on the balance of the Term Loan commence on February 28, 2021 in an amount equal to $1.5 million per quarter; (iii) reduce the Revolver commitment to $2 million from up to $25 million; (iv) adjust the minimum quarterly EBITDA covenants to be maintained by the Company commencing on February 28, 2021 and continuing through to maturity, thereby removing this covenant for the fiscal period ended November 30, 2020 and eliminating the reversion of the financial covenants to that of the original structure on November 30, 2021; (v) modify the applicable margin pricing and standby fee terms to reflect current market conditions; and (vi) reduce the minimum unrestricted cash balance requirement to $20 million, which is already inclusive of the $8 million restricted investment currently outstanding. The interest rate margin will be fixed from November 27, 2020 through to maturity on May 31, 2021.
- As at November 29, 2020, excluding the $8.0 million of restricted investment (GIC), the Company had $135 million in cash and short-term investments. After completing the $55 million term loan repayment on December 1, 2020, on a pro forma basis the Company would have $80 million in cash and short-term investments and $60 million in long-term debt.
Capital Structure
|
in $000s |
31-Aug-20 |
31-Aug-19 |
|
Current and long-term debt |
115,266 |
49,576 |
|
Shareholders' equity |
299,527 |
327,006 |
|
Total debt and shareholders' equity |
414,793 |
376,582 |
|
in 000s |
|
|
|
Outstanding common shares |
194,511 |
156,196 |
|
Options |
9,029 |
8,833 |
|
Restricted share units |
893 |
842 |
|
Performance share units |
127 |
- |
|
Total fully-diluted shares |
204,560 |
165,872 |
Outstanding basic and fully diluted share count as at November 24, 2020 is as follows:
|
in 000s |
24-Nov-20 |
|
Outstanding common shares |
232,088 |
|
Options |
8,144 |
|
Restricted share units |
871 |
|
Performance share units |
125 |
|
Total fully-diluted shares |
241,228 |
Fourth Quarter and Full Year Fiscal 2020 Conference Call
The Company will host a conference call to discuss its results with details as follows:
Date: November 30, 2020
Time: 8:00am Eastern Time
To register for the conference call, please use this link: http://www.directeventreg.com/registration/event/4687978
To ensure you are connected for the full call, we suggest registering a day in advance or at minimum 10 minutes before the start of the call. After registering, a confirmation will be sent through email, including dial in details and unique conference call codes for entry. Registration is open through the live call.
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Non-IFRS Financial Measures
This news release refers to certain financial performance measures (including, target production capacity, and adjusted EBITDA) that are not defined by and do not have a standardized meaning under International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board. These non-IFRS financial performance measures are defined below. Non-IFRS financial measures are used by management to assess the financial and operational performance of the Company. The Company believes that these non-IFRS financial measures, in addition to conventional measures prepared in accordance with IFRS, enable investors to evaluate the Company's operating results, underlying performance and prospects in a similar manner to the Company's management. As there are no standardized methods of calculating these non-IFRS measures, the Company's approaches may differ from those used by others, and accordingly, the use of these measures may not be directly comparable. Accordingly, these non-IFRS 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. Please refer to the Company's Q3 2020 MD&A for definitions and, in the case of adjusted EBITDA, a reconciliation to IFRS amounts.
About Organigram Holdings Inc.
Organigram Holdings Inc. is a NASDAQ Global Select Market and a Toronto Stock Exchange listed company whose wholly owned subsidiary, Organigram Inc., is a licensed producer of cannabis and cannabis-derived products in Canada.
Organigram is focused on producing high-quality, indoor-grown cannabis for patients and adult recreational consumers in Canada, as well as developing international business partnerships to extend the Company's global footprint. Organigram has also developed a portfolio of adult use recreational cannabis brands including The Edison Cannabis Company, SHRED and Trailblazer. Organigram's primary facility is located in Moncton, New Brunswick and the Company is regulated by Health Canada under the Cannabis Act (Canada) and the Cannabis Regulations (Canada).
This news release contains forward-looking information. Forward-looking information, in general, can be identified by the use of forward-looking terminology such as "outlook", "objective", "may", "will", "could", "would", "might", "expect", "intend", "estimate", "anticipate", "believe", "plan", "continue", "budget", "schedule" or "forecast" or similar expressions suggesting future outcomes or events. They include, but are not limited to, statements with respect to expectations, projections or other characterizations of future events or circumstances, and the Company's objectives, goals, strategies, beliefs, intentions, plans, estimates, forecasts, projections and outlook, including statements relating to the Company's future performance, the Company's positioning to capture additional market share and sales, expected improvement to gross margins before fair value changes to biological assets and inventories, the Company's plans and objectives including around its credit facility, availability and sources of any future financing; expectations regarding the impact of COVID-19, expectations around market and consumer demand and other patterns related to existing, new and planned product forms; plans for further construction or expenditures at the Moncton Campus, estimates of costs for completion of those Phases and uses of spaces therein; timing for launch of new product forms, ability of those new product forms to capture sales and market share, estimates around incremental sales and more generally estimates or predictions of actions of customers, suppliers, partners, distributors, competitors or regulatory authorities; statements regarding the future market of the Canadian cannabis market and, statements regarding the Company's future economic performance. These statements are not historical facts but instead represent management beliefs regarding future events, many of which, by their nature are inherently uncertain and beyond management control. Forward-looking information has been based on the Company's current expectations about future events.
Forward-looking information involves known and unknown risks, uncertainties and other factors that may cause actual events to differ materially from current expectations. Important factors - including the heightened uncertainty as a result of COVID-19 including any continued impact on production or operations, impact on demand for products, effect on third party suppliers, service providers or lenders; general economic factors; receipt of regulatory approvals or consents and any conditions imposed upon same and the timing thereof, ability to meet regulatory criteria which may be subject to change, change in regulation including restrictions on sale of new product forms, timing to receive any required testing results and certifications, results of final testing of new products, timing of new retail store openings being inconsistent with preliminary expectations, changes in governmental plans including related to methods of distribution and timing and launch of retail stores, timing and nature of sales and product returns, customer buying patterns and consumer preferences not being as predicted given this is a new and emerging market, material weaknesses identified in the Company's internal controls over financial reporting, the completion of regulatory processes and registrations including for new products and forms, market demand and acceptance of new products and forms, unforeseen construction or delivery delays including of equipment, increases to expected costs, competitive and industry conditions, customer buying patterns and crop yields - that could cause actual results to differ materially from the Company's expectations are disclosed in the Company's documents filed from time to time under the Company's issuer profile on the Canadian Securities Administrators' System for Electronic Document Analysis and Retrieval ("SEDAR") at www.sedar.com and reports and other information filed with or furnished to the United States Securities and Exchange Commission ("SEC") and available on the SEC's Electronic Document Gathering and Retrieval System ("EDGAR") at www.sec.gov including the Company's most recent MD&A and AIF available from time to time. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this news release. The Company disclaims any intention or obligation, except to the extent required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
For Investor Relations enquiries, please contact:
Amy Schwalm
Vice-President, Investor Relations
amy.schwalm@organigram.ca
416-704-9057
For Media enquiries, please contact:
Marlo Taylor
Gage Communications
mtaylor@gagecommunications.ca
INTRODUCTION
This Management’s Discussion and Analysis dated November 29, 2020 (this “MD&A”), should be read in conjunction with the audited annual consolidated financial statements (the “Financial Statements”) of Organigram Holdings Inc. (the “Company” or “Organigram”) for the year ended August 31, 2020 (“Fiscal 2020” or “Q4 Fiscal 2020” when referring to the three months ended August 31, 2020), including the accompanying notes thereto.
Financial figures relating to prior periods in the eight‐quarter comparative table captioned “Summary of Quarterly Results” have been restated due to the reclassification of discontinued operations (see note 26 of the Financial Statements) and the reclassification of indirect production to cost of sales (see note 19 of the Financial Statements).
The financial information in this MD&A contains certain financial and operational performance measures that are not defined by and do not have any standardized meaning under IFRS but are used by management to assess the financial and operational performance of the Company. These include, but are not limited to, the following:
• Yield per plant (in grams);
• Plants per room;
• Target production capacity;
• Adjusted Gross Margin; and
• Adjusted EBITDA.
The Company believes that these non‐IFRS financial measures and operational performance measures, in addition to conventional measures prepared in accordance with IFRS, enable investors to evaluate the Company’s operating results, underlying performance and prospects in a similar manner to the Company’s management. The non‐IFRS financial performance measures are defined in the sections in which they appear. Adjusted Gross Margin and Adjusted EBITDA are reconciled to IFRS in the “Financial Review and Discussion of Operations” section of this MD&A.
As there are no standardized methods of calculating these non‐IFRS measures, the Company’s approaches may differ from those used by others, and accordingly, the use of these measures may not be directly comparable. Accordingly, these non‐IFRS 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.
The Company has determined to discontinue reporting cost‐of‐cultivation as a non‐IFRS financial measure, on the basis that due to the absence of standardized methods for calculating non‐IFRS financial measures, and widely varying inputs and methodologies used in the industry for metrics of this nature, the information is difficult to compare and potentially confusing.
The Company’s wholly‐owned subsidiary, Organigram Inc., is a licensed producer of cannabis and cannabis derived products (a “Licensed Producer” or “LP”) under the Cannabis Act (Canada) and the Cannabis Regulations (Canada) (together, the “Cannabis Act”) and regulated by Health Canada.
The Company’s head and registered office is located at 35 English Drive, Moncton, New Brunswick, E1E 3X3. The Company’s common shares (“Common Shares”) are listed under the ticker symbol “OGI” on both the Nasdaq Global Select Market (“NASDAQ”) and on the Toronto Stock Exchange (“TSX”). Any inquiries regarding the Company may be directed to its Vice President, Investor Relations, Amy Schwalm, at (416) 704‐ 9057 or by email to investorrelations@organigram.ca.
Additional information relating to the Company, including the Company’s most recent Annual Information Form (the “AIF”) is available under the Company’s issuer profile on the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. The Company’s reports and other information filed with or furnished to the United States Securities and Exchange Commission (“SEC”) are available on the SEC’s Electronic Document Gathering and Retrieval System (“EDGAR”) at www.sec.gov.
CAUTIONARY STATEMENT REGARDING FORWARD‐LOOKING INFORMATION
Certain information herein contains or incorporates comments that constitute forward‐looking information within the meaning of applicable securities legislation (“forward‐looking information”). Forward‐looking information, in general, can be identified by the use of forward‐looking terminology such as “outlook”, “objective”, “may”, “will”, “could”, “would”, “might”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “plan”, “continue”, “budget”, “schedule” or “forecast” or similar expressions suggesting future outcomes or events. They include, but are not limited to, statements with respect to expectations, forecasts or other characterizations of future events or circumstances, and the Company’s objectives, goals, strategies, beliefs, intentions, plans, estimates, projections and outlook, including statements relating to the Company’s plans and objectives, or estimates or predictions of actions of customers, suppliers, partners, distributors, competitors or regulatory authorities; and, statements regarding the Company’s future economic performance. These statements are not historical facts but instead represent management beliefs regarding future events, many of which, by their nature are inherently uncertain and beyond management control. Forward‐looking information has been based on the Company’s current expectations about future events.
• Moncton Campus (as defined herein) licensing and target production capacity and timing thereof;
• Expectations regarding production capacity, facility size, THC (as defined herein) content, costs and yields;
• The impact of the current global health crisis caused by COVID‐19 (as defined below);
• Expectations around demand for cannabis and related products, future opportunities and sales including the relative mix of medical versus adult‐use recreational products, the relative mix of products within the adult‐use recreational category including wholesale, the Company’s financial position, future liquidity and other financial results;
• Legislation of additional cannabis types and forms for adult‐use in Canada including regulations relating thereto and the implementation thereof and our future product forms;
• Expectations around branded products and derivative‐based products with respect to timing, launch, product attributes, composition and consumer demand;
• Strategic investments and capital expenditures, and expected related benefits;
• Expectations regarding the resolution of litigation and other legal proceedings;
• The general continuance of current, or where applicable, assumed industry conditions;
• Changes in laws, regulations and guidelines, including the recreational and medical cannabis market;
• Price of cannabis and derivative cannabis products;
• Impact of the Company’s cash flow and financial performance on third parties, including its supply partners;
• Fluctuations in the price of Common Shares and the market for the Common Shares;
• Treatment of the Company’s business under governmental regulatory regimes and tax laws, including the Excise Act
(as defined herein) and the renewal of the Company’s license thereunder and the Company’s ability to obtain export licenses from time to time;
• The Company’s growth strategy, targets for future growth and forecasts of the results of such growth;
• Expectations concerning access to capital and liquidity and the Company’s ability to access the public markets to fund operational activities and growth;
• The Company’s ability to remain listed on the TSX and NASDAQ and the impact of any actions it may be required to take to remain listed;
• The ability of the Company to generate cash flow from operations and from financing activities; and
• The competitive conditions of the industry, including the Company’s ability to maintain or grow its market share.
Forward-looking information is provided for the purposes of assisting the reader in understanding the Company and its business, operations, risks, financial performance, financial position and cash flows as at and for the periods ended on certain dates and to present information about management’s current expectations and plans relating to the future and the reader is cautioned that such statements may not be appropriate for other purposes. Forward-looking information does not guarantee future performance and involves known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in the forward-looking information. In addition, this MD&A may contain forward-looking information attributed to third party industry sources. Undue reliance should not be placed on forward-looking information, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the expectations, predictions, forecasts, projections and, conclusions will not occur or prove accurate, that assumptions may not be correct, and that objectives, strategic goals and priorities will not be achieved.
Factors that could cause actual results to differ materially from those set forth in forward‐looking information include, but are not limited to: financial risks; dependence on senior management, the board of directors of the Company (the “Board of Directors”), consultants and advisors; availability and sufficiency of insurance including continued availability and sufficiency of director and officer and other forms of insurance; the Company and its subsidiaries being able to, where applicable, cultivate cannabis pursuant to applicable law and on the currently anticipated timelines; industry competition; general economic conditions and global events including COVID‐19 retail store closures or reduced sales at retail stores or otherwise due to COVID‐19; heightened uncertainty as a result of COVID‐19 including economic and industry uncertainty and governmental action in respect thereto including with respect to impacts on production, operations, product development, new product launches, disclosure controls and procedures or internal control over financial reporting, including as they may be impacted by delays in remediation due to work from home policies and other COVID 19 impacts, demand for products and services, third‐party suppliers or service providers, and any existing or new international business partnerships; production facilities running at less than full capacity due to reduced workforce for reasons related to COVID‐19 (as described herein) and market demand; potential supply chain and distribution disruptions; product development, facility and technological risks; changes to government laws, regulations or policy, including environmental or tax, or the enforcement thereof; agricultural risks; ability to maintain any required licenses or certifications; supply risks; product risks; construction delays or postponements; packaging and shipping logistics; expected number of medical and adult‐use recreational cannabis users in Canada and internationally; potential time frame for the implementation of legislation to legalize cannabis internationally; the Company’s, its subsidiaries and its investees’ ability to, where applicable, obtain and/or maintain their status as Licensed Producers (as defined herein) or other applicable licenses; risk factors affecting its investees; availability of any required financing on commercially attractive terms or at all; non‐compliance with debt covenants; the potential size of the regulated adult‐use recreational cannabis market in Canada; demand for and changes in the Company’s cannabis and related products, including the Company’s Rec 2.0 products (as defined herein), and the sufficiency of the retail networks to supply such demand; ability to enter and participate in international market opportunities; general economic, financial market, regulatory, industry and political conditions affecting the Company; the ability of the Company to compete in the cannabis industry and changes in the competitive landscape; a material decline in cannabis prices; the Company’s ability to manage anticipated and unanticipated costs; the Company’s ability to implement and maintain effective internal controls over financial reporting and disclosure controls and procedures; and, other risks and factors described from time to time in the documents filed by the Company with securities regulators. Material factors and assumptions used in establishing forward‐looking information include that construction and production activities will proceed as planned and demand for cannabis and related products will change in the manner expected by management, in each case after taking into account any impacts related to COVID‐19 that are currently known or predicted by management based on the limited information available and the fluidity and uncertainty of the crisis. All forward‐looking information is provided as of the date of this MD&A.
The Company does not undertake to update any such forward‐looking information whether as a result of new information, future events or otherwise, except as required by law.
ADDITIONAL INFORMATION ABOUT THE ASSUMPTIONS, RISKS AND UNCERTAINTIES OF THE COMPANY’S BUSINESS AND MATERIAL FACTORS OR ASSUMPTIONS ON WHICH INFORMATION CONTAINED IN FORWARD‐LOOKING INFORMATION IS BASED IS PROVIDED IN THE COMPANY’S DISCLOSURE MATERIALS, INCLUDING IN THIS MD&A UNDER “RISK FACTORS” AND THE COMPANY’S CURRENT AIF UNDER “RISK FACTORS”, FILED WITH THE SECURITIES REGULATORY AUTHORITIES IN CANADA AND AVAILABLE UNDER THE COMPANY’S ISSUER PROFILE ON SEDAR AT WWW.SEDAR.COM AND FILED WITH OR FURNISHED TO THE SEC AND AVAILABLE ON EDGAR AT WWW.SEC.GOV. ALL FORWARD‐LOOKING INFORMATION IN THIS MD&A IS QUALIFIED BY THESE CAUTIONARY STATEMENTS.
BUSINESS OVERVIEW
NATURE AND HISTORY OF THE COMPANY’S BUSINESS
The Company’s wholly‐owned subsidiary Organigram Inc. is a Licensed Producer of cannabis under the Cannabis Act.
The Company conducts its operations at its facility located in Moncton, New Brunswick. The Company has expanded its main facility over time to create additional production capabilities by strategically acquiring land and buildings adjacent to the main facility (together, the “Moncton Campus”). The Moncton Campus has been designed for differentiated cultivation and production with three‐tiered growing. While the Company has essentially completed its expansion at the Moncton Campus with respect to cannabis production capacity, it is still completing its refurbishment with respect to derivative products allowed for legal sale by Licensed Producers such as the Company under amendments to the Cannabis Act (“Rec 2.0”).
Patients order medical cannabis and cannabis derivative based products from the Company primarily through the Company’s online store or by phone. Medical cannabis dried flower and cannabis derivative based products are and will continue to be delivered by secured courier or other methods permitted by the Cannabis Act. The Company’s prices vary based on grow time, strain yield and market conditions.
The Company is also authorized for wholesale shipping of cannabis plant cuttings, dried flower, blends, pre‐rolls and cannabis derivative based products to approved retailers and wholesalers for adult‐use recreational cannabis under the individual provincial and territorial regulations as per the Cannabis Act.
BUSINESS ENVIRONMENT
The Company’s business and activities are heavily regulated. framework of the Company’s business as of the date of the AIF. have the potential to impact the Company’s performance.
The Company’s AIF contains a more detailed description of the regulatory The following provides a description of recent regulatory developments that
Current Regulatory Landscape
Medical cannabis has been legal in Canada since 2001 under various regulatory regimes. On June 20, 2018, the Government of Canada passed the Cannabis Act to allow regulated and restricted access to cannabis for adult‐recreational users. The Cannabis Act came into force on October 17, 2018.
The Cannabis Act creates a strict legal framework for controlling the production, distribution, sale and possession of cannabis in Canada. The Cannabis Act allows adults to legally possess and use cannabis and therefore the possession of small amounts of cannabis is no longer a criminal offence. It also made it a specific criminal offence to sell cannabis to a minor and created significant penalties for those who engage young Canadians in cannabis‐related offences.
On November 9, 2018, Health Canada issued a license to the Company under the Cannabis Act for standard cultivation, standard processing and sale for medical purposes (the “License”). On October 21, 2019, Health Canada amended the License to expand the classes of cannabis products that may be sold to adult recreational use sales channels or sold for medical purposes, to include cannabis topicals, cannabis extracts and edible cannabis. The License has also been amended to add additional growing, processing, drying and storage rooms. The Company received Health Canada’s approval for the renewal of the License effective March 20, 2020. The License is valid until March 20, 2023 and is subject to customary terms and conditions.
The Company also holds a cannabis license under the Excise Act, 2001 (the “Excise Act”) which was renewed on October 17, 2020 and expires on October 16, 2022. All Licensed Producers who are authorized to cultivate, produce and package cannabis products are also required to hold a cannabis license under the Excise Act from the Canada Revenue Agency. The Company intends to renew its licenses prior to expiry.
The Company received its research and development license (the “Research License”) from Health Canada on October 23, 2019 to conduct further in‐house research. The activities authorized under the Research License have and will continue to support the Company’s plans to commercialize cannabis products for Rec 2.0.
Edibles and Derivative Products Regulation
The Cannabis Act was amended on October 17, 2019 to include provisions that came into force on that day relating to the legal sale by Licensed Producers, such as the Company, of a range of new cannabis product forms such as: “edible cannabis”, “cannabis extracts” and “cannabis topicals”.
Certain provinces have announced restrictions on the launch and sale of edible and vaporizable products in their markets, including Quebec and Newfoundland and Labrador. Alberta lifted its previously announced ban on vaporizable cannabis products on February 14, 2020. As the market and regulations are rapidly developing the impact of these announcements is not readily determinable at this time.
A limited selection of Rec 2.0 products began to appear gradually in physical or online stores in the latter half of December 2019. Licensed Producers are required to provide 60‐days prior notice to Health Canada of their intent to sell any new products and such notices could not be given until the new product forms were legalized on October 17, 2019. The Company provided notice for its vaporizer pen portfolio and cannabis‐infused chocolates in 2019 and continues to provide notices to Health Canada for new products from time to time.
See “Canadian Adult‐Use Recreational Market 2.0” in this MD&A.
KEY QUARTERLY FINANCIAL AND OPERATING RESULTS
| Q4-2020 | Q4-2019 | CHANGE | % CHANGE | |||||||||
| Financial Results | ||||||||||||
| Gross revenue | $ | 25,389 | $ | 19,235 | $ | 6,154 | 32% | |||||
| Net revenue | $ | 20,400 | $ | 16,290 | $ | 4,110 | 25% | |||||
| Cost of sales | $ | 29,007 | $ | 15,543 | $ | 13,464 | 87% | |||||
| Gross margin before fair value adjustments | $ | (8,607 | ) | $ | 747 | $ | (9,354 | ) | (1,252)% | |||
| Gross margin % before fair value adj. (1) | -42% | 5% | -47% | (940)% | ||||||||
| Operating expenses | $ | 13,573 | $ | 16,645 | $ | (3,072 | ) | (18)% | ||||
| Adjusted EBITDA (2) | $ | (2,663 | ) | $ | (7,163 | ) | $ | 4,500 | (63)% | |||
| Net loss | $ | (38,590 | ) | $ | (22,456 | ) | $ | (16,134 | ) | 72% | ||
| Net cash used in operating activities (3) | $ | (10,128 | ) | $ | (15,722 | ) | $ | 5,594 | (36)% | |||
| Adjusted Gross Margin (4) | $ | 6,156 | $ | 1,491 | $ | 4,665 | 313% | |||||
| Adjusted Gross Margin % (4) | 30% | 9% | 21% | 233% | ||||||||
| Financial Position | ||||||||||||
| Working capital | $ | 141,123 | $ | 152,417 | $ | (11,294 | ) | (7)% | ||||
| Inventories and biological assets | $ | 71,759 | $ | 113,796 | $ | (42,037 | ) | (37)% | ||||
| Total assets | $ | 435,127 | $ | 428,525 | $ | 6,602 | 2% | |||||
| Operating Results | ||||||||||||
| Kilograms harvested | 11,137 | 7,434 | 3,703 | 50% | ||||||||
| Kilograms sold - dried flower | 4,859 | 2,425 | 2,434 | 100% |
Note 1: Equals gross margin before fair value adjustments (as reflected in the Financial Statements) and gross margin before fair value adjustments divided by net revenue, respectively.
Note 2: Adjusted EBITDA is a non‐IFRS measure that the Company defines as net income (earnings) from continuing operations before: interest expense, net of investment income; income tax; depreciation, amortization, impairment, and gain (loss) on disposal of PP&E (per the statement of cash flows); share‐based compensation (per the statement of cash flows); share of loss and impairment loss from investments in associates; unrealized loss (gain) on changes in fair value of contingent consideration; expenditures incurred in connection with the NASDAQ cross‐listing; the fair value adjustment to biological assets and inventory; write‐offs and impairment of inventories and biological assets; write‐downs of inventory to net realizable value; and COVID‐19 related charges, net of any government subsidies. See the cautionary statement regarding non‐IFRS financial measures in the “Introduction” section at the beginning of this MD&A and the reconciliation to IFRS measures in the Financial Results and Review of Operations section of this MD&A.
Note 3: Q4 Fiscal 2020 net cash used in operating activities has been calculated based on a correction of a presentation error of Q1 to Q3 Fiscal 2020 net cash used in operating activities. Fiscal 2020 year‐to‐date net cash used in operating activities is correctly stated as per the Financial Statements.
Note 4: Adjusted Gross Margin is a non‐IFRS measure that the Company defines as net revenue less: (i) cost of sales, before the effects fair value changes to biological assets and changes in inventory sold; excluding (ii) write‐offs and impairment of inventories and biological assets; (iii) write‐downs to net realizable value; (iv) COVID‐19 related charges; and (v) unabsorbed overhead relating to underutilization of the production facility, most of which is related to non‐cash depreciation expense. See the cautionary statement regarding non‐IFRS financial measures in the “Introduction” section at the beginning of this MD&A and the reconciliation to IFRS measures in the Financial Results and Review of Operations section of this MD&A.
REVENUE
For the three months ended August 31, 2020, the Company reported $20,400 in net revenue. Of this amount $15,063 (73%) was sold to the adult‐use recreational market, $2,275 (11%) to the medical market, $2,593 (13%) to the international market, and $405 (2%) to the wholesale market with the balance to other revenues. Q4 Fiscal 2020 net revenue increased 25% from Q4 Fiscal 2019 net revenue of $16,290, primarily due to higher flower sales volumes, which was offset by a lower average net selling price (“ASP”) compared to Q4 Fiscal 2019, as the dried flower value segment of the recreational market, particularly in large format, grew in Q4 2020 and as the Company now has a number of value products in the market. Additionally, the sale of Rec 2.0 products (vape products and cannabis‐infused chocolates), which had not yet been legalized in Q4 Fiscal 2019, as well as significantly higher international revenues, contributed to the increase over Q4 Fiscal 2019. Q4 Fiscal 2019 net revenue was also lower than Q4 Fiscal 2020 due to a higher sales provision for returns and price adjustments. These contributors to higher net revenue in Q4 Fiscal 2020 were partly offset by a decline in recreational oil sales on lower demand for THC oil in the second year of adult‐use legalization.
Q4 Fiscal 2020 gross revenue increased 32% to $25,389 from $19,235 in the prior year period and was similarly impacted by the factors described above. The percentage increase in gross revenue highlights the increase in shipments and was substantially higher than the net revenue increase as excise taxes represented a greater proportion of gross revenue in Q4 Fiscal 2020 as ASP declined.
Net revenue for Q4 Fiscal 2020 of $20,400 was net of a provision for product returns and pricing adjustments of $1,986 (each net of excise taxes) related to slow-moving products compared to net revenue for Q4 Fiscal 2019 of $16,290, which was net of a provision of $3,698. The Company is cognizant that in this new and emerging market, the size of the customer base, its demands, and preferences cannot yet be ascertained with any level of certainty or reliability, and future demand for existing and new products remains to be determined as the market further develops and matures.
Dried flower comprised 85% of net revenue in the quarter. The ASP of dried flower decreased to $3.58 per gram on a quarter‐over‐quarter basis compared to $5.18 per gram for Q4 Fiscal 2019 as both the Company and the Canadian cannabis industry experienced general price compression in the adult‐recreational and medical markets as these markets matured and the customer and product mix evolved to focus more on value offerings. Further, the lower ASP was in part attributable to international bulk dried flower revenues, which was sold at a lower ASP as compared to Canadian domestic revenues. Selling prices are prone to fluctuation and there may be further price compression if the market remains oversupplied. The Company is committed to refining its product mix as customer preferences evolve.
Sales volumes of dried flower in grams increased 100% to 4,859 kg in Q4 Fiscal 2020 compared to the prior year comparative quarter, primarily as a result of a shift towards large format products as well as the contribution of wholesale and international dried flower sales.
COST OF SALES
Cost of sales for the three months ended August 31, 2020 increased to $29,007 compared to $15,543 in the prior year comparative period, primarily as a result of increased sales volumes. Included in Fiscal Q4 2020 cost of sales the Company wrote‐off excess and unsaleable inventories of $11,099, of which $8,325 related to trim and concentrated extract and $2,774 related to inventory write‐downs on account of provisions for unsaleable inventories and to reflect an estimated decline in selling prices. Additionally, $3,470 was incurred with respect to unabsorbed fixed overhead costs as a result of lower production volumes related to COVID‐19 and market demand. None of these write‐offs and charges were incurred in the prior year comparative period.
GROSS MARGIN BEFORE FAIR VALUE ADJUSTMENTS AND ADJUSTED GROSS MARGIN
The Company realized gross margin before fair value adjustments for the three months ended August 31, 2020 of ($8,607), or (42%) as a percentage of net revenue, compared to $747, or 5%, in the prior year comparative period. The decrease in gross margin before fair value adjustments as a percentage of net revenue is largely due to: (i) inventory provisions and write‐off of excess and obsolete inventories; (ii) inventory write‐downs to net realizable value; (iii) unabsorbed overhead as a result of lower production volumes; (iv) higher cost of sales on higher post‐harvest costs; and (v) a lower ASP from increased competition and the ongoing evolution of the customer and product mix as well as provisions for product returns and pricing adjustments.
Adjusted gross margin1 for the three months ended August 31, 2020 was $6,156, or 30%, compared to $1,491, or 9%, in the prior year quarter largely due to a higher provision for sales returns and pricing adjustments .in Q4 Fiscal 2019.
OPERATING EXPENSES
Selling, general and administrative expenses and share-based compensation were collectively $11,542 for Q4 Fiscal 2020, a decrease from $16,032 in Q4 Fiscal 2019, due to the Company’s efforts to right-size operations particularly as a result of COVID-19, higher than normal licensing and professional fees in the prior year of $1,976, and a reduction in share-based compensation expense of $1,437 (for SG&A employees as defined and discussed below) in part as a result of the Company’s shift in equity compensation schemes.
Included in operating expenses are impairment losses on property, plant and equipment and intangible assets of $2,031, which is comprised of impairment charges of $1,303 against the 1812 Hemp supply agreement intangible asset with the balance mostly related to miscellaneous impairment of property, plant and equipment and an onerous provision related to the future contractual construction costs relating to Phase 4C (the final stage of the Company's Phase 4 expansion, discussed below). The Company reviews the carrying value of its property, plant and equipment at each reporting period for indicators of impairment.
__________________________________________
1 Adjusted gross margin is a non‐IFRS financial measure. See the cautionary statement regarding non‐IFRS financial measures in the “Introduction” section of this MD&A.
ADJUSTED EBITDA
Negative adjusted EBITDA2 was $2,663 in Q4 Fiscal 2020 compared to negative adjusted EBITDA of $7,163 in Q4 Fiscal 2019. The improvement in adjusted EBITDA is primarily attributed to higher adjusted gross margin in Q4 Fiscal 2020 as discussed above. Please refer to the Financial Review and Discussion of Operations section of this MD&A for a reconciliation of net (loss) income to Adjusted EBITDA.
NET LOSS
The net loss was $38,590 in Q4 Fiscal 2020 compared to a net loss of $22,456 in Q4 Fiscal 2019. The increase in net loss was primarily attributed to higher cost of sales resulting from inventory write‐downs and provisions, which was partially offset by higher revenues as described above.
FINANCIAL POSITION
Working capital as at August 31, 2020 declined to $141,123 from $152,417 as at August 31, 2019 as the Company adjusted its fair value inputs and wrote‐down its biological assets and inventories, respectively. This was offset by a net increase in the Company’s cash and short‐term investments of $26,793 resulting from the two at‐the‐market equity raises and debt draws under the Company’s credit facility during Fiscal 2020.
KEY DEVELOPMENTS DURING THE QUARTER AND SUBSEQUENT TO AUGUST 31, 2020
COVID‐19 CORPORATE ACTION PLAN
In March 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus (“COVID‐19”) a global pandemic. Government measures to limit the spread of COVID‐19, including the closure of non‐essential businesses for periods of time, disrupted the Company’s operations during the year ended August 31, 2020 which disruption is ongoing.
The production and sale of cannabis have been recognized as essential services across Canada and non‐essential businesses have had periods of reopening, however COVID‐19 pandemic related challenges persist. Due to the ongoing developments and uncertainty, it is not possible to predict the continuing impact that COVID‐19 will have on the Company, its financial position, its operating results and/or its cash flows. In addition, it is possible that estimates in the Company’s financial statements will change in the near‐term as a result of COVID‐19 and the effect of any such changes could be material, which could result in, among other things, further impairment of long‐lived assets including intangible assets. The Company continues to closely monitor the impact of COVID‐19 on all aspects of its business.
On April 6, 2020, Organigram announced the temporary layoff of approximately 45% of its workforce primarily in an effort to help contain COVID‐19. The Company offered voluntary layoffs to certain staff and those that accepted made up the majority of the layoffs. In some cases, due to the impacts of COVID‐19, some administrative, support and other functions were deemed non‐essential to the short‐term needs of the business and were temporarily laid off. The temporary layoffs were initiated on March 24, 2020. Lump‐sum payments (equating to approximately two weeks of work) were paid to the affected employees to help bridge the gap to available government programs. In addition, the Company absorbed the employee paid portion of health, dental and short‐term disability premiums for all employees during this difficult time. The impact of these temporary layoffs resulted in a charge of approximately $0.7 million during the month of April 2020, which is primarily associated with the lump sum payments provided to these employees. The Company also put in place a number of health and safety measures during Q3 and Q4 2020 including, but not limited to, the following:
• An Emergency Response Team was established to monitor pandemic updates, review safety protocols, assess public health risk and develop action plans;
• Moved to a work from home environment for any functions not required onsite;
• Implemented travel restrictions for work related travel, restricted visitor access to the Company’s facilities and imposed self-isolation for any employees who may have had symptoms of sickness and/or returned from international travel as of March 13th;
• Increased focus on sanitation and social distancing, with additional hand sanitizing stations throughout the Moncton Campus, cleaning and sanitizing of high touch surfaces, and additional cleaning in common areas;
• Imposed restrictions on large meetings and gatherings, opting for web‐based meetings and teleconferencing;
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2 Adjusted EBITDA is a non‐IFRS financial measure. See the cautionary statement regarding non‐IFRS financial measures in the “Introduction” section of this MD&A.
• Mandatory reporting of any hourly employee absence to an attendance phone line including specific reporting of any COVID‐19 symptoms; and
• Reminders of measures to reduce risk of infection and prevent spread including washing hands and avoiding contact with faces.
Effective May 13, 2020, the Company began to implement a staggered return‐to‐work plan.
On July 3, 2020, in response to the continued impact of COVID-19 on the Company’s business and the continuing evolution of the Canadian cannabis industry the Company announced that in order to better align its production capacity to prevailing market conditions it had reduced its workforce by 25% by permanently laying off 220 employees. As of the date of this MD&A, the Company has 431 active employees operating out of its Moncton Campus facility and another 86 outside the facility for 517 total active employees.
LEADERSHIP CHANGES
On July 20, 2020, the Company announced the departure of Ray Gracewood, Senior Vice President of Marketing and Communications who left the Company to pursue other interests.
On October 23, 2020, the Company announced the departure of Julie Chamberlain, Vice President, Marketing who left the Company effective November 6, 2020 for a General Manager role in a non‐competing industry. Further, Cameron Bishop, Vice President, Public Affairs and Stakeholder Relations has also left Organigram to pursue other interests as a consultant.
OTHER KEY DEVELOPMENTS
On June 9, 2020, the Company announced its largest international supply deal to date in the form of a multi‐year agreement with one of Israel’s largest and most established medical cannabis producers, Canndoc Ltd., a subsidiary of InterCure Ltd. for supply of up to 6,000 kg of dried flower. Canndoc has been a pioneer in pharmaceutical‐grade cannabis for more than 12 years and holds international cultivation and distribution agreements in the European Union and Canada.
On August 14, 2020, the Company announced its first shipment of bulk dried flower to Canndoc Ltd. as part of the Company’s multi‐year deal with Canndoc Ltd.
On October 23, 2020, the Company announced the funding of an additional $2.5 million investment in Hyasynth Biologicals Inc. (“Hyasynth”), a private biotechnology company and pioneer in the field of cannabinoid science and biosynthesis.
On November 12, 2020, the Company closed an underwritten public offering (the “Offering”) of 37,375,000 units (the “Units”) at a price of $1.85 per Unit, including the full exercise of the over‐allotment option, underwritten by a syndicate of underwriters led by Canaccord Genuity Corp.. Each Unit is comprised of one common share of the Company and one‐half of one common share purchase warrant of the Company (each full common share purchase warrant, a “Warrant”). Each Warrant will be exercisable to acquire one common share of the Company (a “Warrant Share”) for a period of three years following the closing date of the Offering at an exercise price of $2.50 per Warrant Share, subject to adjustment for certain events.
OPERATIONS AND PRODUCTION
CULTIVATION
While the vast majority of incremental production capacity between 2017 to 2019 by the Company’s competitors was generated from greenhouse (not indoor) production, Organigram focused on a core competency of controlling conditions in precisely built indoor environments with a commitment to continuous improvement and investment in information technology.
The Company’s cultivation plans focus on bringing new cultivars to the market and increasing the tetrahydrocannabinol (“THC”) and terpene profile of its dried flower to meet emerging consumer demand.
The Company is able to control all critical facets of the lighting and environmental elements in its facilities to drive maximum quality and yield in the plants it produces. The Company has also developed its own in‐house proprietary information technology system called OrganiGrow, a database which tracks all grow cycles by harvest period, strain, room, environmental conditions and other factors, which in turn allows the Company to understand and refine the optimal methods to grow cannabis plants.
As a function of its reduced workforce in Q4 Fiscal 2020 due to its layoff of 25% of its workforce, the Company experienced reductions in production and cultivation, as well as processing and packaging capacity. In early Q4 Fiscal 2020, the Company resumed pre‐roll production after it was paused in early Q3 Fiscal 2020 due to a significantly reduced workforce as a result of COVID‐19.
The Company harvested 11,138 kg of cannabis during Q4 Fiscal 2020 compared to 7,434 kg in Q4 Fiscal 2019. The increase from the comparative period, notwithstanding the reduced workforce, was due to greater capacity from the build out of the Moncton Campus.
PHASE 4 EXPANSION
As previously disclosed in Q2 Fiscal 2020, the Company has completed construction of Phases 4A and 4B of the Moncton Campus and received licensing approval from Health Canada for total licensed cultivation capacity of 89,000 kg per year. As the Company adjusts its production methods to achieve higher THC levels in its cannabis plants, the yield per plant has been reduced by approximately 20%, thereby resulting in a licensed capacity of approximately 70,000 kg per year. The total capacity will fluctuate as we refine growing methods and the actual utilization will be dependent on the combination of inventory levels and forecasted sales demand.
As first disclosed with the release of Organigram’s 2019 annual financial results on November 25, 2019, the Company’s management made a strategic decision to delay completion of Phase 4C (the final stage of the Phase 4 expansion), largely due to lower than anticipated consumer demand (which the Company believes is largely due to the lack of an adequate retail store network) and to more effectively manage and prioritize cash flow as well as potentially use the space in Phase 4C for other opportunities (if strategic and/or market factors dictate). During Q3 2020, the Company’s management decided to indefinitely defer completion of Phase 4C, as originally designed for additional cultivation capacity, based on forecast market demand. Phase 4C of the Moncton Campus has effectively been partially completed and without any foreseeable near-term use for this Phase, the Company recognized an impairment loss of $37.7 million in relation to this asset in Q3 Fiscal 2020. Refer to the Financial Review and Discussion of Operations section of this MD&A for further information.
As previously estimated and disclosed, the complete Phase 4 expansion of the Moncton Campus facility represented a total of 77,000 kg per year of additional annual target production capacity and was divided into a series of stages (4A: 25,000 kg; 4B: 28,000 kg; and 4C: 24,000 kg). As a consequence of the aforementioned yield reduction and indefinite deferral of the completion of Phase 4C, the revised annual target production capacity for Phase 4 is now estimated at 42,000 kg (4A: 20,000 kg; 4B: 22,000 kg). During Q4 Fiscal 2020, Phase 4C was completed such that it could be occupied.For the foreseeable future, the Company plans to continue to cultivate less than its cultivation capacity in response to less than anticipated consumer demand as noted above. As discussed herein, the Company has adjusted its workforce to align with expected demand trends. The Company continues to closely monitor market conditions and the evolving COVID‐19 situation.
PHASE 5 REFURBISHMENT
Phase 5 plans include refurbishing 56,000 square feet of interior space within the Company’s existing facility for design under European Union GMP (“EU GMP”) standards for additional extraction capacity, a derivatives and edibles facility and additional office space. EU GMP describes the minimum standard that a manufacturer must meet in its production processes. EU GMP certification is subject to inspections coordinated by the European Medicines Agency. The Company has no plans to seek certification in the near future. Phase 5 houses the high speed, high capacity, fully automated chocolate production line which includes an advanced chocolate molding line and a fully integrated packaging line that includes advanced engineering, robotics, high speed labeling and automated carton packing. Phase 5 plans also include expanded vaporizer pen filling and automated packaging, additional extraction by both CO2 and hydrocarbons as well as expanded areas for formulation including short path distillation for edibles and vaporizer pen formulas. During Q3 Fiscal 2020, Phase 5 received licensing from Health Canada and includes the approval of a two‐floor production facility designed to support all processing activity as well as dedicated spaces for packaging of flower, pre‐rolls, vape pens and powdered beverages. The amendment to the License also allows for new purpose‐built harvest and drying rooms and support areas for quality assurance, maintenance and sanitation.
The estimated total capital cost of Phase 5 is expected to be approximately $65 million. Phase 5 began generating revenue in the Fiscal Year ended 2020 and was substantially complete at year end. The Company is continuing to work on the installation and commissioning of certain equipment in its edibles and extraction area including its hydrocarbon extraction equipment.
In addition to the Phase 4 and Phase 5 expansions, the Company also owns approximately 12.1 acres located across the road from its current production facility, which is available for any future expansion if needed.
The estimates of additional production capacity and costs related thereto in Phase 4 and Phase 5 represent forward‐looking information and are based on a number of material factors and assumptions, including the following:
• The facility size of the Moncton Campus will be as estimated with the same amount of cultivation space being used per grow room for cultivation as in Phase 2 and Phase 3;
• The ratio of dried flower cultivated per canopy square foot of grow room will be consistent with historical output in the Company’s existing facilities; and
• All grow rooms designated as production rooms will be utilized for their intended purposes (from time to time rooms may be used for other permitted purposes, such as for storage).
Several factors can cause actual costs and capacity to differ from estimates including, but not limited to, timing for receipt of regulatory approvals from Health Canada, construction delays or postponements and unforeseen obstacles. See “Risk Factors” in this MD&A and in the Company’s current AIF. Capital expenditures incurred encompass cost of work performed (including any retention/holdback amounts) and are added to property, plant and equipment during the period.
| EXPENDITURES ($M) | ||||||||||||
| PHASE | PURPOSE | STATUS AS OF DATE OF MD&A |
KG/YR OF TARGET PRODUCTION(1) |
KG/YR OF CURRENT FLOWER CAPACITY(2) |
SPENT IN Q4-2020 |
SPENT IN FISCAL 2020 |
||||||
| 1/2/3 | Propagation, PreVeg, Organic, Flower, Post Harvest, Temporary Vapes Processing Area | Licensed and in Production | 28,000 | 20,000 | _ | _ | ||||||
| 4A | Flower Rooms | Licensed and in Production | 20,000 | 14,000 | _ | _ | ||||||
| 4B (3) | Flower Rooms | Licensed and in Production | 22,000 | 16,000 | 1 | 4 | ||||||
| 4C | Flower Rooms | Completion Halted in Response to Market Conditions | N/A | N/A | 1 | 18 | ||||||
| 5 (i) (4) | Post Harvest Rooms, Edibles, Vapes | Licensed and in Production | N/A | N/A | 2 | 39 | ||||||
| 5 (ii) (4) | Harvest Rooms, Drying Rooms, Filling and Packaging Rooms for Various Products, Larger Extraction Facilities | Licensed | N/A | N/A | ||||||||
| 70,000 | 50,000 | 4 | 61 | |||||||||
(1) Based on current capacity and optimal operating condition for the whole cannabis plant.
(2) Based on current capacity and optimal operating condition for only the flower component of the cannabis plant. The overall Flower capacity can fluctuate significantly as management adjusts the number of plants it grows in each room.
(3) Due to less than anticipated consumer demand largely discussed herein, the Company’s management is currently utilizing less than the current operating capacity.
(4) The Company is continuing with commissioning work and expects there to be modest ongoing spend related to that as well as ongoing sustaining capex.
CANADIAN ADULT‐USE RECREATIONAL MARKET
Organigram conducts ongoing consumer research and leverages detailed analyses of consumer purchasing behaviors across Canada to help ensure the Company’s offerings are aligned with anticipated consumer preferences. The Company has been revitalizing its product portfolio with the launch of 40 new stock keeping units (“SKUs”) since July 2020 and expects to launch up to 18 more new SKUs by the end of Q2 Fiscal 2021.
REC 1.0
Dried flower remains the largest category in the Canadian adult‐use recreational market of all product form factors and the Company believes this category will continue to dominate based on the sales history in mature legal markets in certain US states.
Value segment offerings
The Company has noted the significant growth in the dried flower value segment of the market with intensifying competition including recent entries of lower priced offerings which have caused significant market share shifts within the value segment. Particularly since the onset of the COVID-19 pandemic, value in large format sizes have become an increasing focus of consumers. In Q3 Fiscal 2020, the Company responded with the introduction of Trailer Park Buds (“TPB”), its first value offering of dried flower in a large size format of 28g which the Company believes is a differentiated product that does not compete on price alone because it is indoor-grown, whole dried flower and strain specific. In early Q4 Fiscal 2020, the Company announced that it was proactively making some changes to the TPB brand and logo after reviewing perception around the brand with Health Canada. In the intermediate term, Organigram moved to a modified version of the brand and logo, “Buds”. Longer term, the Company has identified options for a permanent revised brand and logo combination for its large format value brand.
The Company’s value segment strategy also includes dried flower offerings that were launched in larger format sizes of 7g and 15g under the Trailblazer brand in July 2020. The Trailblazer value brand continues to offer increasingly higher THC levels versus what was offered when originally launched (near the start of adult‐use cannabis legalization), at a competitive price point, such that the Company believes that it can compete in the growing large format value segment of the market.
Subsequent to Q4 Fiscal 2020, Organigram continued to launch new products and in mid‐September 2020, expanded its strong value portfolio with the launch of SHRED, a high quality, high potency and affordable dried flower that is pre‐shredded for consumer convenience. SHRED offers three pre‐milled varieties, all with THC of 18% or more. It is made from whole flower, does not contain any shake or trim and is milled to the same specifications as the Company’s existing pre‐roll products. SHRED is currently Organigram’s most affordable option (on a per gram basis).
In November 2020, the Company announced the launch of limited edition seasonal offerings, including Trailblazer Kushmas Stix, an affordable 0.5g pre‐roll available in time for gift giving or for adult stocking stuffers.
High THC strains
Cannabis consumers continue to want both high THC dried flower products and cultivar diversity as supported by available sales data. As such, in early August 2020, the Company announced the launch of three new strains of Edison Cannabis Co. (“Edison”) dried flower products, with higher THC: The General (Grapefruit GG4), Chemdog and limited time offering, Samurai Spy (Ninja Fruit). Going forward, the Company has decided to change naming conventions to the street genetic names for dried flower products as it believes these names will better resonate with consumers.
Organigram also began rolling out further line extensions in June 2020, including new size formats and three pack pre‐rolls of its most popular strains such as Limelight and Blue Velvet, for example.
REC 2.0
Cannabis‐Infused Chocolates
At the end of July 2020, the Company announced the launch of Trailblazer Snax, a value‐priced, cannabis‐infused chocolate bar which is made with premium quality ingredients including cocoa butter, all‐natural flavors and pure distillate, while remaining an affordable cannabis‐infused option. It is available in both mint and mocha flavours at 42g with 10mg of THC. Organigram’s investment in state‐of‐the art chocolate equipment and manufacturing processes means that each of the five sections of the Trailblazer Snax bar are filled separately, allowing for higher accuracy of infusion.
The Company’s chocolate portfolio also consists of Edison Bytes truffles which are available in both milk and dark chocolate formulations. These products are available as single chocolates containing 10 mg of THC each or sets of two truffles containing 5 mg each.
In addition to Trailblazer Kushmas Stix, the Company is also offering Canadian cannabis consumers delicately spicy gingerbread flavours mingled with Edison Bytes’ signature rich milk chocolate. These limited time offerings are available in a two‐per‐pack format, with each truffle containing 5 mg THC for a total of 10 mg total in the box.
Vape Portfolio
The Company expects to launch Trailblazer Spark, Flicker and Glow 510‐thread Torch vape cartridges in a new 1g format before the end of Q2 Fiscal 2021 which will extend Organigram’s line up to a suite of trial‐size 0.5 g and full‐size 1 g cartridges for the 510 vaporizer. Trailblazer Torch offers customers 510 cartridges, high‐quality CO2 extract and three unique terpene‐infused flavours.
In addition to the Trailblazer Torch value‐segment offerings, the Company’s vape portfolio also includes products for the mainstream and the premium segments: Edison + Feather ready‐to‐go distillate pens and Edison + PAX ERA® distillate cartridges.
Powdered Beverage Launch
In November 2020, Organigram launched Edison RE:MIX dissolvable cannabis powder. The pre‐packaged powder format makes it easy to mix Edison RE:MIX into beverages quickly and discreetly, so the product can be enjoyed, based on the consumer’s own preference, in a wide variety of settings and on occasions of their choosing.
The results of a recent Organigram survey suggest a significant majority of current cannabis consumers (74%) would prefer to add cannabis to their beverages by themselves (vs. a pre‐mixed beverage). The discreet nature of the product also addresses consumer concerns related to open cannabis consumption.
According to recent third party sales data in Colorado, cannabinoid-infused powders have rapidly risen to the top of the beverage category in popularity, representing 55% of the state’s beverage market sales. In fact, 46% of cannabis consumers reported enjoying cannabinoid-infused beverages multiple times a day (Headset – Colorado Market Insights – July 2020). In Canada, estimates suggest the recreational cannabis beverage market represents a $467M category opportunity and it is expected to increase by 15x its current market size over the next five years (Brightfield Group – Canadian Market Size Insights – July 2020).
As previously announced, Organigram’s researchers have developed a proprietary nano‐emulsification technology that generates nano‐ droplets which are very small and uniform; this provides improved absorption compared to traditional solid edibles and beverages, potentially allowing for a more reliable and controlled experience.
With traditional edibles, beverages, and ingestible oil‐based extracts, the body spends significant time breaking down fat soluble cannabinoid particles which are then absorbed and metabolized in the body before the effects are felt. This lengthy process can result in accidental overconsumption and undesirable experiences.
The nanoemulsion technology is also anticipated to have increased stability to temperature variations, mechanical disturbance, salinity, pH, and sweeteners. The powdered formulation holds the potential to offer consumers a measured dose of cannabinoids which they can then add to liquid, such as a beverage of their choice, while also offering the discretion, portability and shelf life expected of a dried powder formulation.
Edison RE:MIX is available in three formats: two sachets with 5 mg THC per sachet; two sachets with 5:5 mg THC:CBD per sachet; and five sachets with 10 mg CBD per sachet.
OUTLOOK
Organigram remains positive on the cannabis market both in Canada and abroad. The most recent data available from Statistics Canada shows that total Canadian adult use market sales (which represent the majority of legal cannabis sales in the country) tallied $256 million for just the month of September 20203. This represents an annualized run rate of approximately $3.1 billion, which is a record since adult recreational use was legalized in October 2018. Month‐over‐month sequential growth rate was 5.2% and year‐over‐year growth for September was 108.5%.
The Company believes there are a few factors that are creating tailwinds to further industry growth. First the legalization in October of 2019 of Rec 2.0 products has attracted consumers who were not interested in smoking or vaping. New categories such as vape pens, edibles (soft chews, chocolates), beverages to name a few have significantly expanded the addressable market. Second, the number of brick and mortar retail stores has increased significantly particularly in the back half of calendar 2020. Third, the industry as a whole has made a concerted effort to match or beat illicit market pricing which has helped accelerate the conversion of consumers from illicit to legal consumption.
Notwithstanding the above, the cannabis industry in Canada remains highly competitive and generally oversupplied versus the current market demand considering both regulated licensed producers and the still largely unfettered illicit market. In early July 2020, the Company announced it had reduced its workforce by 25% in an effort to better align its production capacity to prevailing market conditions. After two years of adult-use recreational legalization in Canada, consumer trends and preferences continued to solidify, including significant growth in the large format value segment, a desire for higher THC potency particularly in dried flower as well as a penchant for newness including new genetic strains and novel products. Organigram began a product portfolio revitalization earlier this year in an effort to address what it believes to be some of the biggest trends in order to grow sales and capture market share.
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3 Statistics Canada, Cannabis Stats Hub, Accessed: November 26, 2020, (https://www150.statcan.gc.ca/n1/pub/13‐610‐x/cannabis‐eng.htm)
At the same time, the number of retail stores in Canada began to grow meaningfully for the first time since legalization and in September 2020, Ontario’s cannabis retail regulator began doubling the number of licenses being granted from 10 to 20 per month and is now on pace to add up to 40 stores per month, resulting in accelerated growth for Canada’s largest adult-use cannabis market. Since July 2020, the number of retail stores in Canada’s 10 provinces grew one-third and increased approximately 140% in Ontario alone.
With a leaner workforce, the Company experienced some reductions in production, cultivation, processing and packaging capacity. At certain times, this contributed to delays in the product launches for its portfolio revamp and hindered consistent order fulfillment, particularly for high velocity or fast moving items. The Company believes this resulted in some meaningful missed revenue opportunities in Q4 Fiscal 2020 and in Q1 Fiscal 2021.
With substantial retail store growth in play, the Company is evaluating its processes and supply chain, including the benefit of gradually scaling up staffing, to help ensure improved order fulfillment rates and in turn, potentially realize greater sales opportunities. Further, as many of the Company’s product launches are recent and some are still to come, the Company believes it will still take time for the new products to reach their full potential and gain market share to drive meaningful sales growth.
Organigram also continues to make investments in new genetics and improved cultivation processes to increase THC potency and introduce new strains into the highly important dried flower and pre‐roll categories. As discussed in the “Phase 4 Expansion” section of this MD&A, the Company intends to cultivate at less than its full cultivation capacity for the foreseeable future partly to help increase THC potency in its plants, which is anticipated to result in a negative non‐cash adjustment to cost of sales for unabsorbed fixed overhead costs.
In addition to Rec 1.0, the Company plans to continue to expand on Rec 2.0, which it believes will increasingly become a larger relative category more in line with mature U.S. legal markets. As indicated in previous quarters, the Company expects some production inefficiencies to persist in the near term and impact gross margin while it continues to launch new Rec 2.0 products and optimize production.
Outside of Canada, the Company continues to serve international markets (Israel and Australia) from Canada via export permits and looks to augment sales channels internationally over time. International sales increased significantly in Q4 Fiscal 2020 from the prior year period as Organigram shipped its first product to Canndoc Ltd in August 2020 under its supply agreement with the Israeli cannabis medical producer. In early Q1 Fiscal 2021, the Israeli Ministry of Health Israel amended its quality standards for imported medical cannabis. The Company has identified a pathway for demonstrating compliance with these updated standards and has initiated a process which, if completed successfully, will allow it to continue to supply product into the Israeli market.
Recent political changes and cannabis election ballot initiatives for both medical and recreational use in the United States suggest that the potential movements to U.S. federal legalization of cannabis (THC) has increased momentum but the timing and outcome remains difficult to predict. As the Company continues to monitor and develop a potential U.S. THC strategy, it continues to evaluate CBD entry opportunities in the United States.
MEDICAL MARKET
Organigram’s sales in the medical market in Q4 Fiscal 2020 decreased slightly from Q4 Fiscal 2019 due to a lower ASP on medical oil, which was offset by higher volumes, as well as higher revenues on medical flower and the launch of medical vapes and chocolates, which were not available in the prior year. The Company continues to be focused on ensuring there is no disruption in product availability for its patients.
On August 18, 2020, the Company announced its partnership with Medical Cannabis by Shoppers Inc. and TruTrace Technologies Inc. in an effort to track source and genetics of cannabis used by medical patients in order to provide real‐time information about the composition of each cannabis product used by Medical Cannabis by Shoppers customers.
REGISTERED PATIENTS
The Company quantifies the number of patients as those with an active prescription registration. The Company’s active patient count was 18,934 at the end of Q4 Fiscal 2020 compared to 17,200 at the end of Q4 Fiscal 2019. One of the contributors to the growth in patient count was Health Canada’s response to COVID‐19 whereby medical documents expiring between March 13, 2020 and September 30, 2020 were provided an extension for six months beginning on the day after their expiry. As a result of the shifting dynamics (launch of adult‐use recreational market) it will take the Company a number of quarters to be able to better anticipate the longer‐term trend of the medical patient count and medical cannabis business in Canada.
INTERNATIONAL CANNABIS & CBD MARKETS
The Company continued to monitor its investments during Q4 Fiscal 2020.
ALPHA‐CANNABIS GERMANY
On October 10, 2018, the Company, through a wholly‐owned subsidiary, executed an investment agreement with alpha‐cannabis® Pharma GmbH (“Alpha‐Cannabis Germany” or “ACG”), located in Stadthagen, Germany, pursuant to which the Company acquired 8,333 common shares of ACG, representing a 25% interest in the aggregate issued and outstanding capital of ACG, on a fully diluted basis, for an aggregate investment of €1,625,000 (approximately $2.44 million) plus an additional amount of up to €875,000 (approximately $1.35 million) payable to ACG by way of issuance of Common Shares of the Company upon achievement of certain milestones.
Established in 2016, ACG is a privately held company that is strategically positioned to serve the German medical cannabis market. With a team of highly experienced and reputable specialists from the pharmaceutical industry with scientific and business backgrounds, ACG is focused on the development, production and marketing of cannabis‐based active pharmaceutical ingredients and pharmaceuticals.
The Company intends to provide ACG with dried cannabis flower as well as sweet leaf for conversion into extracts for the burgeoning German medical cannabis market. Further, the parties also entered into an agreement whereby the Company has an option to purchase pure synthetic CBD isolate from Alpha‐Cannabis Germany.
Organigram and ACG jointly submitted a tender for domestic cultivation in Germany in Q1 Fiscal 2019. In April 2019, the Company and ACG learned they were not awarded any lots for domestic cannabis production by Germany’s Federal Institute for Drugs and Medical Devices. The Company believes another tender process is likely in the future. With further improvements to ACG facilities underway as well as additional licensing expected, Organigram believes ACG and itself will be better positioned in the next tender process for domestic cultivation.
During Q3 Fiscal 2020, the Company delivered its first shipment of dried flower to ACG for testing purposes as ACG is seeking to obtain certification for EU-GMP certified cannabis oil extracted from the Company’s non-certified dried flower.
EVIANA
On October 2, 2018, the Company participated in the debenture offering of Eviana Health Corporation (“Eviana”) by way of private placement. Eviana is a Canadian Securities Exchange (“CSE”) listed company that was established with the aim of delivering customized consumer health care products using natural hemp strains of cannabis sativa for cannabinoid‐based topical creams and products. The Company’s investment is in the form of convertible debentures and share purchase warrants, which together provide a potential ownership interest of up to 21.4%, which is capped at 19.9% based on certain contractual obligations. In addition to this ownership interest, the Company also considered various qualitative factors in arriving at the determination that significant influence exists, including representation rights on Eviana’s board of directors, and thereby concluding that the equity method of accounting is appropriate.
The convertible debentures have a face value of $5,000, bear interest at 10% per annum, are non‐redeemable, and mature on October 2, 2020. The convertible debentures are convertible at the Company’s option at any time at a price of $1.15 per share, or into 4,347,826 common shares. Conversion of the debentures may be forced by Eviana in the event that the volume weighted average price of the common shares of Eviana for ten consecutive days is greater than $2.15, subject to a minimum volume of 100,000 shares in each of those 10 days.
The share purchase warrants were acquired for no additional consideration, concurrent with the debenture offering, are transferrable, and are exercisable until October 2, 2020. 2,500 share purchase warrant units were acquired, each of which is convertible into 870 common shares per unit, or 2,175,000 common shares in aggregate, at an exercise price of $1.30 per share. These share purchase warrants were not exercised and have expired as of the date of this MD&A.
Concurrent with the Company’s investment in Eviana, the parties entered into a CBD oil supply agreement, whereby the Company has the right, but not obligation, to purchase up to 25% of Eviana’s annual CBD oil at 95% of the agreed raw CBD oil wholesale market price for a period of five years from the date on which the CBD oil is first made commercially available by Eviana for wholesale.
On October 28, 2019, Eviana provided a default announcement in accordance with National Policy - 12-203 Management Cease Trade Orders (“NP 12-203”). Eviana made an application to the British Columbia Securities Commission, as its principal regulator, for a management cease trade order under NP 12-203 in respect of an anticipated default regarding its annual filings. On November 1, 2019, a cease trade order (CTO) was issued by the British Columbia Securities Commission and the Ontario Securities Commission. On November 5, 2019, Eviana was suspended from the CSE in accordance with CSE Policy 3 which is considered a regulatory halt as defined in National Instrument 23-101 – Trading Rules.
At May 31, 2020, the Company identified indicators of impairment with respect to its investment in Eviana. The Company determined the recoverable amount of Eviana to approximate $nil based on the higher of fair value less costs to dispose (“FVLCD”) and value‐in‐use (“VIU”). An impairment loss of $1,400 and $3,000 has been included in the statement of (loss) income and comprehensive (loss) income for the three and nine months ended May 31, 2020, respectively.
On June 18, 2020, the Company served Eviana with a notice of default and demand letter with respect to the non‐payment of interest relating to its convertible debentures as well as other applicable events of default under the debenture instrument. As of the date of this MD&A, the Company has not yet received its December 31, 2019 or June 30, 2020 interest payment on the Eviana convertible debenture.
OTHER STRATEGIC INVESTMENTS AND DEVELOPMENTS
The Company remains committed to the development and acquisition of cannabis or hemp related businesses and production assets in Canada or abroad (subject to compliance with applicable law), intellectual properties, technologies or other assets that are synergistic to the Company’s Canadian and international strategies.
HYASYNTH
On September 12, 2018, the Company entered into a strategic investment to purchase an aggregate of $10,000 convertible secured debentures (the “Hyasynth Debentures”) of Hyasynth Biologicals Inc. (“Hyasynth”), a biotechnology company based in Montreal and leader in the field of cannabinoid science and biosynthesis, in three separate tranches. Organigram has purchased $5,000 in secured convertible 8% Hyasynth Debentures and has further agreed to purchase up to an additional $5,000 of Hyasynth Debentures in a series of two other tranches of $2,500 each based on Hyasynth attaining certain production milestones and the satisfaction of certain other customary closing conditions.
Hyasynth has patent‐pending enzymes, yeast cells and processes that make it possible to produce phytocannabinoids and phytocannabinoid analogues in genetically modified strains of yeast. These proprietary enzymes and yeast strains have allowed Hyasynth to produce CBG, CBD and THC for novel and specialized products such as vaporizable cannabis products and cannabis infused beverages for a fraction of the cost of traditional plant‐based production. The Company anticipates that its investment in Hyasynth has the potential to provide the Company with access to what it expects to be the future of cannabinoid production. The Company expects that cost‐effectiveness and scalability will be necessary to meet the needs of both the Canadian and global cannabis markets.
In addition to the investment, Organigram has the right to purchase potentially all of Hyasynth’s cannabinoid or cannabinoid‐related production at a 10% discount to the wholesale market price for a period of ten years. In addition to the major cannabinoids such as CBD and THC, Hyasynth is also pursuing the production and scale‐up of minor cannabinoids found only in limited quantities in the cannabis plant. One subset of these minor cannabinoids includes propyl‐cannabinoids such as cannabigerivarin (CBGV) and tetrahydrocannabivarin (THCV). While the Company expects that there will always be a need for premium indoor grown cannabis flowers, working with Hyasynth offers the potential to more quickly respond to market demand for cannabinoid‐based recreational and medical cannabis products.
Subsequent to year end, on October 23, 2020, the Company advanced an additional $2,500 to Hyasynth by way of convertible debentures as a result of Hyasynth’s achievement of the contractual production-related milestone for Tranche 2 of the convertible debentures. This brings the Company’s total face value of convertible debentures investment in Hyasynth to $7,500, which provides the Company with a potential ownership interest of up to 46.5% on a fully diluted basis as of October 23, 2020.
SUPPLY AGREEMENT FOR HEMP FOR CBD EXTRACTION
On January 18, 2019, the Company entered into an agreement (the “Supply Agreement”) with 703454 N.B. Inc. (carrying on business as 1812 Hemp) (“1812 Hemp”), a New Brunswick based industrial hemp research company to secure supply of hemp.
Pursuant to the Supply Agreement, the Company receives a 25% discount on all dried product purchased from 1812 Hemp and has continued access to future 1812 harvests until December 16, 2023, with the option to extend for an additional five‐year period. The Company made a payment of $1,500 to 1812 Hemp in connection with the Supply Agreement. Organigram acquired access to approximately 6,000 kg of dried hemp flower harvested in the fall of 2018, which it mostly acquired in Q3 Fiscal 2019.
In addition, pursuant to the Supply Agreement, Organigram has a right‐of‐first refusal on future procurement of hemp from 1812 Hemp.
On July 26, 2019, the Company entered into an advance payment and support agreement (“Payment Agreement”) with 1812 Hemp. Under the terms of the Payment Agreement, the Company advanced $3.0 million to 1812 Hemp in the form of a secured loan. These amounts may be applied against future purchases of hemp under the Supply Agreement. The aggregate amount of advances outstanding under the Payment Agreement as of January 1, 2020 will accrue interest of 9.0% per annum, calculated monthly, until the entire balance of advances is paid. At August 31, 2020, $2,229 in principal was outstanding under the Payment Agreement. Subsequent to August 31, 2020, the Company demanded repayment of the entire amount owing by 1812 Hemp to the Company under the Payment Agreement.
During the three months ended August 31, 2020, management became aware that 1812 Hemp was facing financial hardship due to a lack of customer demand and a change in market conditions, and as a result had significantly scaled back operations. Separately, the Company’s forecasted hemp purchases have decreased significantly as a result of slower than expected progression in Canadian hemp and CBD regulations. Thus, as a result of the aforementioned challenges, management impaired the Supply Agreement intangible asset to its recoverable amount, which was estimated to be $nil, by recording an impairment charge of $1,303 at August 31, 2020.
USE OF PROCEEDS OF PRIOR FINANCINGS
The following table sets out the Company’s previously disclosed expected uses of prior financings as set out in the prospectus filings of prior financings, which include: i) the proceeds of the offering of the December 2017 units; and ii) the proceeds of the offering of the January 2018 Debentures.
|
|
ESTIMATED FUNDS |
FUNDS THE |
ACTUAL FUNDS |
EXPECTED |
EXPECTED |
||||
|
Moncton Campus |
$95.0 million |
$nil |
$123.8 million |
December 2019 |
December 20193 |
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|
|
|
|
|
|
||||
|
Strategic international |
$5.4 million |
$5.4 million |
$7.6 million2 |
Ongoing |
Ongoing |
||||
|
Strategic domestic |
Up to $43.1 million |
Up to $38.0 million |
$5.1 million |
Ongoing |
Ongoing |
||||
|
|
|
|
|
|
|
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|
Hemp market presence |
Up to $10.8 million |
Up to $8.4 million |
$4.5 million |
Ongoing |
Ongoing |
(1) Comprised of December 2017 and January 2018 financings
(2) Excludes contingent consideration that is to be settled in Common Shares of the Company
(3) As disclosed in the “Moncton Campus Expansion” section of the MD&A, the Company has decided to indefinitely cease construction completion of Phase 4C, originally scheduled for completion by the end of calendar 2019. The Company completed Phase 4A and 4B prior to December 2019.
As set out in the table above, the majority of the funds raised were allocated for specific purposes, particularly related to the expansion of the Moncton Campus and strategic opportunities (refer to the “Moncton Campus Expansion” and “International Cannabis & CBD Markets” sections in this MD&A). At this stage, potential strategic acquisitions are at various stages of progression and the allocation of funds may change depending on the strategic priorities of the Company and management’s assessment of the competitive landscape.
During the year ended August 31, 2020, the Company raised net proceeds of approximately $52.9 million and $47.1 million under its December 2019 and April 2020 at‐the‐market equity offerings (“ATM Programs”), respectively. The Company has used, and intends to continue to use, the net proceeds from the ATM Programs to fund capital projects, for general corporate purposes, and to repay indebtedness.
On November 12, 2020, the Company closed an underwritten public offering of units for total gross proceeds of $69,144. Please refer to the “Balance Sheet, Liquidity, and Capital Resources” section of the MD&A for further information.
FINANCIAL REVIEW AND DISCUSSION OF OPERATIONS
CAUTIONARY NOTE REGARDING NON‐IFRS FINANCIAL MEASURES
The Company uses certain non‐IFRS performance measures such as Adjusted EBITDA (excluding fair value adjustment to inventory and biological assets) and Adjusted Gross Margin in its MD&A or other public documents, which are not measures calculated in accordance with IFRS and have limitations as analytical tools. These performance measures have no prescribed meaning under IFRS and therefore amounts presented may not be comparable to similar data presented by other companies. The data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance such as net income or other data prepared in accordance with IFRS. See the cautionary statement in the “Introduction” section at the beginning of this MD&A.
FINANCIAL HIGHLIGHTS
Below is an analysis of the changes from Fiscal 2018 to Fiscal 2019 and Fiscal 2019 to Fiscal 2020. In depth commentary is provided in the pages that follow in relation to the latter. Fiscal 2019 net revenue and gross margin increased over Fiscal 2018 as a result of the launch of the adult‐use recreational market in October 2018, which also resulted in a corresponding increase in operating expenses and other expenses as a result of this new market development, whereas during Fiscal 2018 the Company only generated revenues from medical patients.
| FISCAL 2020 | FISCAL 2019 | $ CHANGE | % CHANGE | FISCAL 2018 | |||||||||||
| Financial Results | |||||||||||||||
| Gross revenue | $ | 103,387 | $ | 97,547 | $ | 5,840 | 6% | $ | 12,429 | ||||||
| Net revenue | $ | 86,795 | $ | 80,413 | $ | 6,382 | 8% | $ | 12,429 | ||||||
| Cost of sales | $ | 105,004 | $ | 42,521 | $ | 62,483 | 147% | $ | 6,814 | ||||||
| Gross margin before fair value adjustments | $ | (18,209 | ) | $ | 37,892 | $ | (56,101 | ) | (148)% | $ | 5,615 | ||||
| Gross margin % before fair value adj. | (21)% | 47% | (68)% | (145)% | 45% | ||||||||||
| Fair value adjustments to biological assets and changes in inventory sold |
$ | (38,281 | ) | $ | 10,577 | $ | (48,858 | ) | (462)% | $ | 46,018 | ||||
| Gross margin | $ | (56,490 | ) | $ | 48,469 | $ | (104,959 | ) | (217)% | $ | 51,633 | ||||
| Operating expenses | $ | 89,020 | $ | 42,982 | $ | 46,038 | 107% | $ | 15,217 | ||||||
| Income (loss) from operations | $ | (145,510 | ) | $ | 5,487 | $ | (150,997 | ) | (2,752)% | $ | 36,416 | ||||
| Other expense (income) | $ | (9,353 | ) | $ | 14,991 | $ | (24,344 | ) | (162)% | $ | 14,292 | ||||
| Net income (loss) from continuing operations | $ | (136,157 | ) | $ | (9,504 | ) | $ | (126,653 | ) | 1,333% | $ | 22,124 | |||
| Net income (loss) from continuing operations per common share, basic |
$ | (0.789 | ) | $ | (0.067 | ) | $ | (0.722 | ) | 1,078% | $ | 0.184 | |||
| Net income (loss) from continuing operations per common share, diluted |
$ | (0.789 | ) | $ | (0.067 | ) | $ | (0.722 | ) | 1,078% | $ | 0.174 | |||
| Net cash used in operating activities | $ | (45,125 | ) | $ | (35,081 | ) | $ | (10,044 | ) | 29% | $ | (12,704 | ) | ||
| Adjusted Gross M argin1 | $ | 28,904 | $ | 38,633 | $ | (9,729 | ) | (25)% | $ | 5,615 | |||||
| Adjusted Gross Margin % 1 | 33% | 48% | (15)% | (31)% | 45% | ||||||||||
| Adjusted EBITDA 1 | $ | 852 | $ | 20,644 | $ | (19,792 | ) | (96)% | $ | (1,003 | ) | ||||
| Financial Position | |||||||||||||||
| Working capital | $ | 141,123 | $ | 152,417 | $ | (11,294 | ) | (7)% | $ | 191,964 | |||||
| Inventory and biological assets | $ | 71,759 | $ | 113,796 | $ | (42,037 | ) | (37)% | $ | 64,827 | |||||
| Total assets | $ | 435,127 | $ | 428,525 | $ | 6,602 | 2% | $ | 302,567 | ||||||
| Non-current financial liabilities | $ | 106,289 | $ | 46,067 | $ | 60,222 | 131% | $ | 98,743 |
Note 1: Non‐IFRS measures that have been defined and reconciled within their respective section sof the MD&A
NET REVENUE FROM CONTINUING OPERATIONS
Net revenue for the Company is defined as gross revenue net of any customer discounts, rebates, and sales returns and recoveries, less excise taxes. Revenue consists primarily of dried flower and cannabis oil sold to the adult‐use recreational, medical, wholesale, and international marketplaces. During Q2 Fiscal 2020, the Company also launched its vape and chocolate products to the adult‐use recreational market.
For the three months ended August 31, 2020, net revenues increased by 25% to $20,400 from $16,290 for the three months ended August 31, 2019 primarily due to higher flower sales volumes, which was offset by a lower average net selling price (“ASP”) compared to Q4 Fiscal 2019, as the dried flower value segment of the recreational market, particularly in large format, grew in Q4 2020. Additionally, the sales of Rec 2.0 products (vape products and cannabis‐infused chocolates), which had not yet been legalized in Q4 Fiscal 2019, as well as significantly higher international revenues, contributed to the increase over Q4 Fiscal 2019. These contributors to revenue were offset by a decline in recreational oil sales as demand for THC oil decreased relative to Fiscal 2019 and the Company received returns primarily related to Fiscal 2019 sales.
Net revenue for Q4 Fiscal 2020 of $20,400 was net of a provision for product returns and pricing adjustments of $1,986 (each net of excise) compared to net revenue for Q4 Fiscal 2019 of $16,290 and a provision for product returns and pricing adjustments of $3,698. The majority of the current period product returns and price adjustments were due to vapes and an isolated wholesale return as well as slow moving recreational flower products. The lack of a sufficient retail network and slower than expected store openings in Ontario also continued to impact sales in Q4 Fiscal 2020, which was further exacerbated by increased industry supply. The Company is cognizant that in this new and emerging market, the size of the customer base, its demands, and preferences cannot yet be ascertained with any level of certainty or reliability and future demand for existing and new products remains to be determined as the market develops and matures.
Dried flower comprised 85% of net revenue in the quarter. The ASP of dried flower decreased to $3.58 per gram on a quarter‐over‐quarter basis compared to $5.18 per gram for Q4 Fiscal 2019 as both the Company and Canadian industry experienced general price compression in the adult‐recreational and medical markets as these markets matured and the customer and product mix evolved to more value offerings. Further, the lower ASP was a result of international bulk dried flower revenues, which was sold at a lower ASP compared to Canadian domestic revenues. Selling prices are prone to fluctuation and there may be further price compression if the market remains oversupplied. The Company is committed to refining its product mix as customer preferences evolve.
Sales volumes of dried flower in grams increased by 100% to 4,859 kg in Q4 Fiscal 2020 compared to the prior year comparative quarter, primarily as a result a shift towards large format products as well as the contribution of wholesale and international dried flower sales.
For the year ended August 31, 2020, the Company recorded an increase of 8% in net revenues to $86,795 from $80,413 for the year ended August 31, 2019. Net revenue increased on a year‐to‐date basis primarily due to the launch of Rec 2.0 products (vapes and chocolates) during Q2 Fiscal 2020 and wholesale and international revenues, which had not occurred in the prior comparative period. This was offset by a decrease in recreational flower and oil sales volumes as a result of large pipeline fill orders shipped during the initial launch of the adult‐use recreational market in the prior year, increased competition, and changing consumer preferences, particularly with respect to oil.
Net revenue for Fiscal 2020 of $86,795 was net of a provision for product returns and pricing adjustments of $8,282 (each net of excise) compared to net revenue for Fiscal 2019 of $80,413 and a provision for product returns and pricing adjustments of $3,698. The majority of Fiscal 2020 product returns and price adjustments were due to slow moving recreational oil and flower products, most of which related to revenues generated in Fiscal 2019.
For the year ended August 31, 2020, the ASP of dried flower decreased to $4.12 per gram compared to $5.00 per gram for the year ended August 31, 2019 due to $15,184 (or 17% as a percentage total net revenue) in opportunistic wholesale revenues, which garner a lower ASP at a higher gross margin, compared to $709 in the prior year, as well as a shift towards value‐oriented large format products and sales returns provisions related primarily to prior year sales. Offsetting this decline in ASP was a 41% increase in sales volumes to 17,269 kg over the prior year comparative period due to legalization of adult‐recreational use cannabis coming into effect partway through Q1 Fiscal 2019 as well as the general growth in this market.
REVENUE COMPOSITION
The Company’s management reviews revenue composition by product category as follows for years ended August 31, 2020 and 2019:
(1) Comprised primarily of sales returns and price allowance provisions for recreational oil.
COST OF SALES AND GROSS MARGIN
The gross margin from continuing operations for the three months ended August 31, 2020 was ($28,756) compared to ($11,059) for the prior year comparative period. The decrease in gross margin quarter‐over‐quarter was primarily driven by primarily as a result of: (i) higher cost of sales on higher post‐harvest costs; (ii) inventory provisions and write‐off of excess and unsaleable inventories as well as inventory write‐downs to net realizable value ($11,099); (iii) unabsorbed overhead ($3,470) as a result of lower production volumes; (iv) a lower ASP from increased competition and the ongoing evolution of the customer and product mix; and (v) write‐downs to net realizable value relating to the fair value component of inventories (fair value loss of $16,261).
The gross margin from continuing operations for the year ended August 31, 2020 was ($56,490) compared to $48,469 for the prior year comparative period. The decrease in gross margin year‐over‐year was primarily driven by the same factors as described above: (i) higher cost of sales on higher post‐harvest costs; (ii) inventory provisions and write‐off of excess and unsaleable inventories as well as inventory write‐ downs to net realizable value ($35,584 compared to $744 in the prior year); (iii) unabsorbed overhead ($5,434 compared to $nil) as a result of lower production volumes; (iv) a lower ASP from increased competition and the ongoing evolution of the customer and product mix; and (v) write‐downs to net realizable value relating to the fair value component of inventories (fair value loss of $72,801 compared to $14,284).
Included in gross margin are the changes in the fair value of biological assets related to IFRS standard IAS 41 – Agriculture. The net decrease in fair value adjustments on a fiscal quarter‐to‐date and year‐to‐date basis compared to the prior year is due to an increase in harvested plants resulting in an increase in fair value on the growth of biological assets of $4,778 and $73,975 (August 31, 2019 ‐ $13,334 and $75,338), respectively, which was offset by the realization of the fair value increment for inventory sold of ($8,666) and ($39,455) (August 31, 2019 – ($11,712) and ($50,477)) and adjustments to the net realizable value of inventory of ($16,261) and ($72,801) (August 31, 2019 – ($13,428) and ($14,284)). The significant increase in adjustment to the net realizable value of inventory relates primarily to a write‐down of the Company’s inventory of flower, trim available for extraction, and concentrated extract for which the Company has excess quantities based on current market dynamics and forecast demand, also taking into consideration requirements with respect to the dating and specifications of products available for sale.
Cost of sales primarily consists of the following:
• Costs of sales of cannabis (dried flower, pre‐rolls, and wholesale/international bulk flower), cannabis oil, vapes, chocolates, and other wholesale formats such as extract include the direct costs of materials and packaging, labour including any associated share‐based compensation, and depreciation of manufacturing related items such as building and equipment related to the production of cannabis and derivatives sold. This includes growing, cultivation and harvesting costs, extraction, vape filling, quality assurance and quality control, as well as packaging and labelling;
• Costs related to other products such as vaporizers and other accessories;
• Shipping expenses to deliver product to the customer;
• The production cost of late‐stage biological assets that are disposed of, provisions and write‐downs for inventory that does not pass the Company’s quality assurance standards and obsolete products and packaging, write‐downs to net realizable value that reduce the value of inventory below the original production or purchase cost, and other production overhead; and
• Unabsorbed fixed overhead charges, primarily comprised of depreciation, resulting from the underutilization of cultivation and production capacity.
Illustrative Overview of Composition and Flow of Biological Assets, Inventories, and Cost of Sales
Notes:
1. The above illustration is for informational purposes only and should not be viewed as an exact representation of the actual flow of inputs and outputs. Certain items referenced above may not have a standard meaning under IFRS and therefore should be considered non‐IFRS measures. Readers should refer to the notes of the August 31, 2020 year‐end financial statements for the official accounting policies.
2. The majority of stock options expense related to the manufacturing and operations groups and most of the Moncton Campus depreciation is captured as part of cultivation costs, however a certain amount of these costs are also added during the post‐harvest and extraction phases.
3. Fair value adjustments are made to the cost basis of biological assets which collectively become the cost basis of inventories. Inventories are then carried at the lower of cost and net realizable value. When sold a portion of inventory is charged to cost of sales (actual costs) with the remainder (FV adjustments) to “Fair value adjustments to biological assets” on statements of income.
4. Excise taxes are excluded from this diagram and are reflected as a netting adjustment against gross revenue to arrive at net revenue for presentation purposes in the consolidated financial statements.
GROSS MARGIN BEFORE FAIR VALUE CHANGES TO BIOLOGICAL ASSETS AND INVENTORIES SOLD AND ADJUSTED GROSS MARGIN
The fair value adjustment to biological assets and inventories sold is comprised of the non‐cash fair value gains (losses) for inventories sold, growth of biological assets, and adjustments to net realizable value. Prior quarters have been adjusted to reflect results only from continuing operations and the reclassification of shipping expenses.
The increase in gross margin before fair value changes to biological assets and inventories sold up to Q1 Fiscal 2019 is consistent with the Company’s low cost of production and ability to sell most of its products at the medium to high end of the product categories. The decline in gross margin before fair value changes to biological assets and inventories sold in Q4 Fiscal 2019 is believed to be an anomaly resulting from an increase in production costs, a temporary decline in production yields during Q3 Fiscal 2019 that resulted in higher cost product being sold through in Q4 Fiscal 2019, year‐end inventory adjustments, and write‐downs of legacy packaging materials that have been replaced with new, more consumer‐friendly packaging. During Q1 Fiscal 2020, the Company’s gross margin before fair value changes to biological assets and inventories sold increased to $9,342 , which then decreased in Q2 and Q3 Fiscal 2020 due to lower sales volumes and costs associated with the launch the new Rec 2.0 products, higher post‐harvest costs, and inventory write‐downs and provisions. The negative gross margin before value changes to biological assets and inventories sold in Q4 2020 of ($6,192) is primarily due to inventory provisions and write‐off of excess and unsaleable inventories, inventory write‐downs to net realizable value, and unabsorbed overhead as a result of lower production volumes.
Adjusted Gross Margin is a non-IFRS measure that the Company defines as net revenue less: (i) cost of sales, before the effects fair value changes to biological assets and changes in inventory sold; excluding (ii) write-offs and impairment of inventories and biological assets; (iii) write-downs to net realizable value; (iv) COVID-19 related charges; and (v) unabsorbed overhead relating to underutilization of the production facility, most of which is related to non-cash depreciation expense. Management believes this measure is useful and relevant as it more fairly represents the gross margin for the revenues generated in the period as it is based on the direct and indirect costs of production related to these revenues and excludes impairments and write-offs related to other inventories resulting from internal or external influences. See the cautionary statement regarding non-IFRS financial measures in the “Introduction” section at the beginning of this MD&A and the reconciliation to IFRS measures in the Financial Results and Review of Operations section of this MD&A. The most directly comparable measure to Adjusted Gross Margin calculated in accordance with IFRS is gross margin before fair value changes to biological assets and inventories sold.
Gross margin before fair value changes to biological assets and inventories sold and Adjusted Gross Margin
| Q1-F19 | Q2-F19 | Q3-F19 | Q4-F19 | Q1-F20 | Q2-F20 | Q3-F20 | Q4-F20 | |||||||||||||||||
| Net revenue | 12,439 | 26,934 | 24,750 | 16,290 | 25,153 | 23,221 | 18,021 | 20,400 | ||||||||||||||||
| Cost of sales before adjustments | 3,618 | 10,890 | 12,473 | 14,799 | 14,966 | 14,772 | 13,909 | 14,244 | ||||||||||||||||
| Adjusted Gross Margin | 8,821 | 16,044 | 12,277 | 1,491 | 10,187 | 8,449 | 4,112 | 6,156 | ||||||||||||||||
| Adjusted Gross Margin % | 71% | 60% | 50% | 9% | 41% | 36% | 23% | 30% | ||||||||||||||||
| Less: | ||||||||||||||||||||||||
| Write-offs and impairment of inventories and biological assets | - | - | - | 744 | 845 | 1,027 | 19,940 | 11,019 | ||||||||||||||||
| Write-downs to net realizable value | - | - | - | - | - | 12 | 2,661 | 80 | ||||||||||||||||
| COVID-19 related charges | - | - | - | - | - | - | 5,901 | 194 | ||||||||||||||||
| Unabsorbed overhead | - | - | - | - | - | - | 1,964 | 3,470 | ||||||||||||||||
| Gross margin before fair value changes to biological assets and inventories sold | 8,821 | 16,044 | 12,277 | 747 | 9,342 | 7,410 | (26,354 | ) | (8,607 | ) | ||||||||||||||
| Gross margin % (before fair value changes to bio assets and inventories sold | 71% | 60% | 50% | 5% | 37% | 32% | -146% | -42% | ||||||||||||||||
| Add/(Deduct): Fair value changes to biological assets and changes in inventory sold | 42,925 | (8,086 | ) | (12,456 | ) | (11,806 | ) | 1,852 | 3,878 | (23,862 | ) | (20,149 | ) | |||||||||||
| Gross margin (1) | 51,746 | 7,958 | (179 | ) | (11,059 | ) | 11,194 | 11,288 | (50,216 | ) | (28,756 | ) | ||||||||||||
| Gross margin % (1) | 416% | 30% | -1% | -68% | 45% | 49% | -279% | -141% |
Note 1: Gross margin reflects the IFRS measure per the Company’s Financial Statements.
GENERAL AND ADMINISTRATIVE
For the three months ended August 31, 2020, general and administrative expenses from continuing operations decreased to $7,612 compared to $9,171 in the prior year comparative period. The decrease is mainly due to adjustments of approximately $1,976 for licensing and professional fees during Q4 Fiscal 2020 that were not expected to recur at the same level as well as a general reduction of staffing, travel, and other administrative expenses stemming from the impact of COVID‐19.
For the year ended August 31, 2020, the Company incurred general and administrative expenses from continuing operations of $27,996 compared to $18,593 (excluding general and administrative expenses attributable to Trauma Healing Centers (“Trauma Healing”) of $75) in the prior year comparative period. The increase from the prior year comparative period is related to an increase in internal resources, office and general expenses, office building depreciation, professional fees, research and development efforts, and public company‐related costs as the Company continued to scale up its operations in connection with the development of the adult‐use recreational market and the cannabis derivatives market that launched in December 2019.
SALES AND MARKETING
For the three months ended August 31, 2020, the Company incurred sales and marketing expenses from continuing operations of $3,218 compared to $4,712 for the three months ended August 31, 2019. The decrease in expenses in the current quarter was due to the decision to scale back on certain sales and marketing efforts, including a workforce reduction in certain areas, as a result of the COVID‐19 pandemic. These expenses include advertising and promotion, client service and sales staff, educational materials, as well as trade investment.
For the year ended August 31, 2020, the Company incurred sales and marketing expenses from continuing operations of $16,528 compared to $14,625 for the prior year comparative period. The increase year‐over‐year is related to the continued development of the adult‐use recreational market and the Company’s investment in its brand portfolio as well as the preparation for the Rec 2.0 launch.
Sales and marketing and general and administrative expenses, excluding non‐cash share‐based compensation (“SG&A”), were $10,830 for Q4 Fiscal 2020, a decrease from $13,883 in Q4 Fiscal 2019. As a percentage of net revenue, SG&A expenses decreased to 52% in Q4 Fiscal 2020 from 85% in Q4 Fiscal 2019 as the Company scaled back on certain sales and marketing efforts, including a workforce reduction in certain areas, as a result of the COVID‐19 pandemic.
SG&A expenses for Fiscal 2020 were $44,524 compared to $33,218 in Fiscal 2019. As a percentage of net revenue, SG&A expenses increased to 51% in Fiscal 2020 from 41% in Fiscal 2019.
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
The Company reviews the carrying value of its property, plant and equipment at each reporting period for indicators of impairment. During the year ended August 31, 2020, management noted indicators of impairment and recorded impairments at an asset specific level as described below.
Moncton Campus – Phase 4C (asset specific)
The construction of Phase 4C of the Moncton Campus, which was intended to house grow rooms with an previously estimated cultivation capacity of 24,000 kg per annum, was indefinitely deferred during the three months ended May 31, 2020 based on available capacity and forecast market demand. Phase 4C of the Moncton Campus has effectively been left partially completed and, due to the specialized and integrated nature of Phase 4C, without any foreseeable near-term use. Management estimated the FVLCD of Phase 4C to approximate the purchase cost of the land and movable equipment, which is $1,328. As a result, the Company recognized an impairment loss of $37,749 in relation to this asset for the year ended August 31, 2020. The entire amount of the impairment loss was recorded against the building infrastructure of Phase 4C. In addition, subsequently incurred and contractually committed future costs totaling $1,050 with respect to Phase 4C at August 31, 2020 were included in the impairment loss for the year ended August 31, 2020.
SHARE‐BASED COMPENSATION
The Company recognized $712 and $4,725 in share‐based compensation in relation to selling, general and administrative employees for the three months and year ended August 31, 2020, respectively, compared to $2,149 and $9,151 for the prior year comparative periods. For the three months ended August 31, 2020, 60,000 options were granted to employees of the Company, valued at $106, compared to 965,000 options granted in the prior year comparative period, valued at $4,300. There were no options granted to key management personnel during the three months ended August 31, 2020 and 2019. The decrease in share‐based compensation expense year‐over‐year is primarily a result of fewer options having been granted during the current period.
For the year ended August 31, 2020, 2,125,000 options were granted, valued at $3,743, compared to 3,589,500 options granted in the prior year comparative period, valued at $13,848. Included in the year ended August 31, 2020 were 790,000 options granted to key management personnel compared to 685,000 options granted for the year ended August 31, 2019.
Included in the three months and year ended August 31, 2020 were nil and 265,258 (August 31, 2019 – nil and 631,949), restricted share units (“RSUs”) granted to employees, of which nil and 211,981 RSUs were issued to key management personnel and members of the Board of Directors compared to nil and 631,949 RSUs issued for the three months and year ended August 31, 2019.
During the three months and year ended August 31, 2020, nil and 142,187 performance share units (“PSUs”) were granted to employees (August 31, 2019 – nil and nil), of which nil and 88,910 PSUs were issued to key management personnel and members of the Board of Directors compared to nil and nil issued for the prior year comparative periods.
Share‐based compensation represent a non‐cash expense, and was valued using the Black‐Scholes valuation model for stock options and using the fair value of the shares on the date of the grant for RSUs. The fair value of PSUs was based on the Company’s share price at the grant date, adjusted for an estimate of likelihood of achievement of the defined performance criteria.
FINANCING COSTS AND INVESTMENT INCOME
Financing costs are comprised of cash interest expense, the amortization of transaction costs, the discount of the long‐term debt outstanding during the period, loan modification losses as described below, and for the prior year comparative period, the discount of the convertible debentures that were previously outstanding. The increase in financing costs for the three months ended August 31, 2020 to $955 from $786 in the prior year comparative period is mainly attributable to the higher term loan balance outstanding during Q4 Fiscal 2020 ($115,000 at August 31, 2020), whereas only the initial draw of the term loan was outstanding during Q4 Fiscal 2020 ($50,000 at August 31, 2019). However, the decrease for the year ended August 31, 2020 to $6,008 from $9,668 in the prior year comparative period is primarily attributable to the convertible debentures previously outstanding, which were completely converted in April 2019, and the resulting lower effective interest rate as well as a lower average outstanding debt balance. This decrease is offset by the loan modification losses of $1,644 incurred with respect to the first and second amendments to the Company’s credit facility as outlined below.
On May 31, 2019, the Company entered into a credit facility with Bank of Montreal (“BMO”) and a syndicate including three other lenders. The facility consists of a $115 million term loan (“Term Loan”) and a $25 million revolving credit facility (“Revolver”, or together with the Term loan, as amended, the “Facilities”), both of which mature on May 31, 2022. Included in the facility is an uncommitted option to increase the Facilities by an incremental $35 million to a total of $175 million, subject to agreement by BMO and the syndicate of lenders and satisfaction of certain legal and business conditions.
On November 15, 2019, the Company amended its Facilities with BMO to: i) extend the final draw deadline of the Term Loan (“Amended Term Loan”) from November 30, 2019 to March 31, 2020; ii) postpone the commencement of scheduled principal repayments on the Term Loan from February 28, 2020 to May 31, 2020; and iii) realign the financial covenants structure, effective November 30, 2019, to be more consistent with industry norms up to and including May 31, 2020. Prior to the Second Amendment, as described below, the financial covenants were to revert to the original structure on August 31, 2020. The Company incurred an amendment fee of $140 plus customary legal expenses in connection with the first amendment.
The Facilities were further amended on February 28, 2020 to extend the final draw deadline of the Term Loan from March 31, 2020 to May 31, 2020.
In accordance with IFRS 9, such modification to the credit facility as outlined above is not an extinguishment of debt either qualitatively or quantitatively, rather it is a non‐substantial modification. Therefore, as per the provisions of IFRS 9 the Company recorded a loss on debt restructuring based on the difference in the present value of the restructured net cash flows discounted at the original effective interest rate (“EIR”) versus the present value of the original net cash flows discounted at the original EIR. This loss of $831 has been recorded under financing costs in the statement of (loss) income and comprehensive (loss) income for the year ended May 31, 2020.
On May 28, 2020, the Company further amended its Facilities (“Second Amendment”) with BMO and the syndicate of lenders to: (i) extend the final draw deadline of the Term Loan to July 31, 2020; (ii) postpone the commencement of principal repayments on the Term Loan to November 30, 2020; (iii) adjust certain financial ratios to be maintained by the Company both before and after November 30, 2021 (the “Conversion Date”); (iv) modify the applicable margin pricing and standby fee terms to reflect current market conditions; and (v) remove the uncommitted option to increase the Facilities by an incremental $35 million. The financial covenants will revert to the original structure, albeit at different ratios, on November 30, 2021. The interest rate margin will be fixed during this period. The Company incurred an amendment fee of $490 plus customary legal expenses in connection with the second amendment.
As a result of the Second Amendment, the Company recorded a loan modification loss of $813 under financing costs in the statement of (loss) income and comprehensive (loss) income for the three months ended May 31, 2020.
During the three months and year ended August 31, 2020, the Company drew an additional $30,000 and $65,000 under the Term Loan, in two tranches, and similar to the initial draw noted above, converted the balances from prime rate loans to bankers’ acceptances. During the year ended August 31, 2020, the Company rolled over $115,000 of the Term Loan balance on a monthly basis through bankers’ acceptances with an average cash interest rate of approximately 4.25%. Based on the current availment option of bankers acceptances’ the applicable margin rate is 3.75% above the applicable bankers acceptances’ rate.
Investment income of $171 and $308 was earned for the three months and year ended August 31, 2020, respectively, compared to investment income of $170 and $662 for the prior year comparative periods. The year‐over‐year decrease in investment income, primarily comprised of interest income, was related to the maturing of short‐term investments in August 2019 ($nil outstanding during the current period). Income was offset for the periods by realized and unrealized fair value losses on the mark‐to‐market revaluation of marketable securities.
GOVERNMENT SUBSIDIES
On April 1, 2020, Department of Finance Canada announced the Canada Emergency Wage Subsidy (“CEWS”), which would subsidize 75% of employee wages, retroactive to March 15, 2020 to Canadian employers whose business had been affected by COVID-19 to enable them to re-hire workers previously laid off as a result of pandemic, help prevent further job losses, and to better position companies to resume normal operations following the crisis. Under this program, the Company recorded a wage subsidy of $4,646 and $7,883 for the three months and year ended August 31, 2020, which has been included as government subsidies in the statements of (loss) income and comprehensive (loss) income.
INVESTMENTS IN ASSOCIATES AND CONTINGENT CONSIDERATION
During Q1 Fiscal 2019, the Company made three strategic and international investments as described previously in this MD&A, which are being accounted for as investments in associates in the Company’s financial statements. During the three months and year ended August 31, 2020, the Company’s share of loss from these investments in associates was $209 and $1,187, respectively, compared to $339 and $1,261 in the prior year comparative periods. Since all three of these investments are effectively in the start‐up or early phases of their operations, these losses are generally to be expected.
At May 31, 2020, the Company identified indicators of impairment with respect to its investment in Eviana. The Company determined the recoverable amount of Eviana to approximate $nil based on the higher of 1) FVLCS; and 2) VIU. An impairment loss of $3,000 has been included in the statement of (loss) income and comprehensive (loss) income for the year ended August 31, 2020.
In connection with the Alpha‐Cannabis Germany investment, the Company had committed to contingent consideration to be paid in the form of Common Shares of the Company upon the achievement of certain milestones by Alpha‐Cannabis Germany. This contingent consideration liability is carried at fair value in the Company’s statement of financial position. For the three months and year ended August 31, 2020, the Company recorded an unrealized gain of $86 and $886, respectively, on the revaluation of this liability compared to an unrealized gain of $864 and unrealized loss of $145 in the prior year comparative periods. The gain is primarily attributable to the decrease in the market price of the Company’s Common Shares.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
Net loss from continuing operations for the three months ended August 31, 2020 was ($38,590) or ($0.199) per Common Share (basic and diluted), compared to ($22,456) or ($0.144) per Common Share (basic and diluted) for the prior year comparative period. The change to net loss for the current quarter was a result of lower gross margin due to higher cost of sales, inventory write‐offs and provisions, including adjustments to net realizable value, and COVID‐19 related production inefficiencies; and negative fair value changes to biological assets and inventories written‐down to net realizable value.
Net loss from continuing operations for the year ended August 31, 2020 was ($136,157) or ($0.789) per Common Share (basic and diluted), compared to ($9,504) or ($0.067) per Common Share (basic and diluted) for the prior year comparative period. The increase in net loss over the prior year comparative period is largely a result of the same factors identified above for the quarter‐to‐date period.
DISCONTINUED OPERATIONS
During the fourth quarter of Fiscal 2018, management decided to discontinue operations of Trauma Healing. On October 16, 2018, the Company sold Trauma Healing to VIVO Cannabis Inc. Revenue and expenses, gains and losses relating to the discontinuation of Trauma Healing have been eliminated from profit or loss from the Company’s continuing operations and are shown as a single line item in the statements of income and comprehensive income. The Company made the decision to divest its interest in Trauma Healing in order to focus its efforts on the emerging adult‐use recreational cannabis market. The Company did not view Trauma Healing as a part of its core business and does not anticipate that the disposal of its interest in Trauma Healing to have any material impact on the expected financial performance on Organigram going forward.
The net loss from discontinued operations during the three months and year ended August 31, 2019 was $nil and $38, or $nil and $nil per Common Share (basic and diluted).
SUMMARY OF QUARTERLY RESULTS
| Q1-F19 | Q2-F19 | Q3-F19 | Q4-F19 | Q1-F20 | Q2-F20 | Q3-F20 | Q4-F20 | |||||||||||||||||
| Financial Results | ||||||||||||||||||||||||
| Adult-use recreational revenue (net of excise) | 9,236 | 24,460 | 21,802 | 13,361 | 12,867 | 15,009 | 15,349 | 15,063 | ||||||||||||||||
| Direct to patient medical revenue (net of excise) | 2,793 | 2,357 | 2,793 | 2,376 | 2,667 | 2,384 | 2,482 | 2,274 | ||||||||||||||||
| International, wholesale and other revenue | 410 | 117 | 155 | 553 | 9,619 | 5,828 | 190 | 3,063 | ||||||||||||||||
| Net revenue from continuing operations | 12,439 | 26,934 | 24,750 | 16,290 | 25,153 | 23,221 | 18,021 | 20,400 | ||||||||||||||||
| Net income (loss) from continuing operations | 29,517 | (6,386 | ) | (10,180 | ) | (22,456 | ) | (863 | ) | (6,833 | ) | (89,871 | ) | (38,590 | ) | |||||||||
| Net income (loss) from continuing operations per common share, basic |
0.231 | (0.049 | ) | (0.068 | ) | (0.144 | ) | (0.006 | ) | (0.041 | ) | (0.512 | ) | (0.199 | ) | |||||||||
| Net income (loss) from continuing operations per common share, diluted |
0.195 | (0.049 | ) | (0.068 | ) | (0.144 | ) | (0.006 | ) | (0.041 | ) | (0.512 | ) | (0.199 | ) | |||||||||
| Operational Results | ||||||||||||||||||||||||
| Dried yield per plant (grams) (1) | 153 | 164 | 110 | 148 | 152 | 155 | 132 | 104 | ||||||||||||||||
| Harvest (kg) | 8,042 | 8,315 | 6,052 | 7,434 | 12,759 | 13,710 | 6,830 | 11,137 | ||||||||||||||||
| Registered medical patients (#) | 13,505 | 14,875 | 17,000 | 17,200 | 18,125 | 16,781 | 14,312 | 18,934 | ||||||||||||||||
| Employee headcount (#) | 479 | 615 | 622 | 707 | 766 | 816 | 474 | 552 |
(1) The Company ceased the harvesting of trim from the cannabis plant during Q3 Fiscal 2020 and therefore the dried flower yield per plant for Q3 and Q4 Fiscal 2020 relates primarily to the flower component of the plant.
The legalization of adult‐use cannabis for recreational purposes in October 2018 resulted in a significant increase in revenue in Q1 Fiscal 2019, which continued through Q3 Fiscal 2019 as the recreational market matured. Prior to this period, the Company was incrementally growing its medical cannabis business, while also preparing for the launch of adult‐use cannabis market for recreational purposes. The decrease in revenue in Q4 Fiscal 2019 was largely due to the lack of a sufficient retail network and slower than expected store openings in Ontario, which was further exacerbated by increased industry supply and a changing market dynamic that resulted in the recognition of a provision for product returns and price adjustments as described previously.
Net income for Q1 Fiscal 2019 increased primarily as a result of the Company’s fair value adjustment to biological assets as the Company built‐ up inventories in advance of the recreational market launch. This was offset by increasing SG&A expenditures during the same timeframe as the Company increased its headcount substantially and invested in sales and marketing, recruitment and retention, and various other administrative expenditures. Net income for Q2 Fiscal 2019 through Q4 Fiscal 2020 declined as the Company recorded net negative changes to Company’s fair value adjustments to biological assets and inventories sold and as investment in SG&A increased and cost of goods sold increased. Besides these factors, the increased net loss during Q4 Fiscal 2020 is primarily driven by the write‐off of excess and unsaleable inventories. Excluding the aforementioned trends, no seasonality has been historically noted.
Adjusted EBITDA
This is a non‐IFRS measure and the Company calculates adjusted EBITDA from continuing operations as net income (earnings) before interest expense, net of investment income; income tax; depreciation, amortization, impairment, and gain (loss) on disposal of PP&E (per the statement of cash flows); share‐based compensation (per the statement of cash flows); share of loss and impairment loss from investments in associates; unrealized loss (gain) on changes in fair value of contingent consideration; expenditures incurred in connection with the NASDAQ cross‐listing; the fair value adjustment to biological assets and inventory; write‐offs and impairment of inventories and biological assets; write‐downs of inventory to net realizable value; and COVID‐19 related charges, net of any government subsidies. Management believes the exclusion of the fair value adjustment is an alternative representation of performance. The fair value adjustment is a non‐cash gain (loss) and is based on the valuation of biological assets and inventory using a fair value less cost to sell model. The most directly comparable measure to adjusted EBITDA (excluding fair value adjustment to biological assets and inventory) calculated in accordance with IFRS is net income (loss) from continuing operations.
Management changed the calculation of adjusted EBITDA during Q2 Fiscal 2019 and has conformed prior quarters accordingly to include an add‐back for share‐based compensation, share of loss from investments in associates, expenditures incurred in connection with the NASDAQ cross‐listing, and unrealized loss on changes in fair value of contingent consideration. During Q4 2020 management further amended the calculation of adjusted EBITDA, and has conformed prior quarters accordingly to include an add‐back for write‐offs and impairment of inventories and biological assets and write‐downs to net realizable value.
Adjusted EBITDA increased from Q1 Fiscal 2019 through to Q2 Fiscal 2019 as the adult-use recreational market was legalized in October 2018 but experienced a decrease during Q3 and Q4 Fiscal 2019 due to lower gross margins on increased production costs, inventory write-downs, and sales provisions as well as higher SG&A expenditures. In Q1 and Q2 Fiscal 2020, increased due to increased gross margin and lower operating expenses compared to Q4 of Fiscal 2019. The significant decrease in adjusted EBITDA during Q3 was due to higher cost of sales mainly attributed to lower revenues. The Q4 2020 adjusted EBITDA was similar to the Q3 as slightly higher net revenues were offset by higher cost of sales. Included in COVID-19 related charges (net) for Q3 and Q4 Fiscal 2020 are $5,048 and $nil, respectively, of plant waste due to insufficient staff to harvest plants as a result of COVID-19, lump sum payments paid to temporarily laid off employees, a temporary pay premium paid to Moncton employees, and the employee portion of health and dental benefits paid for by the Company, less government subsidies income of $3,237 and $4,646, respectively.
| Adjusted EBITDA (Non-IFRS Measure) | ||||||||||||||||||||||||
| Adjusted EBITDA Reconciliation | Q1-F19 (Note 1) |
Q2-F19 | Q3-F19 | Q4-F19 | Q1-F20 | Q2-F20 | Q3-F20 | Q4-F20 | ||||||||||||||||
| Net income (loss) from continuing operations as reported | $ | 29,517 | $ | (6,386 | ) | $ | (10,180 | ) | $ | (22,456 | ) | $ | (863 | ) | $ | (6,833 | ) | $ | (89,871 | ) | $ | (38,590 | ) | |
| Add/(Deduct): | ||||||||||||||||||||||||
| Interest expense (investment income) from continuing operations | 3,944 | 4,085 | 362 | 616 | 937 | 1,804 | 2,175 | 784 | ||||||||||||||||
| Income tax expense (recovery) | 12,785 | (620 | ) | (2,248 | ) | (6,289 | ) | 202 | (698 | ) | (9,975 | ) | - | |||||||||||
| Depreciation, amortization, impairment, and gain (loss) on disposal of PP&E from continuing operations (per statement of cash flows) | 1,671 | 1,802 | 2,220 | 3,955 | 3,760 | 4,406 | 5,033 | 5,537 | ||||||||||||||||
| Impairment of property, plant and equipment | - | - | - | - | - | - | 37,740 | 2,031 | ||||||||||||||||
| Fair value adjustment to biological assets and net realizable value adjustment to inventory | (42,925 | ) | 8,086 | 12,456 | 11,806 | (1,852 | ) | (3,878 | ) | 23,862 | 20,149 | |||||||||||||
| Share-based compensation (per statement of cash flows) | 1,847 | 5,136 | 3,875 | 4,036 | 2,805 | 2,400 | 1,937 | 654 | ||||||||||||||||
| Share of loss and impairment loss from investments in associates | - | 507 | 415 | 1,289 | 256 | 1,894 | 1,828 | 210 | ||||||||||||||||
| Unrealized loss on changes in fair value of contingent consideration | - | 646 | 363 | (864 | ) | (378 | ) | (193 | ) | (229 | ) | (85 | ) | |||||||||||
| COVID-19 related charges (net) | - | - | - | - | - | - | 2,761 | (4,452 | ) | |||||||||||||||
| Nasdaq cross-listing expenditures | - | - | 449 | - | - | - | - | - | ||||||||||||||||
| Adjusted EBITDA as Previously Reported | $ | 6,839 | $ | 13,256 | $ | 7,712 | $ | (7,907 | ) | $ | 4,867 | $ | (1,098 | ) | $ | (24,739 | ) | $ | (13,762 | ) | ||||
| Add/(Deduct): | ||||||||||||||||||||||||
| Write-offs and impairment of inventories and biological assets and write-downs to net realizable value | - | - | - | 744 | 845 | 1,039 | 22,601 | 11,099 | ||||||||||||||||
| Adjusted EBITDA Revised | $ | 6,839 | $ | 13,256 | $ | 7,712 | $ | (7,163 | ) | $ | 5,712 | $ | (59 | ) | $ | (2,138 | ) | $ | (2,663 | ) |
Note 1: Q1 Fiscal 2019 Adjusted EBITDA was originally reported as $4,992, which was subsequently amended to include share‐based compensation in Q2 Fiscal 2019.
BALANCE SHEET, LIQUIDITY AND CAPITAL RESOURCES
The following represents selected balance sheet highlights of the Company at the end Fiscal 2020 and Fiscal 2019:
|
|
AUGUST 31, 2020 |
|
AUGUST 31, 2019 |
|
% CHANGE |
||
|
Cash & short-term investments |
$ |
74,728 |
|
$ |
47,935 |
|
56% |
|
Inventories |
$ |
66,365 |
|
$ |
93,144 |
|
(29)% |
|
Working capital |
$ |
141,123 |
|
$ |
152,417 |
|
(7)% |
|
Total assets |
$ |
435,127 |
|
$ |
428,525 |
|
2% |
|
Total current and long-term debt |
$ |
115,266 |
|
$ |
49,576 |
|
133% |
|
Total shareholders' equity |
$ |
299,527 |
|
$ |
327,006 |
|
(8)% |
On August 31, 2020, the Company had a cash and short‐term investments balance of $74,728 compared to $47,935 at August 31, 2019, an increase of $26,793 which is a result of the two ATM Programs and draws against the Company’s Term Loan, as described below, offset by investments in working capital and property, plant and equipment.
Write‐downs and provisions for excess and unsaleable inventories recorded during Q3 and Q4 Fiscal 2020, resulted in a decrease in the value of inventories at the end of Fiscal 2020 as compared to Fiscal 2019.
Management believes working capital is generally healthy and that as the Company’s original Moncton Campus capital expenditure plan comes to a close, there is sufficient liquidity available for the near to medium term. In the event that the Company is unable to finance any new expansionary capital expenditures or acquisitions from cash on hand or operating cash flows, it could, if necessary and subject to prevailing market conditions, obtain liquidity through the capital markets as the Common Shares are actively traded on two senior exchanges and there is good analyst coverage amongst sell‐side brokerages.
On November 22, 2019, the Company filed a base shelf prospectus (the “Shelf Prospectus”) with the securities regulators in each of the provinces and territories of Canada, and, on November 26, 2019, filed with the U.S. Securities and Exchange (the “SEC”) a corresponding amended shelf registration statement (the “Registration Statement”) on Form F-10 (SEC File No. 333-234564) under the United States Securities Act of 1933, as amended. The Canadian Shelf Prospectus was receipted by the applicable Canadian securities regulatory authorities on November 22, 2019, and the Registration Statement, as amended, was declared effective by the SEC on November 27, 2019. The Shelf Prospectus and Registration Statement allowed the Company to make offerings of up to $175,000 during the 25-month period that the shelf prospectus remains valid through the issuance of Common Shares, preferred shares, debt securities, subscription receipts, warrants or units or a combination thereof. The Company was able, subject to prevailing market conditions, to raise funds from time to time by filing one or more prospectus supplements under the Shelf Prospectus.
On each of December 4, 2019 and April 22, 2020, the Company filed a prospectus supplement to raise up to $55 million and $49 million, respectively, under ATM Programs as described herein to shorten the timeline to raise funds for growth opportunities, working capital, to repay indebtedness, and general corporate purposes. During the year ended August 31, 2020, the Company raised net proceeds of $52,885 and $47,112, respectively, by issuing 16,201,183 and 21,080,229 Common Shares under these programs, bringing both of these ATM Programs to a close within Fiscal 2020.
The following highlights the Company’s cash flows during the three months and year ended August 31, 2020 and 2019:
| THREE MONTHS ENDED | YEAR ENDED | ||||||||||||||
| AUGUST 31, | AUGUST 31, | ||||||||||||||
| 2020 | |||||||||||||||
| (Note 1) | 2019 | 2020 | 2019 | ||||||||||||
| Cash (used) provided by: | |||||||||||||||
| Operating activities | $ | (10,128 | ) | $ | (15,722 | ) | $ | (45,125 | ) | $ | (35,081 | ) | |||
| Financing activities | 46,075 | 8,572 | 160,366 | 74,328 | |||||||||||
| Investing activities | (55,988 | ) | 7,515 | (138,196 | ) | (46,782 | ) | ||||||||
| Cash (used) provided | $ | (20,041 | ) | $ | $365 | $ | (22,955 | ) | $ | (7,535 | ) | ||||
| Effects of foreign exchange on cash | - | 26 | - | 26 | |||||||||||
| Cash position | |||||||||||||||
| Beginning of period | 44,641 | 47,190 | |||||||||||||
| End of period | $ | 24,600 | $ | 47,555 | $ | 24,600 | $ | 47,555 | |||||||
| Short-term investments | 50,128 | 380 | 50,128 | 380 | |||||||||||
| Cash and short-term investments | $ | 74,728 | $ | 47,935 | $ | 74,728 | $ | 47,935 | |||||||
Note 1: Net cash used in operating activities for the three months ended August 31, 2020 has been calculated based on a correction of a reclassification error to the presentation of prior quarter net cash used in operating activities. Fiscal 2020 year‐to‐date net cash used in operating activities is correctly stated as per the Financial Statements.
Cash used in operating activities was $10,128 for the three months ended August 31, 2020, which was primarily driven by the net loss and reduction in accounts payables and accrued liabilities. This compares to cash used in operating activities of $15,722 for the prior year comparative period. Cash used in operating activities for the year ended August 31, 2020 was $45,125, which primarily relates to the continued scaling up of operations and investment in working capital to meet the demands of the adult‐use recreational market whereas cash used in operating activities in the prior year comparative period of $35,081 relates mostly to the building of inventories.
Cash provided by financing activities for the three months and year ended August 31, 2020 was $46,075 and $160,366, respectively, mainly driven by net proceeds from the December 2019 ATM Program (as defined below) and the April 2020 ATM Program (as defined below) of $17,282 and $99,997 in addition to proceeds from long‐term debt issued of $30,000 and $65,000 (excluding fees), respectively. This was offset by cash interest paid for the three months and year ended August 31, 2020 of $1,007 and $4,043, respectively and payments towards lease liabilities of $350 and $897, respectively. In comparison, for the three months and year ended August 31, 2019, cash provided by financing activities was $8,572 and $74,328, respectively, which was primarily driven by long‐term debt issued for net proceeds of $44 and $58,851, respectively, plus stock options and warrants exercised of $9,245 and $35,146, respectively. This was offset by payment of long‐term debt of $3 and $12,674 and cash interest paid of $714 and $6,995, respectively.
During the year ended August 31, 2020, the Company drew an additional $65,000 under the Term Loan, in three tranches, bringing the total outstanding balance of the Term Loan to $115,000, which incurred an average cash interest rate of approximately 4.25% during the period. Based on the current availment option of bankers acceptances’ the applicable margin rate is 3.75% above the applicable bankers acceptances’ rate.
Pursuant to the previously noted Shelf Prospectus, on December 4, 2019, the Company established an ATM Program (the “December 2019 ATM Program”) that allowed the Company to issue up to $55,000 (or its U.S. dollar equivalent) of Common Shares from treasury to the public. Any Common Shares sold in the December 2019 ATM Program were sold through the TSX or the NASDAQ at the prevailing market price at the time of sale.
The Company issued 16,201,183 Common Shares pursuant to the December 2019 ATM Program during the three months ended February 29, 2020 for gross proceeds of $54,966 at a weighted average price of $3.39 per Common Share. Net proceeds realized were $52,885 after agents’ commissions of $1,099, regulatory fees of $12, and legal and professional fees of $968. Proceeds were raised in both USD (for shares sold through the NASDAQ) and CAD (for shares sold through the TSX) and the weighted average share price was calculated using the spot rate on the day of settlement.
On April 22, 2020, the Company established an ATM Program (the “April 2020 ATM Program”) that allowed the Company to issue up to $49,000 (or its U.S. dollar equivalent) of Common Shares from treasury to the public. Common Shares sold in the April 2020 ATM Program were sold through the TSX or the NASDAQ at the prevailing market price at the time of sale.
The Company issued 21,080,229 Common Shares pursuant to the April 2020 ATM Program during the year ended August 31, 2020 for gross proceeds of $48,785 at a weighted average price of $2.31 per common share. Net proceeds realized were $47,112 after agents’ commissions of $975, regulatory fees of $1, and legal and professional fees of $697. Proceeds were raised in both USD (for shares sold through the NASDAQ) and CAD (for shares sold through the TSX) and the weighted average share price was calculated using the spot rate on the day of settlement.
Cash used by investing activities for the three months and year ended August 31, 2020 was $37,462 and $138,196, respectively, primarily driven by the purchase of short‐term investments of $50,000 and $50,000, and by purchase of property, plant and equipment of $nil and $77,223 for the Company’s Moncton Campus, which is effectively completed, as well as the purchase of GICs for restricted cash of $50,000 and $8,000. This compares to cash provided by investing activities of $7,515 and used in investing activities of $46,782 for the prior year comparative periods, which was primarily due to the purchase of property, plant and equipment for $32,740 and $108,764 and investment in associates for $10 and $12,758, which was offset by proceeds from short‐term investments of $40,000 and $75,000.
On November 12, 2020, the Company closed an underwritten public offering of 37,375,000 units of the Company at a price of $1.85 per unit, including a full exercise of the over‐allotment option, underwritten by a syndicate of underwriters led by Canaccord Genuity Corp., for total gross proceeds of $69,144. Each unit is comprised of one Common Share of the Company and one half of one common share purchase warrant of the Company (each full common share purchase warrant, a “Warrant”). Each Warrant will be exercisable to acquire one common share of the Company (a “Warrant Share”) for a period of three years following the closing date of the Offering at an exercise price of $2.50 per Warrant Share, subject to adjustment in certain events. The Company expects to use the net proceeds from the Offering to repay indebtedness and for working capital and other general corporate purposes.
Following completion of the unit offering in November 2020, the Company has exhausted its current Shelf Prospectus. The Company believes it can access the public markets from time to time to raise funds subject to prevailing market conditions.
Subsequent to the year-end, on November 27, 2020, the Company executed the third amendment to its loan Facilities with BMO (as described in the Subsequent Events section of this MD&A). In connection with this amendment and restatement, the Company will use $55 million of the proceeds from the November 12, 2020 offering to pay down its Term Loan balance to $60 million on December 1, 2020, thereby significantly deleveraging the Company and providing management with the financial flexibility required to execute upon the Company’s strategy. The loan facilities contain covenants that require the Company to maintain certain minimum financial ratios and targets, which, given the early stages of the industry and market and the developing consumer trends, among other factors, may be difficult to maintain period-over-period. If the Company does not maintain such ratios and targets, it could have consequences for the availability of credit under the loan facilities or result in repayment requirements that the Company may not be able to satisfy if the Company is unable to renegotiate the terms of the loan facilities, as it has been able to do historically when faced with possible financial covenant breaches. In addition, restrictions and covenants from those facilities may limit the Company’s ability to execute its plans.
As at November 29, 2020, excluding the $8.0 million of restricted investment (GIC), the Company had $135 million in cash and short-term investments. After completing the $55 million term loan repayment on December 1, 2020, on a pro forma basis the Company would have $80 million in cash and short-term investments and $60 million in long-term debt.
OFF BALANCE SHEET ARRANGEMENTS
There were no off‐balance sheet arrangements during the three months and year ended August 31, 2020.
RELATED PARTY TRANSACTIONS
MANAGEMENT AND BOARD COMPENSATION
Key management personnel are those persons having the authority and responsibility for planning, directing and controlling activities of the Company, directly or indirectly. The key management personnel of the Company are the members of the Company’s executive management team and the Board of Directors.
For the three months and year ended August 31, 2020 and 2019, the Company’s expenses included the following management and board compensation:
|
|
|
THREE MONTHS ENDED |
|
|
YEAR ENDED |
||||||
|
|
AUGUST 31, 2020 |
|
AUGUST 31, 2019 |
|
AUGUST 31, 2020 |
|
AUGUST 31, 2019 |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and consulting fees |
$ |
995 |
|
$ |
1,091 |
|
$ |
2,953 |
|
$ |
2,521 |
|
Non-cash share-based compensation |
|
537 |
|
|
787 |
|
|
2,750 |
|
|
5,155 |
|
Total key management compensation |
$ |
1,532 |
|
$ |
1,878 |
|
$ |
5,703 |
|
$ |
7,676 |
During the three months and year ended August 31, 2020, nil and 790,000 stock options (August 31, 2019 – nil and 685,000), respectively, were granted to key management personnel at an average exercise price of $nil and $2.48 (August 31, 2019 ‐ $nil and $4.75) and aggregate fair value of $nil and $1,794 (August 31, 2019 ‐ $nil and $1,736). In addition, during the three months and year ended August 31, 2020, nil and 211,981 RSUs (August 31, 2019 – nil and 631,949), were granted to key management personnel with an aggregate fair value of $nil and $902 (August 31, 2019 – $nil and $3,002), respectively. For the three months and year ended August 31, 2020, nil and 88,910 PSUs (August 31, 2019 – nil and nil) were issued to key management personnel with an aggregate fair value of $nil and $190,712 (August 31, 2019 – $nil and $nil), respectively.
SIGNIFICANT TRANSACTIONS WITH ASSOCIATES
For the year ended August 31, 2020, the Company received no interest income (August 31, 2019 ‐ $374) on its convertible debenture investment in Eviana, which is being recorded as distributions under the equity accounting method.
For the year ended August 31, 2020, the Company earned revenues of $52 (August 31, 2019 ‐ $nil) on product sold to ACG, which has been proportionately eliminated from the Financial Statements based on the Company’s proportionate share of investment in ACG.
SUBSEQUENT EVENTS
i) Hyasynth Tranche 2 Convertible Debentures Issuance
On October 23, 2020, the Company advanced an additional $2,500 to Hyasynth by way of convertible debentures as a result of Hyasynth’s achievement of the contractual production‐related milestone for Tranche 2 of the convertible debentures. This brings the Company’s total face value of convertible debentures investment in Hyasynth to $7,500.
ii) Unit Offering
On November 12, 2020, the Company closed an underwritten public offering of 37,375,000 units of the Company at a price of $1.85 per unit, including a full exercise of the over‐allotment option, underwritten by a syndicate of underwriters led by Canaccord Genuity Corp., for total gross proceeds of $69,144. Each unit is comprised of one Common Share of the Company and one half of one common share purchase warrant of the Company (each full common share purchase warrant, a “Warrant”). Each Warrant will be exercisable to acquire one common share of the Company (a “Warrant Share”) for a period of three years following the closing date of the Offering at an exercise price of $2.50 per Warrant Share, subject to adjustment in certain events. The Company expects to use the net proceeds from the Offering to repay indebtedness and for working capital and other general corporate purposes.
iii) Credit facility amendment and restatement
On November 27, 2020, the Company further amended its Facilities pursuant to an amended and restated credit agreement (“Amendment and Restatement”) with BMO to: (i) reduce the Term Loan amount from $115,000 to $60,000 based on a repayment of $55,000 to be made on December 1, 2020 of the outstanding Term Loan balance of $115,000; (ii) have repayments on the balance of the Term Loan commence on February 28, 2021 in an amount equal to $1,500 per quarter; (iii) reduce the Revolver commitment to $2,000 from up to $25,000; (iv) adjust the minimum quarterly EBITDA covenants to be maintained by the Company commencing on February 28, 2021 and continuing through to maturity, thereby removing this covenant for the fiscal period ended November 30, 2020 and eliminating the reversion of the financial covenants to that of the original structure on November 30, 2021; (v) modify the applicable margin pricing and standby fee terms to reflect current market conditions; and (vi) reduce the minimum unrestricted cash balance requirement to $20,000, which is already inclusive of the $8,000 restricted investment currently outstanding. The interest rate margin will be fixed from November 27, 2020 through to maturity on May 31, 2021. The Company incurred an amendment fee of $217 plus customary legal expenses in connection with the amendment and restatement.
FAIR VALUE MEASUREMENTS
(i) Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants. The Company records certain financial instruments at fair value. The Company’s financial instruments include cash, short‐term investments (including marketable securities), accounts receivable, loan receivable, accounts payable and accrued liabilities, long‐term debt, and contingent share consideration.
Fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
• Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date;
• Level 2 inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
• Level 3 inputs are unobservable inputs for the asset or liability.
The fair value of cash, short‐term investments, accounts receivable, loan receivable, accounts payable and accrued liabilities approximate their carrying amounts due to their short‐term nature. The fair value of marketable securities is based on quoted prices in active markets and is reflected in the carrying value of these financial assets. The fair value of long‐term debt approximates $115,389 based on the face value of debt outstanding, which carries a floating interest rate.
The fair value of the contingent share consideration is primarily based on Level 3 unobservable inputs. The determination of the fair value of this liability is primarily driven by the Company’s expectations of the investment in associate 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 August 31, 2020, the probability of achieving the milestones was estimated to be 68% and the discount rate was estimated to be 20%. If the probabilities of achieving the milestones increased or decreased by 10%, the estimated fair value of the contingent share consideration would increase or decrease by approximately $33. If the discount rates increased or decreased by 5%, the estimated fair value of contingent consideration would decrease or increase, respectively, by approximately $12.
During the period, there were no transfers of amounts between Levels 1, 2 and 3.
(ii) Biological Assets
The Company measures biological assets consisting of cannabis plants at fair value less costs to sell up to the point of harvest, which becomes the basis for the cost of finished goods inventories after harvest. The fair value less costs to sell of biological assets is determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusts that amount for the expected selling price per gram and also for any additional costs to be incurred, such as post‐harvest costs. The following unobservable inputs, all of which are classified as Level 3 on the fair value hierarchy (see above), are used in determining the fair value of biological assets:
• Average selling price per gram – calculated as the weighted average current selling price of cannabis sold by the Company, adjusted for expectations about future pricing;
• Yield by plant – represents the number of grams of finished cannabis inventory which are expected to be obtained from each harvested cannabis plant;
• Wastage of plants based on their various stages of growth – represents the weighted average percentage of biological assets which are expected to fail to mature into cannabis plants that can be harvested;
• Post‐harvest costs – calculated as the cost per gram of harvested cannabis to complete the sale of cannabis plants post‐harvest, consisting of the cost of direct and indirect materials and labour related to drying, labelling and packing.
The Company estimates the harvest yields for the cannabis on plants at various stages of growth. As of August 31, 2020, it is expected that the Company’s biological assets will yield 5,096 kg (August 31, 2019 – 16,595 kg) of cannabis when eventually harvested. The Company’s estimates are, by their nature, subject to change and differences from the anticipated yield will be reflected in the fair value adjustment to biological assets in future periods. The Company accretes fair value on a straight‐line basis according to stage of growth. As a result, a cannabis plant that is 50% through its 19‐week growing cycle would be ascribed approximately 50% of its harvest date expected fair value less costs to sell (subject to wastage adjustments).
Management believes the most significant unobservable inputs and their impact on fair value are as follows:
| SIGNIFICANT INPUTS & | WEIGHTED AVERAGE INPUT | EFFECT ON FAIR VALUE | |||||||||||||
| ASSUMPTIONS | AUG. 31, 2020 | AUG. 31, 2019 | SENSITIVITY | AUG. 31, 2020 | AUG. 31, 2019 | ||||||||||
| Average net selling price per gram | $ | 3.36 | $ | 5.65 | Increase or decrease by $1.00 per gram |
$ | 1,602 | $ | 3,657 | ||||||
| Average yield per plant | 101 grams | 151 grams | Increase or decrease by 10 grams |
$ | 532 | $ | 1,367 | ||||||||
During the three months ended May 31, 2020, management ceased the harvesting of trim from the cannabis plants and therefore the average yield per plant at August 31, 2020 only reflects the average yield of the flower component of the plant.
OUTSTANDING SHARE DATA
(i) Outstanding Shares, Warrants and Options and Other Securities
The following table sets out the number of Common Shares, options, and restricted share units outstanding of the Company as at August 31, 2020 and November 29, 2020:
| AUGUST 31, 2020 | NOVEMBER 28, 2020 | ||||||
| Common shares issued and outstanding | 194,511,061 | 232,088,219 | |||||
| Options | 9,028,904 | 8,144,104 | |||||
| Restricted share units | 893,171 | 870,816 | |||||
| Performance share units | 126,685 | 124,988 | |||||
| Total fully diluted shares | 204,559,821 | 241,228,127 |
(ii) Share‐based Compensation
On February 25, 2020 (the “Approval Date”), the Company’s shareholders approved a new omnibus equity incentive plan that governs grants made on or after the Approval Date. Grants made prior to the Approval Date will continue to be governed under the terms of the plan under which they were granted, including the Company’s 2011 stock option plan and 2017 equity incentive plan, however, no new grants may be made under such plans.
The following table summarizes changes in the Company’s outstanding stock options for the years ended August 31, 2020 and 2019:
| WEIGHTED AVERAGE | ||||||
| NUMBER | EXERCISE PRICE | |||||
| Balance - August 31, 2018 | 7,709,746 | $ | 2.10 | |||
| Granted | 3,589,500 | $ | 7.59 | |||
| Exercised | (2,167,864 | ) | $ | 1.92 | ||
| Cancelled / Forfeited | (298,188 | ) | $ | 6.41 | ||
| Balance - August 31, 2019 | 8,833,194 | $ | 4.23 | |||
| Granted | 2,125,000 | $ | 3.21 | |||
| Exercised | (879,240 | ) | $ | 1.21 | ||
| Cancelled / Forfeited | (1,050,050 | ) | $ | 6.20 | ||
| Balance - August 31, 2020 | 9,028,904 | $ | 4.06 |
The following is a summary of the outstanding stock options as at August 31, 2020:
|
|
OPTIONS OUTSTANDING |
|
OPTIONS EXERCISABLE |
|
Range of Exercise |
|
Weighted Average Remaining |
|
|
Prices |
Quantity Outstanding |
Contractual Life (years) |
Quantity Exercisable |
|
$0.30 - $1.48 |
1,440,599 |
4.7 |
1,376,683 |
|
$1.49 - $2.38 |
2,204,333 |
7.5 |
1,652,833 |
|
$2.39 - $4.65 |
2,069,854 |
7.9 |
1,217,504 |
|
$4.66 - $7.67 |
1,886,518 |
8.2 |
1,276,194 |
|
$7.68 - $11.27 |
1,427,600 |
8.7 |
949,900 |
|
|
9,028,904 |
7.5 |
6,473,114 |
Options outstanding have exercise prices ranging from $0.30 to $11.27 with a weighted average remaining life of seven‐and‐a‐half years. Total share‐based compensation charges, including related to production employees that are charged to biological assets and inventory, for the year ended August 31, 2020 was $7,796 (August 31, 2019 – $14,894) of which $6,127 (August 31, 2019 ‐ $10,036) related to the Company’s stock option plan. The fair value of options granted during the year ended August 31, 2020 was $3,743 (August 31, 2019 ‐ $13,848). These options are measured at fair value at the date of grant and are expensed over the option’s vesting period, which typically range from two to three‐year terms with options vesting in annual tranches evenly over this time period. In determining the amount of share‐based compensation related to the options, the Company used the Black‐Scholes option pricing model to establish the fair value of options granted.
The following is the range of assumptions for the years ended August 31, 2020 and 2019:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||
| Risk free interest rate | 0.45% - 1.65% | 1.20% - 2.42% | |
| Expected life of options | 5.0 - 6.0 years | 5.0 -6.5 years | |
| Expected annualized volatility | 72% - 85% | 64% -71% | |
| Expected dividend yield | - | - | |
| Forfeiture Rate | 8.0% - 8.7% | 7.3% - 8.0% |
Volatility was estimated by using the weighted average historical volatility of the Company and other companies that the Company considers comparable. The expected life in years represents the period of time that options granted are expected to be outstanding. The risk‐free rate is based on government of Canada bonds with a remaining term equal to the expected life of the options. The forfeiture rate is calculated based on historical experience.
The following table summarizes the changes in the Company’s outstanding RSUs:
| NUMBER | |||
| Balance - August 31, 2018 | 145,200 | ||
| Granted | 879,635 | ||
| Exercised | (182,473 | ) | |
| Balance - August 31, 2019 | 842,362 | ||
| Granted | 265,258 | ||
| Exercised | (154,062 | ) | |
| Cancelled/Forfeited | (60,387 | ) | |
| Balance - August 31, 2020 | 893,171 |
The estimated fair value of the equity settled RSUs granted during the year ended August 31, 2020 was $1,037 (August 31, 2019 ‐ $4,543), which was based on the Company’s share price at the grant date and will be recognized as an expense over the vesting period of the RSUs, which is one‐third each year recognized over three years. For the year ended August 31, 2020, $1,576 (August 31, 2019 – $3,475) has been recognized as share‐based compensation expense.
The following table summarizes the movements in the Company’s outstanding PSUs:
| NUMBER | |||
| Balance - August 31, 2019 | - | ||
| Granted | 142,187 | ||
| Exercised | (15,502 | ) | |
| Balance - August 31, 2020 | 126,685 |
The estimated fair value of the equity settled PSUs granted during the year ended August 31, 2020 was $305 (August 31, 2019 ‐ $nil), which was based on the Company’s share price at the grant date, adjusted for an estimate of likelihood of achievement, and will be recognized as an expense over the vesting period of the PSUs, which is during the fiscal year‐ended August 31, 2020. For the year ended August 31, 2020, $272 (August 31, 2019 ‐ $nil) has been recognized as share‐based compensation expense.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of the Financial Statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected.
The following are the estimates and judgments made by management in applying the accounting policies of the Company that have the most significant effect on the financial statements.
1) Biological assets and inventories
Determination of the fair value of biological assets requires management to make a number of estimates, including estimating harvesting costs, selling costs, sales prices, wastage, oil conversion factor, expected yields, and post‐harvest costs of the cannabis plant. The Company records obsolete and unsaleable inventories at the lower of cost and net realizable value. Adjustments to the carrying value of inventories are based on obsolescence trends, historical experience, and forecast demand and pricing for obsolete and unsaleable inventories. Refer to Notes 7 and 8 for further information.
(2) Estimated useful lives and impairment of property, plant and equipment
Amortization of property, plant and equipment requires estimates of useful lives, which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts, taking into consideration factors such as economic and market conditions and the useful lives of assets.
(3) Share‐based payments
In determining the fair value of options and related expenses, management estimates the expected life of the option, the volatility of the Company’s share price, the risk‐free interest rate, and the rate of forfeitures. Refer to Note 12 for further information.
(4) Warrants
In determining the value of warrants, management estimates the expected life of the warrant, the volatility of the Company’s share price, and the risk‐free interest rate.
(5) Adult‐use recreational cannabis revenue – provision for returns and price adjustments
Government customers typically have the right to return products, and in some cases, the right to pricing adjustments for products that are subsequently discounted or sold for a lower price in another jurisdiction. The estimation of potential future returns and pricing adjustments includes the use of management estimates and assumptions that may not be certain given the evolving nature of the industry.
(6) Investments in associates
Management has applied significant judgment in the determination of whether the Company exerts significant influence with respect to its investments, which then allows the Company to account for its investments under the equity accounting method. Further, management has applied significant judgment and made use of management estimates and assumptions in determination and quantification of any impairment losses that may need to be recorded against its investments in associates.
(7) Impairment of long‐lived and intangible assets
In determining the recoverable amount of the Moncton Campus CGU, management has applied significant judgment in the aggregation of the CGU and has made various estimates with respect to the forecast cash flows, terminal growth rate, post‐tax discount rate, and income taxes utilized in the discounted cash flow model to estimate fair value less costs of disposal.
NEW STANDARDS AND INTERPRETATIONS ADOPTED New or amended standards effective September 1, 2019
The Company has adopted the following new or amended IFRS standard for the annual period beginning on September 1, 2019:
IFRS 16 – Leases
In January 2016, the IASB issued IFRS 16 Leases, which replaced IAS 17 Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of low value. 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. The standard was effective for annual periods beginning on or after January 1, 2019 and has been adopted by the Company effective September 1, 2019 using the modified retrospective approach where comparative figures were not restated.
As a result of adopting IFRS 16, the Company recognized right‐of use (“ROU”) assets of $4,464 recorded under property, plant and equipment (Note 9 of the Financial Statements), lease liabilities of $4,439 recorded under other liabilities (Note 13 of the Financial Statements), and a reduction to prepaid expenses of $25 as a result of the leasing arrangements in place at September 1, 2019 and entered during the year ended August 31, 2020 by the Company.
The ROU asset was measured as the amount of the lease liability, using the Company’s incremental borrowing rate on September 1, 2019 that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the ROU asset in a similar economic environment. The weighted average interest rate as of September 1, 2019 to measure the lease liabilities was 5.70%.
The Company elected to use the following practical expedients on adoption of IFRS 16 on all of its leases:
(a) In accordance with IFRS 16.C3, an election is being taken to not reassess whether a contract is or contains a lease at the date of initial application, and instead to only apply IFRS 16 to contracts that were in the scope of IAS 17;
(b) In accordance with IFRS 16.C8(b)(ii), an election is being taken to measure the ROU asset on September 1, 2019 as an amount equal to the lease liability, adjusted for prepaid or accrued lease payments;
(c) In accordance with IFRS 16.C10(a), an election is being taken to apply a single discount rate to a portfolio of leases with reasonably similar characteristics;
(d) In accordance with IFRS 16.C10(b), an election is being taken to rely on the IAS 37 assessment of whether leases are onerous instead of performing an impairment review;
(e) In accordance with IFRS 16.C10(c), an election is being taken to exclude leases for which the term ends within 12 months from September 1, 2019;
(f) In accordance with IFRS 16.C10(d), an election is being taken to exclude initial direct costs from the measurement of the ROU asset on September 1, 2019;
(g) In accordance with IFRS 16.15, an election is being taken, by class of underlying asset, not to 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 where the non‐lease components are not significant compared to the lease components;
(h) In accordance with IFRS 16.5(a), an election is being taken to not recognize a ROU asset and lease liability for leases for which the lease has a term less than 12 months; and
(i) In accordance with IFRS 16.5(b), an election is being taken to not recognize a ROU asset and lease liability for leases for which the underlying asset is of low value, which is defined to mean less than $5,000 USD when new.
The following is a reconciliation between the Company’s operating lease commitments disclosed applying IAS 17 as at August 31, 2019 and the lease liabilities as at September 1, 2019 after adopting IFRS 16:
| Reconciliation - IAS 17 to IFRS 16 | |||
| Operating lease obligations as at August 31, 2019 | $ | 3,049 | |
| Minimum Future payments not related to lease payments | (411 | ) | |
| Lease payments for renewal options reasonably expected to be exercised but not contractually obligated | 655 | ||
| Relief option for short-term leases | (538 | ) | |
| Relief option for leases of low-value assets | (76 | ) | |
| Gross lease liabilities at September 1, 2019 | 2,679 | ||
| Discounting | (459 | ) | |
| Present value of lease liabilities at September 1, 2019 | $ | 2,220 |
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.
Amendments to IFRS 3: Definition of a Business
In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)”. The amendments clarify the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendment provides an assessment framework to determine when a series of integrated activities is not a business. The amendments are effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements resulting from any future transactions.
Amendments to IAS 1: Classification of Liabilities as Current or Non‐Current
The amendments to IAS 1 clarify the requirements relating to determining if a liability should be presented as current or non‐current in the statement of financial position. Under the new requirements, the assessment of whether a liability is presented as current or non‐current is based on the contractual arrangements in place as at the reporting date and does not impact the amount or timing of recognition. The amendment applies retrospectively for annual reporting periods beginning on or after January 1, 2023. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.
CONTINGENT LIABILITIES
The Company recognizes loss contingency provisions for probable losses when management can reasonably estimate the loss. When the estimated loss lies within a range, the Company records a loss contingency provision based on its best estimate of the probable loss. If no particular amount within that range is a better estimate than any other amount, the mid‐point of the range is used. As information becomes known a loss contingency provision is recorded when a reasonable estimate can be made. The estimates are reviewed at each reporting date and the estimates are changed when expectations are revised. An outcome that deviates from the Company’s estimate may result in an additional expense or release in a future accounting period.
During 2015, the Company was named as a defendant in a lawsuit in New Brunswick for breach of confidence, conversion, breach of contract, conspiracy and breach of trust, breach of fiduciary duty, and negligent misrepresentation. The Company believes the lawsuit to be without merit though it will rigorously defend the action. No amount has been accrued in relation to the condensed consolidated interim financial statements for the claim.
On March 3, 2017, a claim in connection with a proposed class‐action lawsuit (the “Claim”) was filed with the Supreme Court of Nova Scotia (the “Court”) seeking to represent a class who purchased medical marijuana that was the subject of the Company’s product recalls in December 2016 and January 2017 as it may have contained trace elements of the pesticides myclobutanil and bifenazate which are not approved for use by licensed producers. The Claim identifies several causes of action including, among others: (i) negligent design, development and testing, (ii) negligent manufacturing, (iii) negligent distribution, marketing and sale, (iv) breach of contract, and (v) breach of the Competition Act, the Consumer Protection Act, and the Sale of Goods Act, and is seeking remedy in the form of, among other things, the disgorgement of profits accrued to the Company for the sale of contaminated products, exemplary or punitive damages and certain costs.
The Claim was amended on November 16, 2017, to include a claim for alleged adverse health consequences caused as a result of using the recalled product. As at the date hereof, the Company has not received any medical information demonstrating adverse health effects caused as a result of using the recalled product.
The amended Claim also contained a request for an order certifying the proceeding as a class proceeding.
During late June 2018, certification hearings were heard before the Court. On January 18, 2019, the Court issued its decision granting certification. On March 4, 2019, the Company filed a notice for leave to appeal the certification of the class action brought against it. Leave to appeal was granted and the appeal was heard on October 15, 2019 and the decision was reserved. On April 30, 2020, the Nova Scotia Court of Appeal ruled that the plaintiff failed to present any evidence that the cannabis purchased by medical customers in 2016 could cause any particular adverse health effects. As a result, class members would not be able to bring claims for damages for adverse health effects in the class proceeding. On June 26, 2020, the plaintiff filed an application for leave to appeal the Nova Scotia Court of Appeal’s decision with the Supreme Court of Canada. On November 5, 2020, the application for leave to appeal was dismissed by the Supreme Court of Canada.
The Company is contesting what remains of the litigation. The Company reported the Claim to its insurance provider which appointed counsel to defend the Claim. Insurance may be available to cover all or a portion of the fees or damages which may be associated with the Claim although the Company’s coverage may be subject to varying limits and exclusions. The litigation process will continue into the foreseeable future unless settled out of court. No amount has been recorded in the condensed consolidated interim financial statements as the Company has not yet determined a reasonable estimate of the cost to resolve this class action.
On June 16, 2020, a claim in connection with a proposed national consumer protection class‐action lawsuit was filed with the Court of Queen’s Bench in Alberta (the “Alberta Claim”) seeking damages against several Canadian cannabis companies including the Company. The Alberta Claim does not particularize all of the claims against the companies however it makes allegations with respect to the content of THC and CBD in the companies’ products. The proposed action is not certified. The Company has reported the Alberta Claim to its insurers.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
In accordance with National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”) and Rule 13a-15 under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), the establishment and maintenance of Disclosure Controls and Procedures (“DCP”) and Internal Control Over Financial Reporting (“ICFR”) is the responsibility of management.
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains a set of DCP designed to provide reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis. As required by NI 52-109 and Exchange Act Rule 13a-15(b), an evaluation of the design of our disclosure controls was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) using the criteria set forth in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO 2013 Framework”). Based upon this evaluation, our CEO and CFO concluded that because of the material weaknesses in our internal control over financial reporting (“ICFR”) described below, our disclosure controls were not effective as at August 31, 2020.
INTERNAL CONTROL OVER FINANCIAL REPORTING
NI 52-109 requires the CEO and CFO to certify that they are responsible for establishing and maintaining ICFR for the Company and that those internal controls have been designed and are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. Similarly, Exchange Act Rule 13a-15(c) requires the Company’s management, with the participation of the CEO and CFO, to evaluate ICFR as of the end of the fiscal year. The CEO and CFO are also responsible for disclosing any changes to the Company’s internal controls during the most recent period that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
The Company’s management, under the supervision and with the participation of its CEO and CFO, conducted an evaluation of the effectiveness of the Company’s ICFR as of August 31, 2020, using the criteria set forth by the COSO 2013 Framework. Based on this evaluation, management concluded that material weaknesses existed as of August 31, 2020, as described below.
MATERIAL CHANGES TO THE CONTROL ENVIRONMENT
There have been no changes to the Company ICFR during the three months ended August 31, 2020 that have materially affected, or are likely to materially affect, the Company’s ICFR.
COMPLEX SPREADSHEET CONTROLS
Management concluded that the Company did not implement and maintain effective controls surrounding complex spreadsheets related to the Company’s valuation of Inventories and Property, Plant and Equipment. Spreadsheets are inherently prone to error due to the manual nature and increased risk of human error. The Company’s controls related to complex spreadsheets did not address all identified material risks associated with manual data entry, updating of assumptions and evidence of sufficient levels of review of completed spreadsheets.
Remediation Plan and Activities
Management has taken steps since this material weakness was first identified for the fiscal year ended August 31, 2018, to improve its process including establishing checklists to be completed quarterly with multiple levels of review. Additional process improvements and further refinements continued to be developed during the quarter. Senior management has discussed this material weakness with the Audit Committee and the Board of Directors continues to review progress on these remediation activities on a regular and ongoing basis. The Company had engaged a third party to aid in the identification, assessment and remediation over the design and implementation effectiveness of internal controls over financial reporting. The Company changed service providers during Q2 2020 and a new third party has been working on identification and assessment of internal controls over financial reporting with the remediation activities being handled by the Company. The Company continued during the quarter to perform some scoping exercises and planning for an enterprise resource planning (“ERP”) implementation. The timing for the ERP implementation is under review and is expected to be a longer‐term exercise as the Company allocates its personnel to various initiatives and continues to responds to COVID‐19. The ERP possesses specific functionality to remove the manual nature and usage of complex spreadsheets in future periods once fully scoped and operational.
GENERAL INFORMATION TECHNOLOGY CONTROLS (GITC)
The Company did not have effective information technology (IT) general controls over all operating systems, databases, and IT applications supporting financial reports. Accordingly, process‐level automated controls and manual controls that were dependent upon the information derived from IT systems were also determined to be ineffective.
Remediation Plan
The Company has engaged a third party to aid in the identification and assessment of the design and implementation effectiveness of IT related ICFR. The Company is implementing the remediation internally. The Company continued to advance a logical access review to enhance segregation of duties on certain in‐scope applications during Q4 2020. The majority of this work is expected to take place in Fiscal 2021. The Company also continued during the quarter to perform some scoping exercises and planning for an ERP implementation as described above. The timing for the ERP implementation is under review and is expected to be a longer‐term exercise as the Company allocates its personnel to various initiatives and continues to responds to COVID‐19.
PROPERTY, PLANT AND EQUIPMENT
The Company did not maintain effective controls over the acquisition and disposal of capital assets, including the review of source documentation, authorization for disposal and processing of the related financial transaction(s).
Remediation Plan
To further strengthen controls surrounding property, plant and equipment, management has initiated or intends to initiate during Fiscal 2021 the following procedures:
∙ Implement a formalized capitalization policy and provide additional training and guidance to internal teams regarding the communicated processes;
∙ Enhancements to the quarterly capital budget analysis prepared on major projects; and
∙ Review the asset register and perform a physical inventory count of all the Company’s assets.
The Company made advancements during Fiscal 2020 on formalizing the capitalization policy and providing additional training and guidance on processes, further enhancing the capital budget analysis and reviewing the asset register and performing a physical inventory count of the Company’s assets. There remains further work to be done which the Company currently expects will be completed in Fiscal 2021.
RISK FACTORS
The Company’s business is subject to risks inherent in a high growth, heavily regulated enterprise, and the Company has identified certain risks pertinent to its business that may have affected or may affect its business, financial conditions, results of operations and cash flows, as further described throughout this MD&A and under “Risk Factors” in the AIF. For additional risk factors, readers are directed to the Company’s most recent AIF available under the Company’s issuer profile on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. As a general matter, management of the Company attempts to assess and mitigate any risks and uncertainties by retaining experienced professional staff and assuring that the Board of Directors and senior management of the Company are monitoring the risks impacting or likely to impact the business on a continuous basis.
(i) Credit Risk
Credit risk arises from deposits with banks, short‐term investments (excluding investments in equity securities), outstanding trade and loan receivables, and restricted investments. For trade receivables, the Company does not hold any collateral as security but mitigates this risk by dealing only with what management believes to be financially sound counterparties and, accordingly, does not anticipate significant loss for non‐performance. For other receivables, out of the normal course of business such as the loan receivable, management generally obtains guarantees and general security agreements. The maximum exposure to credit risk of cash, short‐term investments, accounts receivable, loans receivable, and restricted investment on the statement of financial position at August 31, 2020 approximates $99,736 (August 31, 2019 ‐ $65,385).
As of August 31, 2020, the Company’s aging of trade receivables was as follows:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| 0-60 days | $ | 11,023 | $ | 11,748 | |||
| 61-120 days | 73 | 152 | |||||
| Gross trade receivables | $ | 11,096 | $ | 11,900 | |||
| Less: Provision for doubtful accounts | (13 | ) | (268 | ) | |||
| $ | 11,083 | $ | 11,632 |
(ii) Liquidity Risk
The Company’s liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. At August 31, 2020, the Company had $24,600 (August 31, 2019 – $47,555) of cash and working capital of $141,123 (August 31, 2019 ‐ $152,417). Further, the Company may further consider accessing equity capital through the capital markets.
The Company is obligated to the following contractual maturities relating to their undiscounted cash flows:
| Contractual Cash Flows |
Less than 1 year |
1 to 3 years | 3 to 5 years | More than 5 years |
|||||||||||
| Long-term debt obligations | $ | 123,117 | $ | 16,287 | $ | 106,707 | $ | 123 | - | ||||||
| Operating lease obligations | 6,019 | 1,553 | 2,094 | 1,766 | 606 | ||||||||||
| Purchase obligations | 1,600 | 1,600 | - | - | - | ||||||||||
| Accounts payable and accrued liabilities | 17,486 | 17,486 | - | - | - | ||||||||||
| $ | 148,222 | $ | 36,926 | $ | 108,801 | $ | 1,889 | $ | 606 |
The contractual maturities noted above are based on contractual due dates of the respective financial liabilities.
In connection with the Company’s Moncton Campus expansion plans, the Company is contractually committed to approximately $1,600 of capital expenditures.
(iii) Market Risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk for the Company comprises of:
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk at August 31, 2020 pursuant to the variable rate loans described in Note 10. A 1% change in benchmark interest rates will increase or decrease the Company’s interest expense by $1,150 (August 31, 2019 ‐ $500) per year.
(iv) Concentration risk
The Company’s accounts receivable are primarily due from provincial government agencies (two of which, individually, represented more than 10% of the Company’s revenues during the year ended August 31, 2020), corporations (one of which represented more than 10% of the Company’s revenues during the period), and legal trusts and, thus, the Company believes that the accounts receivable balance is collectible.
TABLE OF CONTENTS
November 29, 2020
Management's Responsibility for the Financial Statements
The accompanying consolidated financial statements of Organigram Holdings Inc. (the "Company") have been prepared by the Company's management in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and contain estimates based on management's judgment. Internal control systems are maintained by management to provide reasonable assurance that assets are safe-guarded and financial information is reliable.
The Board of Directors of the Company is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements and the accompanying management discussion and analysis. The Board of Directors carries out this responsibility principally through its Audit Committee.
The Audit Committee is appointed by the Board of Directors. It meets with the Company’s management and auditors, and reviews internal controls and financial reporting matters to ensure that management is properly discharging its responsibilities before submitting the financial statements to the Board of Directors for approval.
|
/s/ Greg Engel |
/s/ Derrick West |
|
Chief Executive Officer |
Chief Financial Officer |
|
Moncton, New Brunswick |
Moncton, New Brunswick |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Organigram Holdings Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Organigram Holdings Inc. and subsidiaries (the “Company”) as of August 31, 2020 and 2019, the related consolidated statements of loss and comprehensive loss, consolidated statements of changes in equity, and consolidated statements of cash flows, for each of the two years in the period ended August 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2020 and 2019, and its financial performance and its cash flows for each of the two years in the period ended August 31, 2020, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Change in Accounting Principle
As discussed in Note 3 to the financial statements, effective September 1, 2019, the Company adopted IFRS 16, Leases, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte LLP
Chartered Professional Accountants
Moncton, Canada
November 29, 2020
We have served as the Company's auditor since 2015.
ORGANIGRAM HOLDINGS INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at August 31, 2020 and 2019
(Expressed in CDN $000's except share amounts)
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| ASSETS | |||||||
| Current assets | |||||||
| Cash | $ | 24,600 | $ | 47,555 | |||
| Short-term investments (Note 4) | 50,128 | 380 | |||||
| Accounts receivable (Note 5) | 14,747 | 16,541 | |||||
| Current portion of loan receivable (Note 6) | 2,229 | 909 | |||||
| Biological assets (Note 7) | 5,394 | 20,652 | |||||
| Inventories (Note 8) | 66,365 | 93,144 | |||||
| Prepaid expenses and deposits (Note 12 and Note 24) | 6,741 | 17,100 | |||||
| 170,204 | 196,281 | ||||||
| Restricted investment (Note 11) | 8,032 | - | |||||
| Loan receivable (Note 6) | - | - | |||||
| Property, plant and equipment (Note 9) | 247,420 | 218,470 | |||||
| Intangible assets (Note 10) | 1,772 | 2,074 | |||||
| Deferred charges (Note 12 and Note 24) | 698 | 592 | |||||
| Investments in associates (Note 14) | 7,001 | 11,108 | |||||
| $ | 435,127 | $ | 428,525 | ||||
| LIABILITIES | |||||||
| Current liabilities | |||||||
| Accounts payable and accrued liabilities | $ | 17,486 | $ | 40,355 | |||
| Current portion of long term debt (Note 11) | 11,595 | 3,509 | |||||
| 29,081 | 43,864 | ||||||
| Long-term debt (Note 11) | 103,671 | 46,067 | |||||
| Other liabilities (Note 13) | 2,848 | 1,117 | |||||
| Deferred tax liability (Note 23) | - | 10,471 | |||||
| 135,600 | 101,519 | ||||||
| SHAREHOLDERS' EQUITY | |||||||
| Share capital (Note 12) | 420,673 | 318,125 | |||||
| Equity reserves (Note 12) | 23,744 | 17,707 | |||||
| Accumulated other comprehensive income (loss) | 50 | (43 | ) | ||||
| Accumulated deficit | (144,940 | ) | (8,783 | ) | |||
| 299,527 | 327,006 | ||||||
| $ | 435,127 | $ | 428,525 |
On Behalf of the Board:
s/Greg Engel, Director
s/Peter Amirault, Director
The accompanying notes are an integral part of these Consolidated Financial Statements.
ORGANIGRAM HOLDINGS INC.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
For the years ended August 31, 2020 and 2019
(Expressed in CDN $000's except share amounts)
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| REVENUES | |||||||
| Gross revenue (Note 18) | $ | 103,387 | $ | 97,547 | |||
| Excise taxes | (16,592 | ) | (17,134 | ) | |||
| Net revenue | 86,795 | 80,413 | |||||
| Cost of sales (Note 19) | 105,004 | 42,521 | |||||
| Gross margin before fair value adjustments | (18,209 | ) | 37,892 | ||||
| Fair value changes to biological assets and changes in inventory sold (Note 7) |
(38,281 | ) | 10,577 | ||||
| Gross margin | (56,490 | ) | 48,469 | ||||
| OPERATING EXPENSES | |||||||
| General and administrative (Note 22) | 27,996 | 18,593 | |||||
| Sales and marketing | 16,528 | 14,625 | |||||
| Share-based compensation (Note 12) | 4,725 | 9,151 | |||||
| Impairment of property, plant and equipment (Note 9) | 39,771 | 613 | |||||
| Total operating expenses | 89,020 | 42,982 | |||||
| (LOSS) INCOME FROM OPERATIONS | (145,510 | ) | 5,487 | ||||
| Financing costs | 6,008 | 9,668 | |||||
| Investment income | (308 | ) | (662 | ) | |||
| Government subsidies (Note 25) | (7,883 | ) | - | ||||
| Share of loss from investments in associates (Note 14) | 1,187 | 1,261 | |||||
| Impairment of investments in associates (Note 14) | 3,000 | 950 | |||||
| Unrealized (gain) on changes in fair value of contingent consideration (Note 13(i)) |
(886 | ) | 145 | ||||
| Loss from continuing operations before tax | (146,628 | ) | (5,875 | ) | |||
| Income tax (recovery) expense (Note 23) | |||||||
| Deferred, net | (10,471 | ) | 3,629 | ||||
| Net loss from continuing operations | $ | (136,157 | ) | $ | (9,504 | ) | |
| Loss from discontinued operations (Note 26) | - | (38 | ) | ||||
| NET LOSS | $ | (136,157 | ) | $ | (9,542 | ) | |
| Other comprehensive gain (loss) | |||||||
| Foreign currency translation gain (loss), net of tax | 94 | (43 | ) | ||||
| COMPREHENSIVE LOSS | $ | (136,063 | ) | $ | (9,585 | ) | |
| Net loss from continuing operations per common share, basic (Note 12 (vi)) |
$ | (0.789 | ) | $ | (0.067 | ) | |
| Net loss from continuing operations per common share, diluted (Note 12 (vi)) |
$ | (0.789 | ) | $ | (0.067 | ) | |
| Net loss from discontinued operations per common share, basic (Note 12 (vi)) |
$ | - | $ | - | |||
| Net loss from discontinued operations per common share, diluted (Note 12 (vi)) |
$ | - | $ | - | |||
| Net loss per common share, basic (Note 12 (vi)) | $ | (0.789 | ) | $ | (0.068 | ) | |
| Net loss per common share, diluted (Note 12 (vi)) | $ | (0.789 | ) | $ | (0.068 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
ORGANIGRAM HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the years ended August 31, 2020 and 2019
(Expressed in CDN $000's except share amounts)
| NUMBER OF SHARES |
SHARE CAPITAL |
EQUITY RESERVES |
ACCUMULATED OTHER COMPREHENSIVE LOSS |
RETAINED EARNINGS/ (ACCUMULATED DEFICIT) |
SHAREHOLDERS' EQUITY |
|||||||||||||
| Balance - September 1, 2018 | 125,207,938 | $ | 157,790 | $ | 26,045 | $ | - | $ | 759 | $ | 184,594 | |||||||
| Share-based compensation (Note 12 (v)) |
41,000 | 180 | 14,608 | - | - | 14,788 | ||||||||||||
| Exercise of stock options (Note 12 (iii)) | 2,167,864 | 6,588 | (2,418 | ) | - | - | 4,170 | |||||||||||
| Exercise of warrants (Note 12 (iv)) | 7,751,700 | 39,257 | (8,281 | ) | - | - | 30,976 | |||||||||||
| Exercise of restricted share units (Note 12 (v)) |
182,473 | 837 | (837 | ) | - | - | - | |||||||||||
| Conversion of debentures (Note 12 (iii)) |
20,845,372 | 112,166 | (11,247 | ) | - | - | 100,919 | |||||||||||
| Tax impact of equity issue costs | - | 1,307 | (163 | ) | - | - | 1,144 | |||||||||||
| Foreign currency translation gain, net of tax |
- | - | - | (43 | ) | - | (43 | ) | ||||||||||
| Net income | - | - | - | - | (9,542 | ) | (9,542 | ) | ||||||||||
| Balance - August 31, 2019 | 156,196,347 | $ | 318,125 | $ | 17,707 | $ | (43 | ) | $ | (8,783 | ) | $ | 327,006 | |||||
| Balance - September 1, 2019 | 156,196,347 | $ | 318,125 | $ | 17,707 | $ | (43 | ) | $ | (8,783 | ) | $ | 327,006 | |||||
| At-the-market equity financing, net of issue costs of $3,754 (Note 12 (iii)) |
37,281,412 | 99,997 | - | - | - | 99,997 | ||||||||||||
| Share-based compensation (Note 12 (v)) |
- | - | 7,519 | - | - | 7,519 | ||||||||||||
| Exercise of stock options (Note 12 (iii)) | 879,240 | 1,786 | (717 | ) | - | - | 1,069 | |||||||||||
| Exercise of restricted share units (Note 12 (v)) |
154,062 | 765 | (765 | ) | - | - | - | |||||||||||
| Foreign currency translation loss, net of tax |
- | - | - | 93 | - | 93 | ||||||||||||
| Net loss | - | - | - | - | (136,157 | ) | (136,157 | ) | ||||||||||
| Balance - August 31, 2020 | 194,511,061 | $ | 420,673 | $ | 23,744 | $ | 50 | $ | (144,940 | ) | $ | 299,527 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
ORGANIGRAM HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended August 31, 2020 and 2019
(Expressed in CDN $000's except share amounts)
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| CASH PROVIDED (USED) | |||||||
| OPERATING ACTIVITIES | |||||||
| Net loss from continuing operations | $ | (136,157 | ) | $ | (9,504 | ) | |
| Items not affecting cash: | |||||||
| Share-based compensation (Note 12) | 7,796 | 14,894 | |||||
| Depreciation and amortization (Note 9 and Note 10) | 17,958 | 8,902 | |||||
| Loss on disposal of property, plant and equipment (Note 9) | 778 | 133 | |||||
| Impairment losses (Note 9, Note 10 and Note 14) | 42,771 | 1,563 | |||||
| Fair value adjustment to biological assets | (2,853 | ) | (8,060 | ) | |||
| Financing costs | 6,008 | 9,668 | |||||
| Investment income | (308 | ) | (662 | ) | |||
| Share of loss from investments in associates (Note 14) | 1,201 | 1,261 | |||||
| Unrealized gain on changes in fair value of contingent consideration (Note 13(i)) | (886 | ) | 145 | ||||
| Deferred tax expense | (10,471 | ) | 3,635 | ||||
| Changes in non-cash working capital: | |||||||
| Net change in accounts receivable | 1,794 | (13,134 | ) | ||||
| Net change in biological assets | 18,111 | 7,266 | |||||
| Net change in inventories | 27,530 | (48,175 | ) | ||||
| Net change in accounts payable and accrued liabilities | (27,995 | ) | 10,562 | ||||
| Net change in prepaid expenses and deferred charges | 9,598 | (13,540 | ) | ||||
| Net cash used in continuing operations | (45,125 | ) | (35,046 | ) | |||
| Net cash used in discontinued operations (Note 26) | - | (35 | ) | ||||
| Net cash used in operating activities | (45,125 | ) | (35,081 | ) | |||
| FINANCING ACTIVITIES | |||||||
| Proceeds from equity financing, net of issue costs of $3,754 (Note 12 (iii)) | 99,997 | - | |||||
| Payment of lease liabilities (Note 13(ii)) | (897 | ) | - | ||||
| Payment of long-term debt (Note 11) | (55 | ) | (12,674 | ) | |||
| Proceeds from long-term debt, net of fees of $705 (2019 - $1,250) (Note 11) | 64,295 | 58,851 | |||||
| Stock options, warrants and units exercised (Note 12) | 1,069 | 35,146 | |||||
| Interest paid | (4,043 | ) | (6,995 | ) | |||
| Net cash provided by financing activities | 160,366 | 74,328 | |||||
| INVESTING ACTIVITES | |||||||
| Purchase of short-term investments (Note 4) | (50,000 | ) | - | ||||
| Proceeds from short-term investments | 135 | 75,000 | |||||
| Investment income | 393 | 1,637 | |||||
| Investments in associates (Note 14) | - | (12,758 | ) | ||||
| Investment in GIC - restricted investment (Note 11) | (8,000 | ) | - | ||||
| Distributions received from investments in associates | - | 374 | |||||
| Loan advance (Note 6) | (2,071 | ) | (909 | ) | |||
| Proceeds on sale of property, plant and equipment (Note 9) | - | 168 | |||||
| Purchase of property, plant and equipment (Note 9) | (77,223 | ) | (108,764 | ) | |||
| Purchase of intangible assets (Note 10) | (1,430 | ) | (1,530 | ) | |||
| Net cash used in investing activities | (138,196 | ) | (46,782 | ) | |||
| Effects of foreign exchange on cash | - | 26 | |||||
| DECREASE IN CASH | $ | (22,955 | ) | $ | (7,509 | ) | |
| CASH POSITION | |||||||
| Beginning of period | $ | 47,555 | $ | 55,064 | |||
| End of period | $ | 24,600 | $ | 47,555 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
ORGANIGRAM HOLDINGS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended August 31, 2020 and 2019
(Expressed in CDN $000's except share amounts)
1. NATURE OF OPERATIONS
Organigram Holdings Inc. (the "Company") is a publicly traded corporation with its common shares trading on the Toronto Stock Exchange ("TSX") and on the Nasdaq Global Select Market ("NASDAQ") under the symbol "OGI". The head and the registered address of the Company is 35 English Drive, Moncton, New Brunswick, Canada, E1E 3X3.
The Company's major wholly-owned subsidiaries are: (i) Organigram Inc., a licensed producer ("LP" or "Licensed Producer") of cannabis and cannabis-derived products in Canada regulated by Health Canada under the Cannabis Act and the Cannabis Regulations (Canada), and (ii) 10870277 Canada Inc., a special purpose holding company for the Company. Organigram Inc. was incorporated under the Business Corporation Act (New Brunswick), on March 1, 2013. Organigram Holdings Inc, was incorporated under the Canada Business Corporations Act ("CBCA") on April 6, 2016. 10870277 Canada Inc. was incorporated under the CBCA on July 4, 2018.
2. BASIS OF PREPARATION
i) Statement of compliance
These consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and interpretations of the IFRS Interpretations Committee ("IFRIC").
These consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on November 29, 2020.
ii) Basis of measurement
These consolidated financial statements have been prepared on a historical cost basis except for biological assets, short-term investments, share-based compensation, and contingent share consideration, which are measured at fair value.
Historical cost is the fair value of the consideration given in exchange for goods and services, which is generally based upon the fair value of the consideration given in exchange for assets at the time of the transaction.
iii) Basis of consolidation
These consolidated financial statements include the accounts of the Company and its subsidiaries on a consolidated basis after elimination of intercompany transactions and balances. Subsidiaries are entities that the Company controls when it is exposed, or has rights, to variable returns from its involvement and has the ability to affect those returns through its power to direct the relevant activities of the entity.
iv) COVID-19 estimation uncertainty
In March 2020, the World Health Organization declared the outbreak of a novel strain of coronavirus ("COVID-19"), a global pandemic. Government measures to limit the spread of COVID-19, including the closure of non-essential businesses, disrupted the Company's operations during the year ended August 31, 2020.
The production and sale of cannabis have been recognized as essential services across Canada, however COVID-19-related challenges have persisted, including, but not limited to, reduced staffing levels, production inefficiencies resulting from increased health and safety measures, and limited supply chain issues. For the year ended August 31, 2020, the Company recorded impairments against its assets (inventories and property, plant and equipment) due in part to the COVID-19 pandemic.
Due to the ongoing developments and uncertainty surrounding COVID-19, it is not possible to predict the continuing impact that COVID-19 will have on the Company, its financial position, and/or its operating results in the future. In addition, it is possible that estimates in the Company's financial statements will change in the near-term as a result of COVID-19, and the effect of any such changes could be material, which could result in, among other things, further impairment of inventories and long-lived assets including intangible assets. The Company is closely monitoring the impact of the COVID-19 on all aspects of its business.
vi) Foreign currency translation
Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars, which is the Company's and its subsidiaries' functional currency, except for the Company's investment in its associate, alpha-cannabis Pharma GmbH ("ACG"), for which the functional currency has been determined to be Euros.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rate in effect on the date of the applicable transaction. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in currencies other than an operation's functional currency are recognized in the consolidated statements of (loss) income and comprehensive (loss) income.
Foreign operations
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Canadian dollars at the exchange rate in effect on the reporting date. The income and expenses of foreign operations are translated to Canadian dollars using average exchange rates for the month during which the transactions occurred. Foreign currency differences are recognized in other comprehensive income (loss) in the accumulated other comprehensive loss account.
When the Company disposes of its entire interest in a foreign operation, or loses control over a foreign operation, the foreign currency gains or losses accumulated in other comprehensive income (loss) related to the foreign operation are recognized in profit or loss. If the Company disposes of part of an interest in a foreign operation that remains a subsidiary, a proportionate amount of foreign currency gains or losses accumulated in other comprehensive income (loss) related to the subsidiary is reallocated between controlling and non-controlling interests.
3. SIGNIFICANT ACCOUNTING POLICIES
i) Cash
Cash is a financial asset that is measured at amortized cost, which approximates fair value and includes cash-on-hand and deposits held with financing institutions.
ii) Short-term investments
The Company considers short-term investments in the form of guaranteed investment certificates to be an investing activity. These investments are measured at amortized cost. The Company also has equity securities that are carried at fair value through profit or loss.
iii) Biological assets
While the Company's biological assets are within the scope of IAS 41 Agriculture, the direct and indirect costs of biological assets are determined using an approach similar to the capitalization criteria outlined in IAS 2 Inventories. This includes the direct cost of seeds and growing materials as well as other indirect costs such as utilities and supplies used in the growing process. Indirect labour cost for individuals involved in the growing and quality control process is also included, as well as depreciation of manufacturing assets. All direct and indirect costs of biological assets are capitalized as they are incurred. Unrealized fair value gains/losses on growth of biological assets are recorded on the consolidated statements of (loss) income and comprehensive (loss) income. Biological assets are measured at their fair value less costs to sell on the consolidated statement of financial position.
iv) Inventories
Inventories for finished goods and packaging and supplies are initially valued at cost, and subsequently at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to sell. The Company reviews inventories for obsolete, redundant and slow-moving goods and any such inventories identified are written down to net realizable value. The direct and indirect costs of finished goods inventory initially include the fair value of the biological asset at the time of harvest. They also include subsequent costs such as materials, labour and depreciation expense on equipment involved in packaging, labeling and inspection. All direct and indirect costs related to inventory are capitalized as they are incurred, and they are subsequently recorded within cost of sales on the consolidated statements of (loss) income and comprehensive (loss) income at the time the cannabis is sold. Inventory is measured at lower of cost or net realizable value on the statement of financial position.
v) Property, plant and equipment
Property, plant and equipment are initially recognized at acquisition cost or manufacturing cost, including any costs directly attributable to bringing the assets to the location and condition necessary for them to be capable of operating in the manner intended by the Company's management. Property, plant and equipment are subsequently measured at cost, less accumulated depreciation and impairment losses.
Depreciation is recognized on a straight-line basis to reduce the cost, less estimated residual value, of depreciable fixed assets. The following useful lives are applied:
| Building | 25 years | |
| Growing equipment | 10 years | |
| Computer equipment | 5 years | |
| Vehicles | 5 years | |
| Furniture and fixtures | 10 years | |
| Leasehold improvements | 5 years |
Gains or losses arising on the disposal of property, plant and equipment are determined as the difference between the disposal proceeds and the carrying amount of the assets, and are recognized as profit or loss within other income or other expenses.
Assets in process are transferred to the appropriate asset class when available for use and depreciation of these assets commences at that point.
An asset's residual value, useful life and depreciation method are reviewed during each financial year and adjusted if appropriate. When parts of an item of equipment have different useful lives, they are accounted for as separate items (major components) and depreciated accordingly.
vi) Goodwill
Goodwill represents the future economic benefits arising from a business combination that are not individually identified and separately recognized. Goodwill is carried at cost less accumulated impairment losses. Refer to Note 3(viii) for a description of impairment testing procedures.
vii) Assets held for sale
Assets and liabilities held for sale are no longer depreciated and are presented separately in the statement of financial position at the lower of their carrying amount and fair value less costs to sell. An asset is regarded as held for sale if its carrying amount will be recovered principally through a sale transaction, rather than through continuing use. For this to be the case, the asset must be available for immediate sale and its sale must be highly probable.
viii) Impairment of long-lived and intangible assets
Long-lived assets, including property, plant and equipment are reviewed each reporting period for indicators of impairment. Goodwill is assessed for indicators of impairment at each reporting date and is tested annually or whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its recoverable amount. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash-generating unit, or "CGU"). The recoverable amount of an asset or a CGU is the higher of its fair value, less costs of disposal, and its value in use. If the carrying amount of an asset exceeds its recoverable amount, an impairment charge is recognized immediately in profit or loss equal to the amount by which the carrying amount exceeds the recoverable amount. Except for goodwill, where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimate of recoverable amount, and the carrying amount that would have been recorded had no impairment loss been recognized previously.
ix) Share-based payments
The Company measures equity settled share-based payments based on their fair value at the grant date and recognizes compensation expense in profit or loss over the vesting period based on the Company's estimate of equity instruments that will eventually vest. Fair value for options is determined using the Black-Scholes pricing model and fair value for Restricted Share Units ("RSUs") and Performance Share Units ("PSUs") is determined using the Company's share price at the grant date.
Expected forfeitures are estimated at the date of the grant and subsequently adjusted if further information indicates actual forfeitures may vary from the original estimate. The impact of the revision of the original estimate is recognized in profit or loss such that the cumulative expenses reflect the revised estimate.
For stock options granted to non-employees, the expense is measured at the fair value of the goods and services received except when the fair value cannot be estimated in which case it is measured at the fair value of the equity instrument granted.
Consideration paid by employees or non-employees on the exercise of options is recorded as an increase to share capital and the related share-based expense is transferred from equity reserves to share capital.
x) Investments in associates
Associates are companies over which the Company has significant influence and are accounted for under the equity method. Significant influence is presumed when the Company has an ownership interest greater than 20%, unless certain qualitative factors overcome this assumption. Conversely, where the Company has an ownership interest less than 20%, it is presumed that the Company does not have significant influence, unless certain qualitative factors overcome this assumption. In assessing significant influence and the ownership interest, potential voting rights that are currently exercisable are taken into consideration.
Investments in associates are accounted for using the equity method and are initially recognized at cost, inclusive of transaction costs. The consolidated financial statements include the Company's share of the income or loss and equity movement of equity accounted associates. In accordance with IFRS, the associate's most recent available financial statements are used in the application of the equity method. Where the associate's reporting period differs from the Company's, the associate prepares financial information as of the same period end as the Company, unless it is impracticable to do so. Otherwise, the Company will adjust for its share of income and expenses and equity movement based on the associate's most recently completed financial statements, adjusted for the effects of significant transactions. The Company does not recognize losses exceeding the carrying value of its interest in the associate.
xi) Intangible assets
Intangible assets are recorded at cost less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization of definite life intangibles is provided on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any, except for off-market supply agreements, where amortization is provided based on the actual output received versus the estimated output forecast to be received over the life of the agreement.
The estimated useful lives, residual values, and amortization methods are reviewed at each year end, and any changes in estimates are accounted for prospectively. Intangible assets with an indefinite life or not yet available for use are not subject to amortization.
Research costs are expensed as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development to use or sell the asset. Research costs and other development expenditures are recognized as general and administrative expenses on the consolidated statement of income (loss) and comprehensive income (loss) as incurred.
xii) Earnings (loss) per share
Basic earnings (loss) per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted-average number of shares outstanding during the period. Diluted earnings (loss) per share is calculated in a similar manner, but with adjustments to give effect to all dilutive potential common shares outstanding during the period. The dilutive effect of warrants, options, RSUs and PSUs is calculated using the treasury stock method. The if-converted method, which assumes that all convertible debt has been converted if the debt is in-the-money, is used to calculate the dilutive effect of convertible debt. Anti-dilutive effects of potential conversions of securities are ignored for this calculation.
xiii) Revenue recognition
Revenue from the direct sale of cannabis and cannabis oil for a fixed price is recognized when the Company transfers control of the good to the customer, which is at point of delivery for medical cannabis and recreational cannabis.
Revenue includes excise taxes, which the Company pays as principal, but excludes duties and taxes collected on behalf of third parties. Revenue also includes the net consideration to which the Company expects to be entitled. Revenue is recognized to the extent that it is highly probable that a significant reversal will not occur. Therefore, revenue is stated net of expected price discounts, allowances for customer returns and certain promotional activities and similar items. Generally, payment of the transaction price is due within credit terms that are consistent with industry practices, with no element of financing.
Net revenue is revenue less excise taxes. Excise taxes are effectively a production tax which becomes payable when the product is removed from the Company's premises and may or may not be directly related to the value of revenue depending on the province of sale. It is generally not included as a separate item on external invoices; increases in excise tax are not always passed on to the customer and where a customer fails to pay for product received the Company cannot reclaim the excise tax. The Company therefore recognizes excise tax, unless it regards itself as an agent of the regulatory authorities, as a cost and reduction to revenue for the Company.
xiv) Income taxes
The measurement of income taxes payable and deferred income tax assets and liabilities requires management to make judgments in the interpretation and application of the relevant tax laws. The actual amount of income taxes only becomes final upon filing and acceptance of the tax return by the relevant authorities, which occurs subsequent to the issuance of the consolidated financial statements.
Income tax expense (recovery) in the statements of income (loss) and comprehensive income (loss) is the sum of current and deferred tax as explained below.
Current tax is the expected income tax payable (recoverable) on the taxable income (loss) for the period, using tax rates enacted, or substantively enacted, as at the end of the reporting period. Current tax expense (recovery) included in the statements of income (loss) and comprehensive income (loss) reflects the current tax for the reporting period, plus adjustments to the current tax of prior periods, less current tax recorded directly in other comprehensive income (loss) or equity.
Deferred taxes are accounted for under the liability method and are the taxes expected to be payable or recoverable on the temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable income. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable income will be available against which deductible temporary differences and unused tax losses and tax credits can be utilized. Deferred tax is calculated on a non-discounted basis, using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The carrying amounts of individual deferred tax assets are reviewed at the end of each reporting period, but are only recognized for the proportion on which it is probable that sufficient taxable profits will be available for such assets to be recovered.
Deferred tax is not recognized for: i) temporary differences related to the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; ii) differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future; and, iii) differences arising on the initial recognition of goodwill.
xv) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time that the assets are substantially ready for their intended use or sale. Other borrowing costs are expensed in the period in which they are incurred and reported in finance costs. No borrowing costs were capitalized during the periods presented.
xvi) Discontinued operations
A disposal group is presented as a discontinued operation if all of the following conditions are met: i) it is a component of the Company for which operations and cash flows can be clearly distinguished operationally and financially from the rest of the Company, ii) it represents a separate major line of business or operations that either has been disposed of or is classified as held for sale; and iii) it is part of a single coordinated plan to dispose of a separate major line of business of operations.
Assets in a disposal group classified as held for sale are presented separately in the consolidated statements of financial position. Discontinued operations are presented separately from continuing operations in the consolidated statements of income (loss) and comprehensive income (loss) and consolidated statements of cash flows.
xvii) Government subsidies
Government subsidies are recognized when there is reasonable assurance that the subsidy will be received, and all the attached conditions will be complied with. Subsidies are recognized as income in the statement of income (loss) and comprehensive income (loss) on a systematic basis over the periods in which the expenses are recognized for the related costs for which the subsidies are intended to compensate, which in the case of subsidies related to assets requires setting it up as deferred income or deducting it from the carrying amount of the asset.
xviii) Critical accounting estimates and judgments
The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected.
The following are the estimates and judgments made by management in applying the accounting policies of the Company that have the most significant effect on the financial statements.
1) Biological assets and inventories
Determination of the fair value of biological assets requires management to make a number of estimates, including estimating harvesting costs, selling costs, sales prices, wastage, oil conversion factor, expected yields, and post-harvest costs of the cannabis plant. The Company records obsolete and unsaleable inventories at the lower of cost and net realizable value. Adjustments to the carrying value of inventories are based on obsolescence trends, historical experience, and forecast demand and pricing for obsolete and unsaleable inventories. Refer to Notes 7 and 8 for further information.
(2) Estimated useful lives and impairment of property, plant and equipment
Amortization of property, plant and equipment requires estimates of useful lives, which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts, taking into consideration factors such as economic and market conditions and the useful lives of assets.
(3) Share-based payments
In determining the fair value of options and related expenses, management estimates the expected life of the option, the volatility of the Company's share price, the risk-free interest rate, and the rate of forfeitures. Refer to Note 12 for further information.
(4) Warrants
In determining the value of warrants, management estimates the expected life of the warrant, the volatility of the Company's share price, and the risk-free interest rate.
(5) Adult-use recreational cannabis revenue - provision for returns and price adjustments
Government customers typically have the right to return products, and in some cases, the right to pricing adjustments for products that are subsequently discounted or sold for a lower price in another jurisdiction. The estimation of potential future returns and pricing adjustments includes the use of management estimates and assumptions that may not be certain given the evolving nature of the industry.
(6) Investments in associates
Management has applied significant judgment in the determination of whether the Company exerts significant influence with respect to its investments, which then allows the Company to account for its investments under the equity accounting method. Further, management has applied significant judgment and made use of management estimates and assumptions in determining and quantifying any impairment losses that may need to be recorded against its investments in associates.
(7) Impairment of long-lived and intangible assets
In determining the recoverable amount of the Company's Moncton campus (the "Moncton Campus") CGU, management has applied significant judgment in the aggregation of the CGU and has made various estimates with respect to the forecast cash flows, terminal growth rate, post-tax discount rate, and income taxes utilized in the discounted cash flow model to estimate fair value less costs of disposal.
NEW STANDARDS AND INTERPRETATIONS ADOPTED
New or amended standards effective September 1, 2019
The Company has adopted the following new or amended IFRS standard for the annual period beginning on September 1, 2019:
IFRS 16 - Leases
In January 2016, the IASB issued IFRS 16 Leases, which replaced IAS 17 Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of low value. 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. The standard was effective for annual periods beginning on or after January 1, 2019 and has been adopted by the Company effective September 1, 2019 using the modified retrospective approach where comparative figures were not restated.
As a result of adopting IFRS 16, the Company recognized right-of use ("ROU") assets of $4,464 recorded under property, plant and equipment (Note 9), lease liabilities of $4,439 recorded under other liabilities (Note 13), and a reduction to prepaid expenses of $25 as a result of the leasing arrangements in place at September 1, 2019 and entered during the year ended August 31, 2020 by the Company.
The ROU asset was measured as the amount of the lease liability, using the Company's incremental borrowing rate on September 1, 2019 that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the ROU asset in a similar economic environment. The weighted average interest rate as of September 1, 2019 to measure the lease liabilities was 5.70%.
The Company elected to use the following practical expedients on adoption of IFRS 16 on all of its leases:
(a) In accordance with IFRS 16.C3, an election is being taken to not reassess whether a contract is or contains a lease at the date of initial application, and instead to only apply IFRS 16 to contracts that were in the scope of IAS 17;
(b) In accordance with IFRS 16.C8(b)(ii), an election is being taken to measure the ROU asset on September 1, 2019 as an amount equal to the lease liability, adjusted for prepaid or accrued lease payments;
(c) In accordance with IFRS 16.C10(a), an election is being taken to apply a single discount rate to a portfolio of leases with reasonably similar characteristics;
(d) In accordance with IFRS 16.C10(b), an election is being taken to rely on the IAS 37 assessment of whether leases are onerous instead of performing an impairment review;
(e) In accordance with IFRS 16.C10(c), an election is being taken to exclude leases for which the term ends within 12 months from September 1, 2019;
(f) In accordance with IFRS 16.C10(d), an election is being taken to exclude initial direct costs from the measurement of the ROU asset on September 1, 2019;
(g) In accordance with IFRS 16.15, an election is being taken, by class of underlying asset, not to 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 where the non-lease components are not significant compared to the lease components;
(h) In accordance with IFRS 16.5(a), an election is being taken to not recognize a ROU asset and lease liability for leases for which the lease has a term less than 12 months; and
(i) In accordance with IFRS 16.5(b), an election is being taken to not recognize a ROU asset and lease liability for leases for which the underlying asset is of low value, which is defined to mean less than $5,000 USD when new.
The following is a reconciliation between the Company's operating lease commitments disclosed applying IAS 17 as at August 31, 2019 and the lease liabilities as at September 1, 2019 after adopting IFRS 16:
| Operating lease obligations as at August 31, 2019 | $ | 3,049 | |
| Minimum future payments not related to lease payments | (411 | ) | |
| Lease payments for renewal options reasonably expected to be exercised but not contractually obligated | 655 | ||
| Relief option for short-term leases | (538 | ) | |
| Relief option for leases of low-value | (76 | ) | |
| Gross lease liabilities at September 1, 2019 | 2,679 | ||
| Discounting | (459 | ) | |
| Present value of lease liabilities at September 1, 2019 | 2,220 |
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.
Amendments to IFRS 3: Definition of a Business
In October 2018, the IASB issued "Definition of a Business (Amendments to IFRS 3)". The amendments clarify the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendment provides an assessment framework to determine when a series of integrated activities is not a business. The amendments are effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. The Company is currently evaluating the potential impact of these amendments on the Company's consolidated financial statements resulting from any future transactions.
Amendments to IAS 1: Classification of Liabilities as Current or Non-Current
The amendments to IAS 1 clarify the requirements relating to determining whether a liability should be presented as current or non-current in the statement of financial position. Under the new requirements, the assessment of whether a liability is presented as current or non-current is based on the contractual arrangements in place as at the reporting date and does not impact the amount or timing of recognition. The amendment applies retrospectively for annual reporting periods beginning on or after January 1, 2023. The Company is currently evaluating the potential impact of these amendments on the Company's consolidated financial statements.
4. SHORT TERM INVESTMENTS
The Company's short-term investments included the following on August 31, 2020 and August 31, 2019:
| DESCRIPTION | INTEREST % | AUGUST 31, 2020 | AUGUST 31, 2019 | |||||
| GIC - maturing September 16, 2020 | 0.95% | $ | 10,000 | $ | - | |||
| GIC - maturing September 24, 2020 | 0.95% | 10,000 | - | |||||
| GIC - maturing December 15, 2020 | 1.16% | 10,000 | - | |||||
| GIC - maturing December 23, 2020 | 1.16% | 10,000 | - | |||||
| GIC - maturing June 17, 2021 | 0.93% | 10,000 | - | |||||
| Equity securities in VIVO Cannabis Inc. | 128 | 380 | ||||||
| $ | 50,128 | $ | 380 |
On October 16, 2018, the Company sold its wholly-owned subsidiary, Trauma Healing Centers, Incorporated ("THCI"), in exchange for consideration consisting of common shares in the purchaser (an unaffiliated publicly-traded company), VIVO Cannabis Inc. ("VIVO") (the "VIVO Shares"). The VIVO Shares are carried at fair value through profit or loss. Subsequent to August 31, 2020, all of the VIVO Shares were sold.
5. ACCOUNTS RECEIVABLE
The Company's accounts receivable included the following balances as of August 31, 2020 and August 31, 2019:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Trade receivables | $ | 11,096 | $ | 11,900 | |||
| Harmonized sales taxes receivable | 728 | 4,741 | |||||
| Government programs | 2,936 | 168 | |||||
| Less: Provision for doubtful accounts | (13 | ) | (268 | ) | |||
| $ | 14,747 | $ | 16,541 |
On April 1, 2020, Department of Finance Canada announced the Canada Emergency Wage Subsidy ("CEWS"), which would subsidize 75% of employee wages, retroactive to March 15, 2020, to Canadian employers whose businesses had been affected by COVID-19 in order to enable them to re-hire workers previously laid off as a result of pandemic, help prevent further job losses, and to better position companies to resume normal operations following the crisis. At August 31, 2020, under this program, the Company applied for a wage subsidy of $2,936 for the period July 5, 2020 to August 29, 2020, which is included under government programs above.
6. LOAN RECEIVABLE
On July 26, 2019, the Company entered into an advance payment and support agreement ("Payment Agreement") with 703454 N.B. Inc. (carrying on business as 1812 Hemp) ("1812 Hemp"). Under the terms of the Payment Agreement, the Company advanced $3,000 to 1812 Hemp in the form of a secured loan. This amount may be applied against future purchases of hemp under the Supply Agreement described in Note 10. The aggregate amount of advances outstanding as of January 1, 2020 accrue interest of 9.0% per annum, calculated monthly, until the entire balance of advances is paid. At August 31, 2020, $2,229 in principal was outstanding under the Payment Agreement. Subsequent to August 31, 2020, the Company demanded repayment of the entire amount owing by 1812 Hemp to the Company under the Payment Agreement.
7. BIOLOGICAL ASSETS
The Company measures biological assets, which consist of cannabis plants, at fair value less costs to sell up to the point of harvest, which then becomes the basis for the cost of finished goods inventories after harvest. Subsequent expenditures incurred on these finished goods inventories after harvest are capitalized based on IAS 2 Inventories.
The changes in the carrying value of biological assets as of August 31, 2020 are as follows:
| OTHER BIOLOGICAL ASSETS |
CANNABIS ON PLANTS | TOTAL | |||||||
| Carrying amount, August 31, 2018 | $ | 599 | $ | 19,259 | $ | 19,858 | |||
| Add net production costs | (596 | ) | 37,534 | 36,938 | |||||
| Net change in fair value less costs to sell due to biological transformation |
- | (8,060 | ) | (8,060 | ) | ||||
| Transferred to inventory upon harvest | - | (28,084 | ) | (28,084 | ) | ||||
| Carrying amount, August 31, 2019 | $ | 3 | $ | 20,649 | $ | 20,652 | |||
| Add net production costs | 13 | 41,039 | 41,052 | ||||||
| Net change in fair value less costs to sell due to biological transformation |
- | (2,853 | ) | (2,853 | ) | ||||
| Deduct net abnormal plant destruction costs | (5,048 | ) | (5,048 | ) | |||||
| Transferred to inventory upon harvest | - | (48,409 | ) | (48,409 | ) | ||||
| Carrying amount, August 31, 2020 | $ | 16 | $ | 5,378 | $ | 5,394 |
During the year ended August 31, 2020, the Company had to cull plants with a carrying value of $5,048 (August 31, 2019 - $nil) due to lack of sufficient staffing as a result of COVID-19. These costs were expensed to cost of sales.
The fair value less costs to sell of biological assets is determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusts that amount for the expected selling price per gram and also for any additional costs to be incurred, such as post-harvest costs. The following unobservable inputs, all of which are classified as Level 3 on the fair value hierarchy (see Note 16), are used in determining the fair value of biological assets:
i. Average selling price per gram - calculated as the weighted average current selling price of cannabis sold by the Company, adjusted for expectations about future pricing;
ii. Yield by plant - represents the number of grams of finished cannabis inventory which are expected to be obtained from each harvested cannabis plant;
iii. Wastage of plants based on their various stages of growth - represents the weighted average percentage of biological assets which are expected to fail to mature into cannabis plants that can be harvested; and
iv. Post-harvest costs - calculated as the cost per gram of harvested cannabis to complete the sale of cannabis plants post-harvest, consisting of the cost of direct and indirect materials and labour related to drying, labelling and packaging.
The Company estimates the harvest yields for the cannabis on plants at various stages of growth. As of August 31, 2020, it is expected that the Company's biological assets will yield 5,096 kg (August 31, 2019 - 16,595 kg) of cannabis when eventually harvested. The Company's estimates are, by their nature, subject to change, and differences from the anticipated yield will be reflected in the fair value adjustment to biological assets in future periods. The Company accretes fair value on a straight-line basis according to stage of growth. As a result, a cannabis plant that is 50% through its 19-week growing cycle would be ascribed approximately 50% of its harvest date expected fair value less costs to sell (subject to wastage adjustments).
Management believes the most significant unobservable inputs and their impact on fair value are as follows:
| SIGNIFICANT INPUTS & | WEIGHTED AVERAGE INPUT | EFFECT ON FAIR VALUE | |||||||||||||
| ASSUMPTIONS | AUG. 31, 2020 | AUG. 31, 2019 | SENSITIVITY | AUG. 31, 2020 | AUG. 31, 2019 | ||||||||||
| Average net selling price per gram | $ | 3.36 | $ | 5.65 | Increase or decrease by $1.00 per gram |
$ | 1,602 | $ | 3,657 | ||||||
| Average yield per plant | 101 grams | 151 grams | Increase or decrease by 10 grams |
$ | 532 | $ | 1,367 | ||||||||
During the three months ended May 31, 2020, management ceased the harvesting of trim from the cannabis plants and therefore the average yield per plant at August 31, 2020 primarily reflects the average yield of the flower component of the plant.
The fair value adjustment to biological assets and inventory sold consists of the following:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Realized fair value amounts included in inventory sold | $ | (39,455 | ) | $ | (50,477 | ) | |
| Increase (decrease) in fair value on growth of biological assets | 73,975 | 75,338 | |||||
| Adjustment to net realizable value | (72,801 | ) | (14,284 | ) | |||
| Fair value adjustment to biological assets | $ | (38,281 | ) | $ | 10,577 |
The adjustment to net realizable value is related to the write-down of the fair value component of dry cannabis available for packaging, flower and trim available for extraction, concentrated extract, and packaged inventories due to excess or obsolete quantities as well as the decrease in the estimated net realizable value of these inventories based on the evolving nature of the adult-use market.
8. INVENTORIES
The Company's inventories are comprised of the following balances as of August 31, 2020 and August 31, 2019:
| AUGUST 31, 2020 | |||||||||
| CAPITALIZED COST |
FAIR VALUE ADJUSTMENT |
CARRYING VALUE |
|||||||
| Plants in drying stage | $ | 2,036 | $ | 1,841 | $ | 3,877 | |||
| Dry cannabis | |||||||||
| Available for packaging | 13,124 | 7,808 | 20,932 | ||||||
| Packaged inventory | 3,707 | 1,956 | 5,663 | ||||||
| Flower and trim available for extraction | 849 | 1,062 | 1,911 | ||||||
| Concentrated extract | 13,252 | 6,130 | 19,382 | ||||||
| Formulated extracts | |||||||||
| Available for packaging | 1,097 | 384 | 1,481 | ||||||
| Packaged inventory | 1,045 | 226 | 1,271 | ||||||
| Packaging and supplies | 11,848 | - | 11,848 | ||||||
| $ | 46,958 | $ | 19,407 | $ | 66,365 | ||||
| AUGUST 31, 2019 | |||||||||
| CAPITALIZED COST |
FAIR VALUE ADJUSTMENT |
CARRYING VALUE |
|||||||
| Plants in drying stage | $ | 1,945 | $ | 4,256 | $ | 6,201 | |||
| Dry cannabis | |||||||||
| Available for packaging | 5,261 | 12,718 | 17,979 | ||||||
| Packaged inventory | 4,205 | 2,549 | 6,754 | ||||||
| Flower and trim available for extraction | 4,433 | 12,193 | 16,626 | ||||||
| Concentrated extract | 15,393 | 21,573 | 36,966 | ||||||
| Formulated extracts | |||||||||
| Available for packaging | 754 | 1,121 | 1,875 | ||||||
| Packaged inventory | 728 | 425 | 1,153 | ||||||
| Packaging and supplies | 5,590 | - | 5,590 | ||||||
| $ | 38,309 | $ | 54,835 | $ | 93,144 | ||||
Flower and trim available for extraction are converted into concentrated extract, which can then be used for oil formulation (combining with a carrier oil) or other products such as edibles, and beverage and vaporizable products.
The amount of inventory expensed in cost of sales for the year ended August 31, 2020 was $42,872 (August 31, 2019 - $35,224). The amount of inventory write-down, provision, and plant waste included in cost of sales for the year ended August 31, 2020 was $45,270 (August 31, 2019 - $4,733), which relates to the production or purchase costs of these inventories and biological assets (refer to Note 7 for the write-down and provisions against the fair value component of these inventories).
Inventory write-down and provision relating to excess and unsaleable inventories for the year ended August 31, 2020 was $32,831 (August 31, 2019 - $744), of which $20,251 (August 31, 2019 - $nil) related to concentrated extract and flower and trim available for extraction. Inventory write-down related to adjustments to net realizable value during the year ended August 31, 2020 was $2,753 (August 31, 2019 - $nil). Inventory write-offs for the year ended August 31, 2020 related to abnormal plant waste due to lack of sufficient staffing as a result of COVID-19 was $5,048 (August 31, 2019 - $nil).
9. PROPERTY, PLANT AND EQUIPMENT
| LAND | BUILDINGS | CONSTRUCTION IN PROCESS |
GROWING & PROCESSING EQUIPMENT |
OTHER (NOTE A) |
RIGHT-OF-USE LEASE ASSETS (NOTE B) |
TOTAL | |||||||||||||||
| Cost | |||||||||||||||||||||
| Balance, August 31, 2018 | $ | 2,205 | $ | 47,101 | $ | 11,993 | $ | 40,493 | $ | 2,922 | $ | - | $ | 104,714 | |||||||
| Additions | 6 | 15,753 | 105,512 | 5,554 | 3,366 | - | 130,191 | ||||||||||||||
| Construction completed | - | 8,042 | (51,990 | ) | 42,698 | 1,250 | - | - | |||||||||||||
| Disposals | - | (122 | ) | - | (201 | ) | - | - | (323 | ) | |||||||||||
| Impairment loss | - | - | - | (613 | ) | - | - | (613 | ) | ||||||||||||
| Reclassification of computer software (NOTE A) |
- | - | - | - | (841 | ) | - | (841 | ) | ||||||||||||
| Balance, August 31, 2019 | $ | 2,211 | $ | 70,774 | $ | 65,515 | $ | 87,931 | $ | 6,697 | $ | - | $ | 233,128 | |||||||
| Accumulated depreciation | |||||||||||||||||||||
| Balance, August 31, 2018 | $ | - | $ | (1,997 | ) | $ | - | $ | (2,956 | ) | $ | (1,122 | ) | $ | - | $ | (6,075 | ) | |||
| Depreciation | - | (2,245 | ) | - | (5,679 | ) | (946 | ) | - | (8,870 | ) | ||||||||||
| Disposals | - | 5 | - | 17 | - | - | 22 | ||||||||||||||
| Reclassification of computer software (NOTE A) |
- | - | - | - | 265 | - | 265 | ||||||||||||||
| Balance, August 31, 2019 | $ | - | $ | (4,237 | ) | $ | - | $ | (8,618 | ) | $ | (1,803 | ) | $ | - | $ | (14,658 | ) | |||
| Cost | |||||||||||||||||||||
| Balance, August 31, 2019 | $ | 2,211 | $ | 70,774 | $ | 65,515 | $ | 87,931 | $ | 6,697 | $ | - | $ | 233,128 | |||||||
| Transition to IFRS 16 | - | - | - | - | - | 2,244 | 2,244 | ||||||||||||||
| Additions (Note C) | 1,864 | 22,316 | 46,847 | 7,597 | 1,335 | 2,220 | 82,179 | ||||||||||||||
| Construction completed | - | 71,663 | (110,234 | ) | 37,851 | 720 | - | - | |||||||||||||
| Disposals | - | (517 | ) | - | (436 | ) | (75 | ) | - | (1,028 | ) | ||||||||||
| Impairment loss (Note D) | - | (37,214 | ) | - | 48 | - | - | (37,166 | ) | ||||||||||||
| Balance, August 31, 2020 | $ | 4,075 | $ | 127,022 | $ | 2,128 | $ | 132,991 | $ | 8,677 | $ | 4,464 | $ | 279,357 | |||||||
| Accumulated depreciation | |||||||||||||||||||||
| Balance, August 31, 2019 | $ | - | $ | (4,237 | ) | $ | - | $ | (8,618 | ) | $ | (1,803 | ) | $ | - | $ | (14,658 | ) | |||
| Depreciation | - | (4,074 | ) | - | (11,568 | ) | (1,362 | ) | (557 | ) | (17,561 | ) | |||||||||
| Disposals | - | 108 | - | 145 | 29 | - | 282 | ||||||||||||||
| Balance, August 31, 2020 | $ | - | $ | (8,203 | ) | $ | - | $ | (20,041 | ) | $ | (3,136 | ) | $ | (557 | ) | $ | (31,937 | ) | ||
| Net book value | |||||||||||||||||||||
| August 31, 2019 | $ | 2,211 | $ | 66,537 | $ | 65,515 | $ | 79,313 | $ | 4,894 | $ | - | $ | 218,470 | |||||||
| August 31, 2020 | $ | 4,075 | $ | 118,819 | $ | 2,128 | $ | 112,950 | $ | 5,541 | $ | 3,907 | $ | 247,420 |
Most of the additions during the year ended August 31, 2020 were related to the expansion of the Company's facility located in Moncton (the "Moncton Campus").
A) Other - Computer Software
During the three months ended November 30, 2019, the Company determined that due to the increasing value of its computer software, it should be reclassified from property, plant and equipment to intangible assets. Computer software has historically been included in the "other" category within property, plant and equipment due to its relatively insignificant value. The August 31, 2019 cost of $841 and accumulated amortization of $265 relating to computer software have been reclassified from property, plant and equipment to intangible assets (Note 10) as a result.
B) Right-of-Use Assets and Transition to IFRS 16
As described in Note 4, the Company adopted IFRS 16 effective September 1, 2019. As a result, certain lease obligations were capitalized as ROU assets on the transition date and depreciated for the year ended August 31, 2020. ROU assets mostly comprise of office and warehouse space.
C) Reconciliation of property, plant and equipment additions to the statements of cash flows
The following table reconciles additions of property, plant and equipment per the above table to the purchases of property, plant and equipment per the statements of cash flows:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Additions | $ | 82,179 | $ | 130,191 | |||
| Additions related to IFRS 16 Leases | (2,220 | ) | - | ||||
| Net change in accounts payable and accrued liabilities related to purchases of property, plant and equipment |
(2,736 | ) | (21,427 | ) | |||
| Purchase of property, plant and equipment | $ | 77,223 | $ | 108,764 |
D) Impairment
The Company reviews the carrying value of its property, plant and equipment at each reporting period for indicators of impairment. During the year ended August 31, 2020, management noted indicators of impairment and recorded impairments at an asset specific level.
Moncton Campus - Phase 4C (asset specific)
The construction of Phase 4C of the Moncton Campus, which was intended to house grow rooms with a previously estimated cultivation capacity of 24,000 kg per annum, was indefinitely deferred during the three months ended May 31, 2020 based on available capacity and forecast market demand. Phase 4C of the Moncton Campus has effectively been left partially completed and, due to the specialized and integrated nature of Phase 4C, without any foreseeable near-term use. Management estimated the fair value less cost to dispose ("FVLCD") of Phase 4C to approximate the purchase cost of the land and movable equipment, which is $1,328. As a result, the Company recognized an impairment loss of $37,749 in relation to this asset for the year ended August 31, 2020. The entire amount of the impairment loss was recorded against the building infrastructure of Phase 4C. In addition, subsequently incurred and contractually committed future costs totaling $1,050 with respect to Phase 4C at August 31, 2020 were included in the impairment loss for the year ended August 31, 2020.
10. INTANGIBLE ASSETS
| SUPPLY AGREEMENT |
LICENSE AGREEMENT |
COMPUTER SOFTWARE |
TOTAL | |||||||||
| Cost | ||||||||||||
| Balance, August 31, 2018 | $ | - | $ | - | $ | - | $ | - | ||||
| Additions | 1,530 | - | - | 1,530 | ||||||||
| Reclassification of computer software (NOTE A) | - | - | 841 | 841 | ||||||||
| Balance, August 31, 2019 | $ | 1,530 | $ | - | $ | 841 | $ | 2,371 | ||||
| Accumulated amortization | ||||||||||||
| Balance, August 31, 2018 | $ | - | $ | - | $ | - | $ | - | ||||
| Amortization | (32 | ) | - | - | (32 | ) | ||||||
| Reclassification of computer software (NOTE A) | - | - | (265 | ) | (265 | ) | ||||||
| Balance, August 31, 2019 | $ | (32 | ) | $ | - | $ | (265 | ) | $ | (297 | ) | |
| Cost | ||||||||||||
| Balance, August 31, 2019 | $ | 1,530 | $ | - | $ | 841 | $ | 2,371 | ||||
| Additions | - | 198 | 1,232 | 1,430 | ||||||||
| Impairment (NOTE B) | (1,303 | ) | - | - | (1,303 | ) | ||||||
| Disposal | - | - | (32 | ) | (32 | ) | ||||||
| Balance, August 31, 2020 | $ | 227 | $ | 198 | $ | 2,041 | $ | 2,466 | ||||
| Accumulated amortization | ||||||||||||
| Balance, August 31, 2019 | $ | (32 | ) | $ | - | $ | (265 | ) | $ | (297 | ) | |
| Amortization | (195 | ) | - | (202 | ) | (397 | ) | |||||
| Balance, August 31, 2020 | $ | (227 | ) | $ | - | $ | (467 | ) | $ | (694 | ) | |
| Net book value | ||||||||||||
| August 31, 2019 | $ | 1,498 | $ | - | $ | 576 | $ | 2,074 | ||||
| August 31, 2020 | $ | - | $ | 198 | $ | 1,574 | $ | 1,772 |
A) Other - Computer Software
During the three months ended November 30, 2019, the Company determined that due to the increasing value of its computer software, it should be reclassified from property, plant and equipment to intangible assets. Computer software has historically been included in the "other" category within property, plant and equipment due to its relatively insignificant value. The August 31, 2019 cost of $841 and accumulated amortization of $265 relating to computer software have been reclassified from property, plant and equipment to intangible assets as a result.
B) Impairment
On January 18, 2019, the Company entered into an agreement with 1812 Hemp to secure supply of hemp (the "Supply Agreement"). Pursuant to the Supply Agreement, the Company is to receive a 25% discount on the price per kilogram of dried hemp flower harvested that is purchased from 1812 Hemp. The term of the Supply Agreement is from December 17, 2018 to December 16, 2023 and the Company has the option to renew it for an additional five-year period upon six months' notice. In addition, the Company has a right-of-first refusal on the future procurement of high cannabidiol (CBD) hemp from 1812. The Company paid $1,500 to 1812 Hemp plus transaction costs of $30 in connection with this transaction, which it has recorded as an intangible asset with a finite useful life that will be amortized based on the actual volume of dried hemp flower purchased as a proportion of its forecast purchase volumes. During the three months ended August 31, 2020, management became aware that 1812 Hemp was facing financial hardship due to a lack of customer demand and a change in market conditions and as a result, 1812 Hemp had significantly scaled back operations. Separately, the Company's forecast hemp purchases have decreased significantly as a result of slower than expected progression in Canadian hemp and CBD regulations. Thus, as a result of the aforementioned challenges, management impaired the Supply Agreement intangible asset to its recoverable amount, which was estimated to be $nil, by recording an impairment charge of $1,303 at August 31, 2020.
11. LONG-TERM DEBT
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Bank of Montreal ("BMO") senior secured term loan ("Term Loan") maturing May 31, 2022 with principal repayments starting November 30, 2020 based on a 10 year amortization |
$ | 115,000 | $ | 50,000 | |||
| Atlantic Canada Opportunities Agency ("ACOA") Business Development Program loan maturing September 1, 2024 with a 7 year amortization, bearing interest at an interest rate of 0% |
311 | 346 | |||||
| Vehicle loans - five year term maturing June 17, 2024 | 78 | 98 | |||||
| Deferred financing costs, net of loan modification loss on BMO Term Loan | (123 | ) | (868 | ) | |||
| 115,266 | 49,576 | ||||||
| Less: current portion of long term debt | (11,595 | ) | (3,509 | ) | |||
| Long-term portion | $ | 103,671 | $ | 46,067 |
BMO CREDIT FACILITY
On May 31, 2019, the Company entered into a credit facility with Bank of Montreal ("BMO") as lead arranger and agent and a syndicate including three other lenders. The facility consists of a $115,000 term loan ("Term Loan") and a $25,000 revolving credit facility ("Revolver", and together with the Term Loan, as amended, the "Facilities"), both of which mature on May 31, 2022. Included in the facility was an uncommitted option to increase the Facilities by an incremental $35,000 to a total of $175,000, subject to agreement by BMO and the syndicate lenders and satisfaction of certain legal and business conditions.
The Facilities are secured by assets of the Company and its subsidiaries. The proceeds of the Term Loan have been used to fund the Phase 4 and 5 expansions of the Moncton Campus and were also used to refinance the Company's long-term debt with Farm Credit Canada. The Revolver may be used for general corporate and working capital purposes. Availability under the Revolver is based on a percentage of the Company's trade receivables at the end of each month and remains undrawn at August 31, 2020.
First Amendment
On November 15, 2019, the Company amended its Facilities with BMO to: i) extend the final draw deadline of the Term Loan ("Amended Term Loan") from November 30, 2019 to March 31, 2020; ii) postpone the commencement of scheduled principal repayments on the Term Loan from February 28, 2020 to May 31, 2020; and iii) realign the financial covenants structure, effective November 30, 2019, to be more consistent with industry norms up to and including May 31, 2020. Prior to the Second Amendment, as described below, the financial covenants were to revert to the original structure on August 31, 2020. The Company incurred an amendment fee of $140 plus customary legal expenses in connection with the first amendment.
The amended Facilities were further amended on February 28, 2020 to extend the final draw deadline of the Amended Term Loan from March 31, 2020 to May 31, 2020.
In accordance with IFRS 9, such modification to the Facilities as outlined above is not an extinguishment of debt either qualitatively or quantitatively, rather it is a non-substantial modification. Therefore, as per the provisions of IFRS 9 the Company recorded a loss on debt restructuring based on the difference in the present value of the restructured net cash flows discounted at the original effective interest rate ("EIR") versus the present value of the original net cash flows discounted at the original EIR. This loss of $831 has been recorded under financing costs in the statement of (loss) income and comprehensive (loss) income for the year ended August 31, 2020.
Second Amendment
On May 28, 2020, the Company further amended its Facilities ("Second Amendment") with BMO to: (i) extend the final draw deadline of the Term Loan to July 31, 2020; (ii) postpone the commencement of principal repayments on the Amended Term Loan to November 30, 2020; (iii) adjust certain financial ratios to be maintained by the Company both before and after November 30, 2021 (the "Conversion Date"); (iv) modify the applicable margin pricing and standby fee terms to reflect current market conditions; and (v) remove the uncommitted option to increase the Amended Facilities by an incremental $35 million. The financial covenants will revert to the original structure, albeit at different ratios, on November 30, 2021. The interest rate margin will be fixed during this period. The Company incurred an amendment fee of $490 plus customary legal expenses in connection with the second amendment.
As a result of the Second Amendment, the Company recorded a loan modification loss of $813 under financing costs in the statement of (loss) income and comprehensive (loss) income for the three months ended May 31, 2020.
As part of the Second Amendment, the Company is also required to establish and maintain with BMO a cash collateral of $8,000 at all times. As a result, the Company purchased a two-year GIC not redeemable before maturity, which is to be held by BMO as a pledged deposit. Since the GIC is restricted from being exchanged or used for any other purpose for greater than one year, the Company has classified it as a restricted investment on the statement of financial position under non-current assets.
Pursuant to the agreed upon conditions of the Second Amendment, the Company drew down additional funds up to the $115,000 Term Loan commitment during June 2020. Principal repayments on the Amended Term Loan will commence on November 30, 2020 at a rate of 2.5% per quarter of the total Amended Term Loan balance. The Company may, at its discretion, repay the balance of the Amended Facilities without penalty, at any time.
Amendment and Restatement
Subsequent to the year-end, on November 27, 2020, the Company further amended its Facilities pursuant to an amended and restated credit agreement ("Amendment and Restatement") with BMO to: (i) reduce the Term Loan amount from $115,000 to $60,000 based on a repayment of $55,000 to be made on December 1, 2020 of the outstanding Term Loan balance of $115,000; (ii) have repayments on the balance of the Term Loan commence on February 28, 2021 in an amount equal to $1,500 per quarter; (iii) reduce the Revolver commitment to $2,000 from up to $25,000; (iv) adjust the minimum quarterly EBITDA covenants to be maintained by the Company commencing on February 28, 2021 and continuing through to maturity, thereby removing this covenant for the fiscal period ended November 30, 2020 and eliminating the reversion of the financial covenants to that of the original structure on November 30, 2021; (v) modify the applicable margin pricing and standby fee terms to reflect current market conditions; and (vi) reduce the minimum unrestricted cash balance requirement to $20,000, which is already inclusive of the $8,000 restricted investment currently outstanding. The interest rate margin will be fixed from November 27, 2020 through to maturity on May 31, 2021. The Company incurred an amendment fee of $217 plus customary legal expenses in connection with the amendment and restatement.
Other Terms and Conditions
Under the terms of the Facilities, the Company can elect, at its sole discretion, to receive advances under the Amended Term Loan through certain availment options, which includes prime rate loans and bankers' acceptances with maturity dates between 28 and 182 days. The Company, therefore, has the choice to continuously roll over the bankers' acceptances upon their maturities or to convert the then outstanding principal and interest into prime rate loans at any time before May 31, 2022. The interest rate of the Amended Facilities is a set margin over the above-noted availment options, which shall remain fixed until November 30, 2021, at which point it may subsequently increase or decrease based on a pricing grid linked to the Company's debt to EBITDA coverage at each quarter-end.
During the year ended August 31, 2019, the Company converted its $50,000 outstanding principal amount under the Term Loan to bankers' acceptances, which reduced the cash interest rate from 5.70% (EIR of 6.39%) as at May 31, 2019 to 4.46% (EIR of 5.18%) as at August 31, 2019. In accordance with IFRS 9, the loan conversion was determined to not be a modification of the loan terms.
During the year ended August 31, 2020, the Company drew an additional $65,000 under the Term Loan, in three tranches, and similar to the initial draw noted above, converted the balances from prime rate loans to bankers' acceptances. During the year ended August 31, 2020, the Company rolled over $115,000 of the Term Loan balance on a monthly basis through bankers' acceptances with an average cash interest rate of approximately 4.25%. Based on the current availment option of bankers acceptances' the applicable margin rate is 3.75% above the applicable bankers acceptances' rate.
Transaction costs incurred with respect to the Amended Facilities have totaled $2,085 to date, which have been allocated against the Term Loan ($1,899) and Revolver ($186 split between prepaid assets and deferred charges). The weighted-average effective interest rate for the Term Loan based on these capitalized transaction costs, the loan modification loss, and the current cash interest rate was approximately 4.3% at August 31, 2020.
The Facilities contain customary financial and restrictive covenants. At August 31, 2020, the Company was in compliance with these covenants.
Principal repayments required on the long-term debt for the next five years as at August 31, 2020 are as follows:
| Less than 1 year | $ | 11,605 | |
| 1 to 2 years | 103,580 | ||
| 2 to 3 years | 80 | ||
| 3 to 4 years | 78 | ||
| 4 to 5 years | 46 | ||
| Thereafter | - | ||
| Total | $ | 115,389 |
12. SHARE CAPITAL
(i) Authorized share capital
The authorized share capital of the Company is an unlimited number of common shares without par value and an unlimited number of preferred shares without par value. All issued shares, consisting only of common shares, are fully paid and non-assessable.
(ii) Issued share capital
As at August 31, 2020, the Company's issued and outstanding share capital consisted of 194,511,061 (August 31, 2019 - 156,196,347) common shares with a stated value of $420,673 (August 31, 2019 - $318,125).
(iii) Issuances of share capital
At-the-market ("ATM") equity financing - December 2019 Offering
On December 4, 2019, the Company established an at-the-market equity program (the "December 2019 ATM Program") that allowed the Company to issue up to $55,000 (or its U.S. dollar equivalent) of common shares from treasury to the public. Common shares sold in the December 2019 ATM Program were sold through the TSX or the NASDAQ at the prevailing market price at the time of sale.
Subject to securities laws and stock exchange requirements, the volume and timing of distributions under the December 2019 ATM Program were determined in the Company's sole discretion. All of the common shares issuable pursuant to the December 2019 ATM Program, were issued as of February 13, 2020. The Company has used, and intends to continue to use, the net proceeds of the December 2019 ATM Program to fund capital projects, for general corporate purposes and to repay indebtedness. As common shares distributed in the December 2019 ATM Program were issued and sold at the prevailing market price at the time of the sale, prices varied among purchasers during the period of the distribution.
Distributions of the common shares through the December 2019 ATM Program were made pursuant to the terms of an equity distribution agreement dated December 4, 2019 among the Company, BMO Nesbitt Burns Inc., as Canadian agent, and BMO Capital Markets Corp., as U.S. agent (collectively, the "agents").
The Company issued 16,201,183 common shares during the three months ended February 29, 2020 for gross proceeds of $54,966 at a weighted average price of $3.39 per common share. Net proceeds realized were $52,885 after agents' commissions of $1,100, regulatory fees of $12, and legal and professional fees of $969. Proceeds were raised in both USD (for shares sold through the NASDAQ) and CAD (for shares sold through the TSX) and the weighted average share price was calculated using the spot rate on the day of settlement.
ATM equity financing - April 2020 Offering
On April 22, 2020, the Company established an at-the-market equity program (the "April 2020 ATM Program") that allowed the Company to issue up to $49,000 (or its U.S. dollar equivalent) of common shares from treasury to the public. Common shares sold in the April 2020 ATM Program were sold through the TSX or the NASDAQ at the prevailing market price at the time of sale.
Subject to securities laws and stock exchange requirements, the volume and timing of distributions under the April 2020 ATM Program were determined in the Company's sole discretion. All of the common shares issuable pursuant to the April 2020 ATM Program, were issued as of June 8, 2020. The Company has used, and intends to continue to use, the net proceeds of the April 2020 ATM Program to fund capital projects, for general corporate purposes and to repay indebtedness. As common shares distributed in the April 2020 ATM Program were issued and sold at the prevailing market price at the time of the sale, prices varied among purchasers during the period of the distribution.
Distributions of the common shares through the April 2020 ATM Program were made pursuant to the terms of an equity distribution agreement dated April 22, 2020 among the Company and the agents.
The Company issued 14,035,278 common shares during the three months ended May 31, 2020 for gross proceeds of $31,069 at a weighted average price of $2.21 per common share. The Company subsequently completed its April 2020 ATM Program on June 8, 2020, by issuing the remaining shares under the ATM, which comprised of 7,044,951 common shares for gross proceeds of $17,915 at a weighted average price of $2.54 per common share. In aggregate, the Company issued 21,080,229 common shares under the April 2020 ATM Program during the year ended August 31, 2020 for gross proceeds of $48,785 at a weighted average price of $2.31 per common share. Net proceeds realized were $47,112 after agents' commissions of $975, regulatory fees of $1, and legal and professional fees of $697. Proceeds were raised in both USD (for shares sold through the NASDAQ) and CAD (for shares sold through the TSX) and the weighted average share price was calculated using the spot rate on the day of settlement.
Equity financing
On December 18, 2017, the Company issued 16,428,572 units by way of a bought deal at $3.50 per unit share for total gross consideration of $48,711 recorded to share capital and an increase of $8,789 to the reserve for options and warrants. Each unit consisted of one common share and one-half common share purchase warrant (each whole common share purchase warrant, a "Warrant"). Each Warrant entitled the holder thereof to acquire one common share of the Company at a price of $4.00 until June 18, 2019. Total issue costs were $3,678, with $3,116 charged to share capital and the remaining $562 charged to the reserve for options and warrants. These Warrants are measured at fair value at the date of grant. In determining the amount of reserve for the Warrants, the Company used the Black-Scholes option pricing model to establish the fair value of Warrants granted using the following assumptions:
| Risk free interest rate % | 1.6% | |
| Expected life of Warrants (years) | 1.5 | |
| Expected annualized volatility % | 64.6% | |
| Expected dividend yield % | - |
Volatility was estimated by using the weighted average historical volatility of the Company and other companies that the Company considers comparable. The expected life in years represents the period of time that the Warrants granted are expected to be outstanding. The risk-free rate is based on government of Canada bonds with a remaining term equal to the expected life of the Warrants. A forfeiture rate of zero percent was used as the Company anticipated all Warrants will be exercised.
During the prior fiscal year, all except for 347,432 Warrants were exercised prior to expiry on June 18, 2019 on a one-for-one basis. The 347,432 Warrants that remained unexercised at the expiry time expired as a result. The Warrants were delisted from the TSX Venture Exchange on June 18, 2019.
Convertible debenture financing
On January 31, 2018, 115,000 convertible debentures were sold at a price of $1,000 per convertible debenture, for aggregate gross proceeds of $115,000 resulting in an increase to the reserve for options and warrants of $12,003, net of deferred tax of $4,902, related to the embedded conversion feature in the convertible debenture. Total issue cost was $7,155 with $6,094 charged to the debenture liability and the remaining $756, net of deferred tax of $305, charged to the reserve for options and warrants.
Conversion of debentures
For the year ended August 31, 2019, the Company issued 20,845,372 common shares at a price per share of $5.42 on the conversion of convertible debentures for an increase of $112,166 to share capital and a decrease of $11,247 to the reserve for options and warrants, respectively. This non-cash financing activity has been excluded from the Company's statement of cash flows as it did not provide or use any cash.
On February 27, 2019, the Company elected to exercise its right under the indenture governing the convertible unsecured debentures to convert all of the principal amount outstanding of the remaining debentures on April 1, 2019 into common shares of the Company on the basis of the daily volume-weighted average price ("VWAP") of the common shares exceeding $7.05 for any 10 consecutive trading days. As of April 1, 2019, all of the convertible unsecured debentures issued were converted to common shares of the Company and no further liability or obligation exists with respect to the convertible unsecured debentures.
Share-based payments
On July 14, 2017, the Company entered into an advisory services agreement with a cannabis consultant that resulted in the grant of 125,000 common shares that vested over various service periods up to and including October 14, 2018. The fair value of the grant was measured based on the average monthly share price of the Company over the various tranches and vesting periods resulting in a cumulative expense of $539. On October 23, 2017, the Company issued 50,000 common shares, of which 20,000 related to the advisory services agreement, as share consideration to the consultant and recognized $144 to share capital. During the year ended August 31, 2019, the Company settled the remaining balance of 105,000 common shares due to the consultant in the form of 41,000 common shares of the Company and 84,000 restricted stock units, which vest immediately, to purchase 84,000 common shares of the Company, which fully settled the Company's obligations relating to this agreement.
Exercise of stock options
During the year ended August 31, 2020, 879,240 (August 31, 2019 - 2,167,864) share options were exercised at an average exercise price of $1.21 (August 31, 2019 - $1.92) for an increase of $1,786 (August 31, 2019 - $6,588) to share capital and a decrease to the reserve for options and warrants of $717 (August 31, 2019 - $2,418).
(iv) Warrants
During the year ended August 31, 2019, 7,739,205 Warrants were exercised at an average price of $4.00 for a value of $39,257 to share capital and a decrease to the reserve for options and warrants of $8,281. All the outstanding Warrants at June 18, 2019 that were not exercised into common shares prior to expiry on June 18, 2019 lapsed and therefore no further Warrants remain outstanding.
(v) Share-based compensation
On February 25, 2020 (the "Approval Date"), the Company's shareholders approved a new omnibus equity incentive plan (the "New Equity Incentive Plan") that governs grants made on or after the Approval Date. Grants made prior to the Approval Date will continue to be governed under the terms of the plan under which they were granted including the Company's 2011 stock option plan and its 2017 equity incentive plan (the "2017 Equity Incentive Plan"), however, no new grants may be made under such plans.
Stock options
The following table summarizes changes in the Company's outstanding stock options for the years ended August 31, 2020 and 2019:
| NUMBER | WEIGHTED AVERAGE EXERCISE PRICE |
||||||
| Balance - August 31, 2018 | 7,709,746 | $ | 2.10 | ||||
| Granted | 3,589,500 | $ | 7.59 | ||||
| Exercised | (2,167,864 | ) | $ | 1.92 | |||
| Cancelled / Forfeited | (298,188 | ) | $ | 6.41 | |||
| Balance - August 31, 2019 | 8,833,194 | $ | 4.23 | ||||
| Granted | 2,125,000 | $ | 3.21 | ||||
| Exercised | (879,240 | ) | $ | 1.21 | |||
| Cancelled / Forfeited | (1,050,050 | ) | $ | 6.20 | |||
| Balance - August 31, 2020 | 9,028,904 | $ | 4.06 |
The following is a summary of the outstanding stock options as at August 31, 2020:
|
OPTIONS OUTSTANDING |
OPTIONS EXERCISABLE |
|||
|
Range of Exercise |
|
Weighted Average Remaining |
|
|
|
Prices |
Quantity Outstanding |
Contractual Life (years) |
Quantity Exercisable |
|
|
|
|
|
|
|
|
$0.30 - $1.48 |
1,440,599 |
4.7 |
1,376,683 |
|
|
$1.49 - $2.38 |
2,204,333 |
7.5 |
1,652,833 |
|
|
$2.39 - $4.65 |
2,069,854 |
7.9 |
1,217,504 |
|
|
$4.66 - $7.67 |
1,886,518 |
8.2 |
1,276,194 |
|
|
$7.68 - $11.27 |
1,427,600 |
8.7 |
949,900 |
|
|
|
9,028,904 |
7.5 |
6,473,114 |
|
Options outstanding have exercise prices that range from $0.30 to $11.27 with a weighted average remaining life of 7.5 years. Total share-based compensation charges, including related to production employees that are charged to biological assets and inventory, for the year ended August 31, 2020 was $7,796 (August 31, 2019 - $14,894) of which $6,127 (August 31, 2019 - $10,036) related to the Company's stock option plan. The fair value of options granted during the year ended August 31, 2020 was $3,743 (August 31, 2019 - $13,848). These options are measured at fair value at the date of grant and are expensed over the option's vesting period, which typically range from two to three-year terms with options vesting in annual tranches evenly over this time period. In determining the amount of share-based compensation related to the options, the Company used the Black-Scholes option pricing model to establish the fair value of options granted.
The following is the range of assumptions for the years ended August 31, 2020 and 2019:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||
| Risk free interest rate | 0.45% - 1.65% | 1.20% - 2.42% | |
| Expected life of options | 5.0 - 6.0 years | 5.0 -6.5 years | |
| Expected annualized volatility | 72% - 85% | 64% -71% | |
| Expected dividend yield | - | - | |
| Forfeiture Rate | 8.0% - 8.7% | 7.3% - 8.0% |
Volatility was estimated by using the weighted average historical volatility of the Company and other companies that the Company considers comparable. The expected life in years represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on government of Canada bonds with a remaining term equal to the expected life of the options. The forfeiture rate is calculated based on historical experience.
Equity incentive plan
As of August 31, 2020, the Company has granted both restricted share units ("RSUs") and performance share units ("PSUs") under the 2017 Equity Incentive Plan and RSUs under the New Equity Incentive Plan. The grant price of any RSU or PSU was determined based on market price calculated in accordance with TSX rules at the time of grant and with respect to PSUs, adjusted for any non-market and market performance vesting conditions in accordance with IFRS 2.
The following table summarizes the movements in the Company's outstanding RSUs:
| NUMBER | |||
| Balance - August 31, 2018 | 145,200 | ||
| Granted | 879,635 | ||
| Exercised | (182,473 | ) | |
| Balance - August 31, 2019 | 842,362 | ||
| Granted | 265,258 | ||
| Exercised | (154,062 | ) | |
| Cancelled/Forfeited | (60,387 | ) | |
| Balance - August 31, 2020 | 893,171 |
The estimated fair value of the equity settled RSUs granted during the year ended August 31, 2020 was $1,037 (August 31, 2019 - $4,543), which was based on the Company's share price at the grant date and will be recognized as an expense over the vesting period of the RSUs, which is over a period of one year for most grants. For the year ended August 31, 2020, $1,576 (August 31, 2019 - $3,475) has been recognized as share-based compensation expense.
The following table summarizes the movements in the Company's outstanding PSUs:
| NUMBER | |||
| Balance - August 31, 2019 | - | ||
| Granted | 142,187 | ||
| Exercised | (15,502 | ) | |
| Balance - August 31, 2020 | 126,685 |
The estimated fair value of the equity settled PSUs granted during the year ended August 31, 2020 was $305 (August 31, 2019 - $nil), which was based on the Company's share price at the grant date, adjusted for an estimate of likelihood of achievement, and will be recognized as an expense over the vesting period of the PSUs, which is during the fiscal year-ended August 31, 2020. For the year ended August 31, 2020, $272 (August 31, 2019 - $nil) has been recognized as share-based compensation expense.
(vi) Earnings (Loss) per share
Earnings (loss) per share represents net income (loss) attributable to common shareholders divided by the weighted average number of common shares outstanding during the year.
Diluted (loss) income per share is calculated by dividing the applicable net (loss) income by the sum of the weighted average number of common shares outstanding and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued during the year.
The reconciliation of the weighted average number of shares, for the purposes of diluted earnings per share, to the weighted average number of ordinary shares, used in the calculation of basic earnings per share, is as follows:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Weighted average number of shares used in basic earnings per share | 172,668,816 | 140,923,324 | |||||
| Options | 4,540,182 | 5,194,827 | |||||
| Warrants | - | 4,738,388 | |||||
| Restricted share units | 727,275 | 684,534 | |||||
| Performance share units | 126,685 | - | |||||
| Weighted average number of shares used in diluted earnings per share |
178,062,958 | 151,541,073 |
The outstanding number and type of securities that could potentially dilute basic net (loss) income per share in the future but that were not included in the computation of diluted net income (loss) per share because to do so would have increased (decreased) the net (loss) income per share (anti-dilutive) are as follows:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Stock options | 4,382,918 | 1,847,500 | |||||
| 4,382,918 | 1,847,500 |
13. OTHER LIABILITIES
The carrying value of other liabilities consists of:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Contingent share consideration | 231 | 1,117 | |||||
| Lease liabilities | 2,617 | - | |||||
| 2,848 | 1,117 |
(i) Contingent share consideration
In connection with the Company's investment in alpha-cannabis® Pharma GmbH as described in Note 14, the Company has a commitment to deliver additional consideration of up to €875 in the form of the Company's common shares contingent on the achievement of certain gross margin-based milestones. At August 31, 2020, the Company revalued the contingent liability and recorded a corresponding gain in the statement of operations of $886 for the year ended August 31, 2020 (August 31, 2019 - loss of $145).
(ii) Lease liabilities
In connection with the Company's adoption of IFRS 16 effective September 1, 2019, lease liabilities were recorded as described in Note 3.
On March 13, 2020, the Company entered into a lease amending agreement for its Toronto corporate office: i) extending the lease of its existing 5,007 square feet of office space (the "Existing Premises") originally expiring on August 31, 2020; and ii) leasing an additional 6,572 square feet of office space adjacent to the Existing Premises (the "Additional Premises"). The term of the lease for Existing Premises will be extended for a period of five years and two months commencing on September 1, 2020 and expiring on October 31, 2025. As this amending lease agreement for the Existing Premises is effectively a modification to the original lease agreement, the Company has recognized the ROU asset and corresponding lease liability pertaining to the Existing Premises as of the effective date of the lease amending agreement, which was March 13, 2020.
On April 21, 2020, the Company, as sub-landlord, entered into a sublease agreement with a subtenant pursuant to which the Company agreed to sublease 3,099 square feet of its Additional Premises noted above for a period of five years and two months commencing on September 1, 2020 and expiring on October 30, 2025 for a total of $251 per annum for an aggregate rental income of $1,296 over the term of the sublease. Under the currently contemplated terms, both parties have the mutual right to terminate the sublease upon six months' written notice to either party, which shall not occur prior to August 31, 2023. This sublease agreement has no impact on the amount of lease liabilities as it is a net investment in the sublease by the Company.
On July 16, 2020, the Company, as sublandlord, entered into a sublease agreement with a subtenant, pursuant to which the Company agreed to sublease 3,473 square feet of its rented premises for a period of five years and two months commencing on September 1, 2020 and expiring on October 30, 2025 for a total of $282 per annum for an aggregate rental income of $1,431 over the term of the sublease. Under the terms, the sub-landlord has a right to terminate the sublease upon six months' written notice to the subtenant, which shall not occur prior to April 30, 2021, whereas the subtenant have a right to terminate the sublease upon eight months' written notice to the sublandlord, which shall not occur prior to February 28, 2022.
The following is a continuity schedule of lease liabilities for the year ended August 31, 2020:
| Balance, August 31, 2019 | $ | - | |
| IFRS 16 transition | 2,219 | ||
| Lease additions | 2,220 | ||
| Lease payments | (897 | ) | |
| Interest expense on lease liabilities | 163 | ||
| Balance, August 31, 2020 | 3,705 | ||
| Current portion included in accounts payable and accrued liabilities | (1,088 | ) | |
| Long-term portion | $ | 2,617 |
The undiscounted contractual payments relating to the current and future lease liabilities at August 31, 2020 is:
| Less than 1 year | $ | 1,553 | |
| 1 to 2 years | 1,049 | ||
| 2 to 3 years | 1,045 | ||
| 3 to 4 years | 998 | ||
| 4 to 5 years | 768 | ||
| Thereafter | 606 | ||
| Total | $ | 6,019 |
Included in the undiscounted contractual payments relating to current and future lease liabilities above is the Additional Premises as noted above, the term of which will commences on September 1, 2020.
14. INVESTMENTS IN ASSOCIATES
The carrying value of investments in associates consist of:
| ALPHA-CANNABIS | EVIANA HEALTH | HYASYNTH | ||||||||||
| PHARMA GMBH | CORPORATION | BIOLOGICALS INC. | ||||||||||
| (A) | (B) | (C) | TOTAL | |||||||||
| Participating share (1) | 25.0% | 19.9% | 43.4% | |||||||||
| Balance, August 31, 2018 | $ | - | $ | - | $ | - | $ | - | ||||
| Additions | 3,408 | 5,000 | 5,000 | 322 | ||||||||
| Transaction costs | 160 | 73 | 89 | |||||||||
| Distributions | - | (374 | ) | - | (374 | ) | ||||||
| Share of net loss | (50 | ) | (734 | ) | (477 | ) | (1,261 | ) | ||||
| Impairment loss | - | (950 | ) | - | (950 | ) | ||||||
| Foreign currency translation gain (loss) | (22 | ) | (15 | ) | - | (37 | ) | |||||
| Balance, August 31, 2019 | $ | 3,496 | $ | 3,000 | $ | 4,612 | $ | 11,108 | ||||
| Share of net loss | (75 | ) | - | (1,112 | ) | (1,187 | ) | |||||
| Impairment loss | - | (3,000 | ) | - | (3,000 | ) | ||||||
| Elimination of proportionate share of transactions with associates |
(14 | ) | - | - | (14 | ) | ||||||
| Foreign currency translation gain (loss) | 94 | - | - | 94 | ||||||||
| Balance, August 31, 2020 (2) | $ | 3,501 | $ | - | $ | 3,500 | $ | 7,001 |
Note 1: % Interest includes the potential ownership interest that could result from the conversion of debentures and exercise of warrants
Note 2: The Company utilizes the most recently issued quarterly financial statements of its associates in its results with a two month lag since the Company does not have the same reporting date as its associates (for the year ended August 31, 2020, the Company utilized its associates' June 30, 2020 results)
a) alpha-cannabis Pharma GmbH
On October 10, 2018, the Company executed an investment agreement with alpha-cannabis® Pharma GmbH ("ACG") pursuant to which the Company acquired 8,333 common shares of ACG, representing a 25% stake in the capital of ACG, for aggregate proceeds of €1,625 ($2,436). Established in 2016, ACG is a privately held company that is strategically positioned to serve the German medical cannabis market.
The Company has a commitment to deliver additional consideration of up to €875 in the form of the Company's common shares contingent on the achievement of certain gross margin-based milestones. The Company has estimated the fair value of these contingent shares as €649 ($972) as of the investment date and has included a corresponding long-term liability under other liabilities in the statement of financial position. Refer to Note 12 for further information.
Concurrent with the Company's investment in ACG, the parties entered into a CBD supply agreement, whereby ACG may supply the Company with synthetic CBD, as well as a cannabis supply agreement, whereby the Company may supply ACG with dried cannabis flowers.
b) Eviana Health Corporation
On October 2, 2018, the Company participated in the debenture offering of Eviana Health Corporation ("Eviana") by way of private placement. Eviana is a Canadian Securities Exchange ("CSE") listed company that was established with the aim of delivering customized consumer health care products using natural hemp strains of cannabis sativa for cannabinoid-based topical creams and products. The Company's investment is in the form of convertible debentures and share purchase warrants, which together provide a potential ownership interest of up to 21.4%, which is capped at 19.9% based on certain contractual obligations. In addition to this ownership interest, the Company also considered various qualitative factors in arriving at the determination that significant influence exists, including representation rights on Eviana's board of directors, and thereby concluding that the equity method of accounting is appropriate.
The convertible debentures have a face value of $5,000, bear interest at 10% per annum, are non-redeemable, and mature on October 2, 2020. The convertible debentures are convertible at the option of the holder at any time at a price of $1.15 per share, or into 4,347,826 common shares of Eviana. Conversion of the debentures may be forced by Eviana in the event that the volume weighted average price of the common shares of Eviana for ten consecutive days is greater than $2.15, subject to a minimum volume of 100,000 shares in each of those 10 days.
The share purchase warrants were acquired for no additional consideration, concurrent with the debenture offering, are transferrable, and are exercisable until October 2, 2020. 2,500 share purchase warrant units were acquired, each of which is convertible into 870 common shares per unit, or 2,175,000 common shares in aggregate, at an exercise price of $1.30 per share.
Concurrent with the Company's investment in Eviana, the parties entered into a CBD oil supply agreement, whereby the Company has the right, but not obligation, to purchase up to 25% of Eviana's annual CBD oil at 95% of the agreed raw CBD oil wholesale market price for a period of 5 years from the date on which the CBD oil is first made commercially available by Eviana for wholesale.
On October 28, 2019, Eviana provided a default announcement in accordance with National Policy 12-203 Management Cease Trade Orders ("NP 12-203"). Eviana made an application to the British Columbia Securities Commission, as its principal regulator, for a management cease trade order ("MCTO") under NP 12-203 in respect of an anticipated default regarding its annual filings. On November 1, 2019, a cease trade order ("CTO") was issued by the British Columbia Securities Commission and the Ontario Securities Commission. On November 5, 2019, Eviana was suspended from the CSE in accordance with CSE Policy 3 which is considered a regulatory halt as defined in National Instrument 23-101 - Trading Rules.
At May 31, 2020, the Company identified indicators of impairment with respect to its investment in Eviana. The Company determined the recoverable amount of Eviana to approximate $nil based on the higher of fair value less costs to sell ("FVLCS") and value-in-use ("VIU"). An impairment loss of $3,000 has been included in the statement of (loss) income and comprehensive (loss) income for the year ended August 31, 2020.
On June 18, 2020, the Company served Eviana with a notice of default and demand letter with respect to the non-payment of interest relating to its convertible debentures as well as other applicable events of default under the debenture agreement. As of the date these financial statements were approved, the Company has not yet received its December 31, 2019 or June 30, 2020 interest payment on the Eviana convertible debenture.
c) Hyasynth Biologicals Inc.
On September 12, 2018, the Company invested in Hyasynth Biologicals Inc. ("Hyasynth") by way of convertible secured debentures, to be purchased in three tranches and valued in the aggregate at $10,000. Tranche 1 was issued on that date, Tranche 2 was issued on October 23, 2020 (as described below), and one additional tranche that may be issued based on the achievement of a specific milestone. Hyasynth is a privately held biotechnology company based in Montreal, Quebec and is a leader in the field of cannabinoid science and biosynthesis. The Company's investment is in the form of convertible debentures, which provide a potential ownership interest of up to 43.4% based on Tranche 1. In addition to the ownership interest, the Company also considered various qualitative factors in arriving at the determination that significant influence exists, including representation on Hyasynth's board of directors, and thereby concluded that the equity method of accounting is appropriate.
Tranche 1 of the convertible debentures has a face value of $5,000, bears interest at 8.0% per annum, are secured, and mature on the earlier of August 31, 2023 or the closing date of a qualified sale transaction, unless an automatic or optional conversion has occurred. Tranche 1 of the convertible debentures are convertible at the option of the holder at any time at a price of $40 per share, or into 125,000 common shares. Conversion of the debentures may be automatically triggered based on the completion of a qualified transaction or Hyasynth's facility reaching a pre-defined production capacity. Tranche 2 and 3 of the convertible debentures, each of which commits $2.5 million for an aggregate of $5 million, have certain production-related milestones that must be achieved within a 24- and 36-month period, respectively, for issuance to occur.
Concurrent with the Company's investment in Hyasynth, the parties entered into a CBD supply agreement, whereby the Company has the ability to purchase up to 100% of Hyasynth's annual cannabinoid or cannabinoid-related production at a 10% discount to the agreed upon wholesale market price for a period of 10 years from the date Hyasynth commences commercial production of the products.
Subsequent to the year end, on October 23, 2020, the Company advanced an additional $2,500 to Hyasynth by way of convertible debentures as a result of Hyasynth’s achievement of the contractual production-related milestone for Tranche 2 of the convertible debentures. This brings the Company’s total face value of convertible debentures investment in Hyasynth to $7,500, which provides the Company with a potential ownership interest of up to 46.5% on a fully diluted basis.
15. RELATED PARTY TRANSACTIONS
Key management personnel are those persons having the authority and responsibility for planning, directing and controlling activities of the entity, directly or indirectly. The key management personnel of the Company are the members of the Company's executive management team and Board of Directors. The transactions are conducted at arm's length and in the normal course of operations.
(i) Management and Board compensation
For the years ended August 31, 2020 and 2019, the Company's expenses included the following management and board compensation:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Salaries and consulting fees | $ | 2,953 | $ | 2,521 | |||
| Share-based compensation | 2,750 | 5,155 | |||||
| Total key management compensation | $ | 5,703 | $ | 7,676 |
During the year ended August 31, 2020, 790,000 stock options (August 31, 2019 - 685,000) were granted to key management personnel at an average exercise price of $2.48 (August 31, 2019 - $4.75) and aggregate fair value of $1,794 (August 31, 2019 - $1,736). In addition, during the year ended August 31, 2020, 211,981 RSUs (August 31, 2019 - 631,949), were granted to key management personnel with an aggregate fair value of $902 (August 31, 2019 - $3,002). For the year ended August 31, 2020, 88,910 PSUs (August 31, 2019 - nil) were issued to key management personnel with an aggregate fair value of $191 (August 31, 2019 - $nil).
(ii) Significant transactions with associates
For the year ended August 31, 2020, the Company received no interest income (August 31, 2019 - $374) on its convertible debenture investment in Eviana as disclosed in Note 14, which is being recorded as distributions under the equity accounting method.
For the year ended August 31, 2020, the Company earned revenues of $52 (August 31, 2019 - $nil) on product sold to ACG, which has been proportionately eliminated from the consolidated financial statements based on the Company's proportionate share of investment in ACG.
16. CAPITAL MANAGEMENT
The Company considers its capital to consist of share capital, equity reserves, long-term debt, accumulated other comprehensive income, and retained earnings, which is disclosed in the August 31, 2020 consolidated statement of financial position as $414,793 (August 31, 2019 - $376,582). Equity reserves is comprised of any amounts recorded with respect to the recognition of share-based compensation expense (options, RSUs, or PSUs) or the fair value of warrants issued. Accumulated other comprehensive income is entirely comprised of foreign currency translation gains and losses recorded on the Company's investment in ACG.
The Company manages its capital structure and adjusts it based on funds available to the Company, in order to fund its expansion and construction of its facility. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business.
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative stage of the Company, is reasonable. There has been no change in how the Company defines or manages capital during the period.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS AND FINANCIAL RISK FACTORS
i) Fair value of financial instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants. The Company records certain financial instruments at fair value. The Company's financial instruments include cash, short-term investments (including marketable securities), accounts receivable, loan receivable, accounts payable and accrued liabilities, long-term debt, and contingent share consideration.
Fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
• Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date;
• Level 2 inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
• Level 3 inputs are unobservable inputs for the asset or liability.
The fair value of cash, short-term investments, accounts receivable, loan receivable, accounts payable and accrued liabilities approximate their carrying amounts due to their short-term nature. The fair value of marketable securities is based on quoted prices in active markets and is reflected in the carrying value of these financial assets. The fair value of long-term debt approximates $115,389 based on the face value of debt outstanding, which carries a floating interest rate.
The fair value of the contingent share consideration is primarily based on Level 3 unobservable inputs. The determination of the fair value of this liability is primarily driven by the Company's expectations of the investment in associate 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 August 31, 2020, the probability of achieving the milestones was estimated to be 68% and the discount rate was estimated to be 20%. If the probabilities of achieving the milestones increased or decreased by 10%, the estimated fair value of the contingent share consideration would increase or decrease by approximately $33. If the discount rates increased or decreased by 5%, the estimated fair value of contingent consideration would decrease or increase, respectively, by approximately $12.
During the period, there were no transfers of amounts between Levels 1, 2 and 3.
ii) Financial risk factors
The Company is exposed to various risks through its financial instruments, as follows:
(i) Credit risk arises from deposits with banks, short-term investments (excluding investments in equity securities), outstanding trade and loan receivables, and restricted investments. For trade receivables, the Company does not hold any collateral as security but mitigates this risk by dealing only with what management believes to be financially sound counterparties and, accordingly, does not anticipate significant loss for non-performance. For other receivables, out of the normal course of business such as the loan receivable, management generally obtains guarantees and general security agreements. The maximum exposure to credit risk of cash, short-term investments, accounts receivable, loans receivable, and restricted investment on the statement of financial position at August 31, 2020 approximates $99,736 (August 31, 2019 - $65,385).
As of August 31, 2020, the Company's aging of trade receivables was as follows:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| 0-60 days | $ | 11,023 | $ | 11,748 | |||
| 61-120 days | 73 | 152 | |||||
| Gross trade receivables | $ | 11,096 | $ | 11,900 | |||
| Less: Provision for doubtful accounts | (13 | ) | (268 | ) | |||
| $ | 11,083 | $ | 11,632 |
(ii) Liquidity risk - The Company's liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements. At August 31, 2020, the Company had $24,600 (August 31, 2019 - $47,555) of cash and working capital of $141,123 (August 31, 2019 - $152,417). Further, the Company may further consider accessing equity capital through the capital markets.
The Company is obligated to the following contractual maturities relating to their undiscounted cash flows:
| Carrying Amount |
Contractual Cash Flows |
Less than 1 year |
1 to 3 years | 3 to 5 years | More than 5 years |
|||||||||||||
| Accounts payable and accrued liabilities | $ | 17,486 | $ | 17,486 | $ | 17,486 | $ | - | $ | - | - | |||||||
| Long-term debt | 115,266 | 115,388 | 11,605 | 103,660 | 123 | - | ||||||||||||
| Interest payments | - | 7,729 | 4,682 | 3,047 | - | - | ||||||||||||
| $ | 132,752 | $ | 140,603 | $ | 33,773 | $ | 106,707 | $ | 123 | $ | - |
The contractual maturities noted above are based on contractual due dates of the respective financial liabilities.
In connection with the Company's Moncton Campus expansion plans, the Company is contractually committed to approximately $1,600 of capital expenditures.
(iii) Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk for the Company comprises of:
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk at August 31, 2020 pursuant to the variable rate loans described in Note 11. A 1% change in benchmark interest rates will increase or decrease the Company’s interest expense by $1,150 (August 31, 2019 - $500) per year.
18. REVENUE
Net revenue for the Company is defined as gross revenue, which is net of any customer discounts, rebates, and sales returns and recoveries, less excise taxes.
Revenues for the years ended August 31, 2020 and 2019 are disaggregated as follows:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Adult-use recreational wholesale revenue (Canadian) | $ | 73,938 | $ | 85,018 | |||
| Wholesale to Licensed Producers revenue (Canadian) | 15,184 | 709 | |||||
| Direct to patient medical revenue (Canadian) | 10,748 | 11,192 | |||||
| International (business to business) | 3,272 | 98 | |||||
| Other revenue | 245 | 530 | |||||
| Gross revenue | $ | 103,387 | $ | 97,547 | |||
| Excise taxes | (16,592 | ) | (17,134 | ) | |||
| Net revenue | $ | 86,795 | $ | 80,413 |
Recreational revenue is primarily comprised of provincial government bodies and large retailers that sell cannabis through their respective distribution models, whereas wholesale revenue is comprised of wholesale shipments to other cannabis companies, including licensed producers, for further processing and sales onto their end customers.
During the year ended August 31, 2020, the Company had three customers (August 31, 2019 - two customers) that individually represented more than 10% of the Company's net revenue.
19. COST OF SALES
Cost of sales is comprised of the cost of inventories sold during the period, shipping expenses, the production cost of late-stage biological assets that are disposed of, provisions and write-downs for inventory that does not pass the Company's quality assurance standards and obsolete products and packaging, and other production overhead. For the three months ended November 30, 2019, the Company determined that the classification of indirect production is more accurately reflected as and most comparable to industry peers as a component of cost of sales rather than a separate line in the statement of operations. As a result, indirect production of $4,733 has been reclassified from indirect production to cost of sales for the year ended August 31, 2019 to conform to the current period presentation. This change in presentation has no impact on gross margin before fair value adjustments.
During the year ended August 31, 2020, the Company recorded write-downs and provisions in relation to excess and obsolete inventories and biological assets as well as adjustments to net realizable value totaling $35,584 (August 31, 2019 - $4,733), which are detailed in Note 8.
During the year ended August 31, 2020, the Company recorded charges of $6,095 (August 31, 2019 - $nil) related to a reduced workforce due to COVID-19, which was comprised of $5,048 in plant culling, $1,047 mostly related to lump-sum payments paid to temporarily laid-off workers. The Company also recorded $5,434 (August 31, 2019 - $nil) in charges for unabsorbed fixed overhead related to reduced production volumes. These charges were expensed to cost of sales.
20. CONTINGENCIES
The Company recognizes loss contingency provisions for probable losses when management can reasonably estimate the loss. When the estimated loss lies within a range, the Company records a loss contingency provision based on its best estimate of the probable loss. If no particular amount within that range is a better estimate than any other amount, the mid-point of the range is used. As information becomes known a loss contingency provision is recorded when a reasonable estimate can be made. The estimates are reviewed at each reporting date and the estimates are changed when expectations are revised. An outcome that deviates from the Company's estimate may result in an additional expense or release in a future accounting period.
During 2015, the Company was named as a defendant in a lawsuit in New Brunswick for breach of confidence, conversion, breach of contract, conspiracy and breach of trust, breach of fiduciary duty, and negligent misrepresentation. The Company believes the lawsuit to be without merit though it will rigorously defend the action. No amount has been accrued in relation to the consolidated financial statements for the claim.
On March 3, 2017, a claim in connection with a proposed class-action lawsuit (the "Claim") was filed with the Supreme Court of Nova Scotia (the "Court") seeking to represent a class who purchased medical marijuana that was the subject of the Company's product recalls in December 2016 and January 2017 as it may have contained trace elements of the pesticides myclobutanil and bifenazate which are not approved for use by licensed producers. The Claim identifies several causes of action including, among others: (i) negligent design, development and testing, (ii) negligent manufacturing, (iii) negligent distribution, marketing and sale, (iv) breach of contract, and (v) breach of the Competition Act, the Consumer Protection Act, and the Sale of Goods Act, and is seeking remedy in the form of, among other things, the disgorgement of profits accrued to the Company for the sale of contaminated products, exemplary or punitive damages and certain costs.
The Claim was amended on November 16, 2017, to include a claim for alleged adverse health consequences caused as a result of using the recalled product. As at the date hereof, the Company has not received any medical information demonstrating adverse health effects caused as a result of using the recalled product.
The amended Claim also contained a request for an order certifying the proceeding as a class proceeding.
During late June 2018, certification hearings were heard before the Court. On January 18, 2019, the Court issued its decision granting certification. On March 4, 2019, the Company filed a notice for leave to appeal the certification of the class action brought against it. Leave to appeal was granted and the appeal was heard on October 15, 2019 and the decision was reserved. On April 30, 2020, the Nova Scotia Court of Appeal ruled that the plaintiff failed to present any evidence that the cannabis purchased by medical customers in 2016 could cause any particular adverse health effects. As a result, class members would not be able to bring claims for damages for adverse health effects in the class proceeding. On June 26, 2020, the plaintiff filed an application for leave to appeal the Nova Scotia Court of Appeal's decision with the Supreme Court of Canada. On November 5, 2020, the application for leave to appeal was dismissed by the Supreme Court of Canada.
The Company is contesting what remains of the litigation. The Company reported the Claim to its insurance provider which appointed counsel to defend the Claim. Insurance may be available to cover all or a portion of the fees or damages which may be associated with the Claim although the Company’s coverage may be subject to varying limits and exclusions. The litigation process will continue into the foreseeable future unless settled out of court. No amount has been recorded in the consolidated financial statements as the Company has not yet determined a reasonable estimate of the cost to resolve this class action.
On June 16, 2020, a claim in connection with a proposed national consumer protection class-action lawsuit was filed with the Court of Queen's Bench in Alberta (the "Alberta Claim") seeking damages against several Canadian cannabis companies including the Company. The Alberta Claim does not particularize all of the claims against the companies however it makes allegations with respect to the content of THC and CBD in the companies' products. The proposed action is not certified. The Company has reported the Alberta Claim to its insurers.
21. OPERATING SEGMENTS
The Company previously operated in two operating segments - production and sale of cannabis and patient counselling, operating as Trauma Healing Centers, Incorporated ("THCI"). THCI was disposed of on October 16, 2018 (see Note 24). As a result, the Company currently operates in only one operating segment, the production and sale of cannabis. All assets for the production and sale of cannabis segment are domiciled within Canada and effectively all revenues are generated in Canada, except those revenues disclosed in Note 18.
22. GENERAL AND ADMINISTRATIVE EXPENSES BY NATURE (EXCLUDING DISCONTINUED OPERATIONS
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Office and general | $ | 11,819 | $ | 7,942 | |||
| Wages and benefits | 7,611 | 4,443 | |||||
| Professional fees | 5,367 | 4,636 | |||||
| Depreciation and amortization | 1,510 | 664 | |||||
| Research and development | 1,269 | 409 | |||||
| Travel and accommodation | 383 | 456 | |||||
| Utilities | 37 | 43 | |||||
| Total general and administrative expenses | $ | 27,996 | $ | 18,593 |
23. INCOME TAXES
There are no current income taxes payable or recoverable for the years ended August 31, 2020 and 2019.
Components of deferred income tax expense are as follows:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Origination and reversal of temporary differences | $ | (37,875 | ) | $ | 1,987 | ||
| Change in tax rate and rate differences | 421 | 281 | |||||
| Change in unrecognized temporary differences | 27,245 | 1,349 | |||||
| Prior period adjustments | (262 | ) | 12 | ||||
| Total income tax (recovery) expense | $ | (10,471 | ) | $ | 3,629 |
A reconciliation of income tax expense at the statutory rate to amounts recorded in the consolidated financial statements is provided below.
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Income (loss) from continuing operations before income taxes | $ | (146,628 | ) | $ | (5,875 | ) | |
| Statutory income tax rate | 29.0% | 29.0% | |||||
| Tax calculated at statutory rate | (42,522 | ) | (1,704 | ) | |||
| Non-deductible (non-taxable) items | 2,643 | 3,742 | |||||
| Difference between current and future tax rates | 421 | 281 | |||||
| Benefit of deductible temporary differences not recognized | 27,245 | 1,349 | |||||
| Effect of tax rates in other jurisdictions | 2,016 | - | |||||
| Other | (274 | ) | (39 | ) | |||
| Income tax (recovery) expense per financial statements | $ | (10,471 | ) | $ | 3,629 |
Recognized deferred tax assets and liabilities consist of the following:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Deferred tax assets are attributable to the following: | |||||||
| Non-capital losses | $ | 6,670 | $ | 10,708 | |||
| Lease liabilities | 1,038 | - | |||||
| Deferred tax assets | 7,708 | 10,708 | |||||
| Set-off of tax | (7,708 | ) | (10,708 | ) | |||
| Net deferred tax asset | $ | - | $ | - | |||
| Deferred tax liabilities are attributable to the following: | |||||||
| Long-term assets | $ | (961 | ) | $ | (4,983 | ) | |
| Biological assets | (170 | ) | (961 | ) | |||
| Inventories | (5,367 | ) | (15,200 | ) | |||
| Right-of-use lease assets | (1,096 | ) | - | ||||
| Other | (114 | ) | (35 | ) | |||
| Deferred tax liabilities | (7,708 | ) | (21,179 | ) | |||
| Set-off of tax | 7,708 | 10,708 | |||||
| Net deferred tax liability | $ | - | $ | (10,471 | ) |
The changes in temporary differences during the years ended August 31, 2020 and 2019 were as follows:
| NET BALANCE AT AUGUST 31, 2019 |
RECOGNIZED IN PROFIT OR LOSS |
RECOGNIZED DIRECTLY IN EQUITY & OCI |
NET BALANCE AT AUGUST 31, 2020 |
|||||||||
| Non-capital losses | $ | 10,708 | $ | (4,039 | ) | $ | - | $ | 6,669 | |||
| Share issuance costs | - | - | - | - | ||||||||
| PP&E | (4,983 | ) | 4,022 | - | (961 | ) | ||||||
| Biological assets | (961 | ) | 791 | - | (170 | ) | ||||||
| Inventories | (15,200 | ) | 9,833 | - | (5,367 | ) | ||||||
| Lease liabilities | - | 1,038 | - | 1,038 | ||||||||
| Right-of-use lease assets | - | (1,096 | ) | - | (1,096 | ) | ||||||
| Other | (35 | ) | (78 | ) | - | (113 | ) | |||||
| Net tax assets (liabilities) | $ | (10,471 | ) | $ | 10,471 | $ | - | $ | - | |||
| NET BALANCE AT AUGUST 31, 2018 |
RECOGNIZED IN PROFIT OR LOSS |
RECOGNIZED DIRECTLY IN EQUITY & OCI |
NET BALANCE AT AUGUST 31, 2019 |
|||||||||
| Non-capital losses | $ | 8,604 | $ | 2,723 | $ | (619 | ) | $ | 10,708 | |||
| Share issuance costs | 1,657 | - | (1,657 | ) | - | |||||||
| PP&E | (1,275 | ) | (3,708 | ) | - | (4,983 | ) | |||||
| Biological assets | (3,307 | ) | 2,346 | - | (961 | ) | ||||||
| Inventories | (10,385 | ) | (4,815 | ) | - | (15,200 | ) | |||||
| Unsecured convertible debentures | (3,306 | ) | (108 | ) | 3,414 | - | ||||||
| Other | 32 | (67 | ) | - | (35 | ) | ||||||
| Net tax assets (liabilities) | $ | (7,980 | ) | $ | (3,629 | ) | $ | 1,138 | $ | (10,471 | ) |
At August 31, 2020, the Compansy has non-capital loss carryforwards available to offset future taxable income in Canada, which expire as follows:
| AUGUST 31, 2020 | |||||||
| August 31, 2035 | $ | 1,070 | |||||
| August 31, 2037 | 11,727 | ||||||
| August 31, 2038 | 14,296 | ||||||
| August 31, 2039 | 16,746 | ||||||
| August 31, 2040 | 81,205 | ||||||
| $ | 125,044 |
The Company recognizes tax benefits on losses or other deductible amounts where the probable criteria for the recognition of deferred tax assets has been met. The Company's unrecognized deductible temporary differences and unused tax losses for which no deferred tax asset is recognized consist of the following amounts:
| AUGUST 31, 2020 | AUGUST 31, 2019 | ||||||
| Deductible temporary differences | $ | 17,348 | $ | 12,010 | |||
| Tax losses | 102,183 | 3,809 | |||||
| $ | 119,531 | $ | 15,819 |
24. LICENSING AGREEMENT
On October 4, 2016, the Company entered into a licensing agreement with Swear Net Inc. (the Trailer Park Boys Inc. "TPB") for an exclusive product and branding partnership superseded by a licensing agreement with TPB dated April 15, 2020 and terminated on September 14, 2020 subject to transitionary licensing provisions until April 30, 2021. In exchange for services, the Company paid $100 in cash and issued 150,000 options at a strike price of $1.52 per share. The fee is being recognized over the life of the agreement of five years as services are delivered. For the year ended August 31, 2020, $22 (August 31, 2019 - $99) has been amortized to share-based compensation and $32 (August 31, 2019 - $32) has been amortized to selling and marketing expenses. At August 31, 2020, the Company has recorded the current portion of the cash payment and stock options fee of $57 (August 31, 2019 - $89) as a prepaid expense and the long-term portion of the fee of $2 (August 31, 2019 - $24) in deferred charges on the consolidated statements of financial position.
Under the agreement, the Company issued an additional 350,000 in options at a price of $1.52 which vest in accordance with certain conditions being met. As of August 31, 2020, these conditions have been met. For the year ended August 31, 2020, $51 has been expensed (August 31, 2019 - $51) to share-based compensation. At August 31, 2020, the Company has recorded the current portion of the stock options fee of $51 (August 31, 2019 - $51) as a prepaid expense and the long-term portion of the fee of $4 (August 31, 2019 - $55) in deferred charges on the consolidated statements of financial position.
25. GOVERNMENT SUBSIDIES
On April 1, 2020, Department of Finance Canada announced the CEWS, which would subsidize 75% of employee wages, retroactive to March 15, 2020, to Canadian employers whose business had been affected by COVID-19 to enable them to re-hire workers previously laid off as a result of pandemic, help prevent further job losses, and to better position companies to resume normal operations following the crisis. Under this program, the Company applied for a wage subsidy of $7,883 for the period March 15, 2020 to August 29, 2020, which has been included as government subsidies in the statements of (loss) income and comprehensive (loss) income.
26. OPERATIONS OF TRAUMA HEALING CENTERS
THCI previously offered a multi-disciplinary approach to post traumatic stress disorder treatment, chronic pain, trauma therapy, and medical cannabis as an alternative medicine. On October 16, 2018, the Company sold THCI to Harvest Medicine ("HMED"). HMED is a wholly owned subsidiary of VIVO Cannabis Inc. ("VIVO"). The transaction resulted in HMED acquiring 100% of the issued and outstanding shares of THCI from the Company. The total purchase price for the shares was $1,141 which was satisfied by the issuance of 864,678 common shares in the capital of VIVO at a share price of $1.32. This non-cash investing activity has been excluded from the statement of cash flows as it did not use or provide any cash. The derecognized assets and liabilities on October 16, 2018 were as follows:
| Derecognized assets and liabilities | |||
| Cash | $ | 96 | |
| Accounts receivable | 140 | ||
| Other current assets | 9 | ||
| Property, plant and equipment | 86 | ||
| Goodwill | 880 | ||
| Trade and other payables | (70 | ) | |
| Net assets disposed | $ | 1,141 | |
| Fair value of consideration received | $ | 1,141 | |
| Gain/(loss) on disposal | - |
During the fourth quarter of fiscal year 2018, management decided to divest the operations of THCI. Consequently, assets and liabilities allocable to THCI were classified as a disposal group. Revenue and expenses, gains and losses relating to the discontinuation of THCI have been eliminated from profit or loss from the Company's continuing operations and are shown as a single line item in the statements of income (loss) and comprehensive income (loss).
Operating income (loss) of THCI and the loss from re-measurement of assets and liabilities classified as discontinued operations are summarized as follows up to the date of disposal (see below):
| FOR THE PERIOD SEPTEMBER 1, 2018 TO OCTOBER 16, 2018 |
|||
| Revenue | |||
| Sales | $ | 138 | |
| Cost of sales | 54 | ||
| Gross margin from discontinued operations | 84 | ||
| Expenses | |||
| General and administrative | 75 | ||
| Total expenses | 75 | ||
| Investment income (expense) | - | ||
| Income (loss) from operations | $ | 9 | |
| Loss on remeasurement to fair value less costs to sell | (47 | ) | |
| Loss on discontinued operations | $ | (38 | ) |
Cash flows generated by THCI for the reporting periods are summarized as follows:
| FOR THE PERIOD SEPTEMBER 1, 2018 TO OCTOBER 16,2018 |
|||
| Operating activities | $ | (35 | ) |
| Investing activities | - | ||
| Cash used by discounted operations | $ | (35 | ) |
27. SUBSEQUENT EVENTS
i) Hyasynth Tranche 2 convertible debentures issuance
On October 23, 2020, the Company advanced an additional $2,500 to Hyasynth by way of convertible debentures as a result of Hyasynth’s achievement of the contractual production-related milestone for Tranche 2 of the convertible debentures. This brings the Company’s total face value of convertible debentures investment in Hyasynth to $7,500, which provides the Company with a potential ownership interest of up to 46.5% on a fully diluted basis as of October 23, 2020.
ii) Unit offering
On November 12, 2020, the Company closed an underwritten public offering of 37,375,000 units of the Company at a price of $1.85 per unit, including a full exercise of the over-allotment option, underwritten by a syndicate of underwriters led by Canaccord Genuity Corp., for total gross proceeds of $69,144. Each unit is comprised of one Common Share of the Company and one half of one common share purchase warrant of the Company (each full common share purchase warrant, a "Warrant"). Each Warrant will be exercisable to acquire one common share of the Company (a "Warrant Share") for a period of three years following the closing date of the Offering at an exercise price of $2.50 per Warrant Share, subject to adjustment in certain events. The Company expects to use the net proceeds from the Offering to repay indebtedness and for working capital and other general corporate purposes.
iii) Credit facility amendment and restatement
On November 27, 2020, the Company further amended its Facilities pursuant to an amended and restated credit agreement ("Amendment and Restatement") with BMO to: (i) reduce the Term Loan amount from $115,000 to $60,000 based on a repayment of $55,000 to be made on December 1, 2020 of the outstanding Term Loan balance of $115,000; (ii) have repayments on the balance of the Term Loan commence on February 28, 2021 in an amount equal to $1,500 per quarter; (iii) reduce the Revolver commitment to $2,000 from up to $25,000; (iv) adjust the minimum quarterly EBITDA covenants to be maintained by the Company commencing on February 28, 2021 and continuing through to maturity, thereby removing this covenant for the fiscal period ended November 30, 2020 and eliminating the reversion of the financial covenants to that of the original structure on November 30, 2021; (v) modify the applicable margin pricing and standby fee terms to reflect current market conditions; and (vi) reduce the minimum unrestricted cash balance requirement to $20,000, which is already inclusive of the $8,000 restricted investment currently outstanding. The interest rate margin will be fixed from November 27, 2020 through to maturity on May 31, 2021. The Company incurred an amendment fee of $217 plus customary legal expenses in connection with the amendment and restatement.
ORGANIGRAM HOLDINGS INC.
as Borrower
- and -
THE LENDERS FROM TIME TO TIME PARTY TO THIS AGREEMENT
as Lenders
- and -
BANK OF MONTREAL
as Administrative Agent
- and -
BANK OF MONTREAL
as Lead Arranger and Sole Bookrunner
AMENDED AND RESTATED CREDIT AGREEMENT
November 27, 2020
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TABLE OF CONTENTS
Page
- 3 -
- 4 -
- 5 -
Exhibits
"A" - Lenders and Lenders' Commitments
"B" - Draw Request
"C" - Rollover Notice
"D" - Substitution Notice
"E" - Repayment Notice
"F" - Borrowing Base Certificate
"G" - Compliance Certificate
"H" - Form of BA Equivalent Note
"I" - CBA Model Provisions
Schedules
6.01(b) - Companies Information
6.01(h) - Material Permits
6.01(i) - Specific Permitted Liens
6.01(j) - Owned Properties
6.01(k) - Material leased Properties
6.01(l) - Intellectual Property
6.01(n) - Material Agreements
6.01(o) - Labour Agreements
6.01(p) - Environmental Matters
6.01(q) - Litigation
6.01(r) - Pension Plans
7.02(iii) - Investments existing on the Closing Date
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Execution Copy
AMENDED AND RESTATED CREDIT AGREEMENT
This Agreement dated November 27, 2020 is made among:
ORGANIGRAM HOLDINGS INC.
as Borrower
- and -
THE LENDERS FROM TIME TO TIME
PARTY TO THIS AGREEMENT
as Lenders
- and -
BANK OF MONTREAL
as Administrative Agent
- and -
BANK OF MONTREAL
as Lead Arranger and Sole Bookrunner
For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each party, the parties agree as follows:
ARTICLE I - INTERPRETATION
1.01 Definitions
In this Agreement, the words and phrases set out in the CBA Model Provisions (as hereinafter defined) shall have the respective meanings set forth therein (subject to Section 12.01 hereof). In addition, the following words and phrases shall have the respective meanings set forth below:
"Acceleration Date" means the earlier of (i) the date of the occurrence of an Insolvency Event in respect of any Secured Company; and (ii) the date on which the Borrower fails to repay the Obligations in full pursuant to an Acceleration Notice issued by the Agent.
"Acceleration Notice" is defined in Section 10.02.
"Acceptable Appraisal" means an up-to-date appraisal in respect of the Property by an AACI appraiser in form and substance satisfactory to the Lenders which considers the following approaches to value: fair market, cost, and comparable and alternate use value on a hypothetical best use facility; together with a transmittal letter from such appraiser addressed to the Agent which permits the Agent and the Lenders to rely thereon.
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"Adjusted GAAP" at any time means GAAP in effect at such time as if IFRS 16 had not been implemented.
"Advance" means an extension of credit by one or more of the Lenders to the Borrower pursuant to this Agreement, including for greater certainty an extension of credit in the form of a Prime-Based Loan, a Bankers' Acceptance, a BA Equivalent Loan or the issuance of a Letter of Credit, but for greater certainty does not include a Conversion or Rollover.
"Affiliate" is defined in the CBA Model Provisions.
"Agent" means BMO in its capacity as the administrative agent hereunder, and its successors in such capacity.
"Aggregate Net Hedge Liability" means, on any date of determination, the net aggregate amount of the Borrower's liability under all Hedge Transactions outstanding on such date in the event of a default or termination thereunder, calculated in accordance with the terms thereof (and for greater certainty, determined after netting any amounts payable to the Borrower thereunder against amounts payable by the Borrower thereunder).
"Agreement" means this amended and restated credit agreement (including the Exhibits and Schedules) as it may be amended, supplemented, replaced or restated from time to time; and each reference herein to "this Agreement", "the date hereof", "the date of this Agreement" and similar references are references to this amended and restated credit agreement and not to the Previous Credit Agreement.
"AML Legislation" means all anti-money laundering, anti-terrorist financing, government sanction and "know your client" Laws in effect in any jurisdiction in which any Company carries on business or owns assets, including any guidelines or orders thereunder, specifically including the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada).
"Applicable Law" is defined in the CBA Model Provisions.
"Applicable Margin" means in respect of any Availment Option and in respect of any Fiscal Quarter, the percentage in the column relating to such Availment Option in the following table:
|
Prime-Based Loans |
Bankers' Acceptances / BA Equivalent Loans / Letter of Credit |
Standby Fee |
|
[Redacted: Margin] |
[Redacted: Margin] |
[Redacted: Margin] |
"Approved Jurisdiction" means a country in which it is legal in all political subdivisions therein (including for greater certainty on a federal, state and municipal basis) to undertake any Cannabis-Related Activities provided that in each case (i) such country has been approved in writing by the Required Lenders in their discretion and (ii) if required by the Agent, the ability to undertake Cannabis-Related Activities to the extent permitted by Applicable Law therein is confirmed by a legal opinion provided by the Borrower's counsel in such jurisdiction, in form and substance satisfactory to the Agent. The Required Lenders may in their discretion from time to time (i) upon receipt of a written request by the Borrower, designate any jurisdiction an Approved Jurisdiction provided that the above criteria are satisfied; and (ii) revoke the designation of any jurisdiction as an Approved Jurisdiction by written notice to the Borrower if such criteria are not satisfied. Each of Canada, Austria, Greece, Germany and Uruguay is an Approved Jurisdiction as at the date of this Agreement.
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"Associate" has the meaning ascribed thereto in the Canada Business Corporations Act.
"Availment Option" means a method of borrowing which is available to the Borrower as provided herein.
"BA Equivalent Loan" means an Advance in Canadian Dollars made by a Non-BA Lender to the Borrower in respect of which the Borrower has issued a BA Equivalent Note.
"BA Equivalent Note" means a promissory note payable by the Borrower to a Non-BA Lender in the form of Exhibit "G" attached hereto.
"BA Lender" means a Lender identified in Exhibit "A" attached hereto as a Lender which will accept Bankers' Acceptances hereunder.
"Bankers' Acceptance" means a bill of exchange or a blank non-interest bearing depository bill as defined in the Depository Bills and Notes Act (Canada) drawn by the Borrower and accepted by a BA Lender in respect of which the Borrower becomes obligated to pay the face amount thereof to the holder (which may be a third party or such BA Lender) upon maturity.
"BMO" means Bank of Montreal and its successors and permitted assigns.
"Borrower" means Organigram Holdings Inc., a corporation subsisting under the federal laws of Canada.
"Business Day" means any day on which the Agent is open for over-the-counter business in Toronto, Ontario, excluding Saturday, Sunday and any other day that is a statutory holiday in Toronto, Ontario.
"Canadian Dollars" or "CDN$" means the lawful money of Canada.
"Cannabis" means:
(a) any plant or seed, whether live or dead, from any species or subspecies of genus Cannabis, including Cannabis sativa, Cannabis indica and Cannabis ruderalis, Marijuana and Industrial Hemp and any part, whether live or dead, of the plant or seed thereof, including any stalk, branch, root, leaf, flower, or trichome;
(b) any material obtained, extracted, isolated, or purified from the plant or seed or the parts contemplated by clause (a) of this definition, including any oil, cannabinoid, terpene, genetic material or any combination thereof;
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(c) any organism engineered to biosynthetically produce the material contemplated by clause (b) of this definition, including any micro-organism engineered for such purpose;
(d) any biologically or chemically synthesized version of the material contemplated by clause (b) of this definition or any analog thereof, including any product made by any organism contemplated by clause (c) of this definition;
(e) any other meaning ascribed to the term "cannabis" under Applicable Law in any Approved Jurisdiction, including the Cannabis Act and the Controlled Drugs and Substances Act (Canada); and
(f) any other meaning ascribed to the term "cannabis" under the Controlled Substances Act (United States).
"Cannabis Act" means An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts, S.C. 2018, c. 16, as amended from time to time.
"Cannabis-Related Activities" means any activities, including advertising or promotional activities, relating to or in connection with the importation, exportation, cultivation, production, purchase, distribution or sale of Cannabis or Cannabis-related products.
"Cannabis Regulations" means Cannabis Regulations under the Cannabis Act, as amended from time to time and all other regulations made from time to time under the Cannabis Act or any other statute in an Approved Jurisdiction with respect to Cannabis-Related Activities.
"Capital Expenditures" means expenditures made directly or indirectly which are considered to be in respect of the acquisition or leasing of capital assets in accordance with GAAP, including the acquisition or improvement of Real Property, plant, machinery or equipment, whether fixed or removable.
"Capital Lease" means any lease of assets which in accordance with Adjusted GAAP would be required to be capitalized on the balance sheet of the lessee.
"Cash Collateral" has the meaning set out in Section 7.01(o).
"Cash Equivalents" means any of the following:
• direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the Government of Canada or of any Canadian province (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the Government of Canada or of such Canadian province), in each case maturing within one year from the date of acquisition thereof;
• investments in certificates of deposit, bankers' acceptances and time deposits maturing within one hundred and eighty (180) days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of Canada or of any Canadian province which has a combined capital surplus and undivided profits of not less than [Redacted: Threshold] and a senior unsecured rating of "A-" or better by S&P and "A3" or better by Moody's;
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• investments in certificates of deposit having maturities of less than one (1) year, issued by BMO; and
• cash held in bank accounts in compliance with Section 7.01(k).
"Cash Taxes" in respect of any fiscal period means amounts actually paid by the Companies in such fiscal period in respect of income and capital Taxes (whether relating to such fiscal period or any other fiscal period).
"CBA Model Provisions" means the model credit agreement provisions attached hereto as Exhibit "H", which have been revised under the direction of the Canadian Bankers' Association Secondary Loan Market Specialist Group from provisions prepared by The Loan Syndications and Trading Association, Inc.
"CDOR Rate" means on any day the annual rate of interest which is the rate determined as being the arithmetic average of the quotations of all institutions listed in respect of the rate for Canadian Dollar denominated bankers' acceptances for the relevant period displayed and identified as such on the "Reuters Screen CDOR Page" (as defined in the International Swap Dealer Association, Inc. definitions, as modified and amended from time to time) as of 10:00 a.m. Toronto, Ontario local time on such day and, if such day is not a Business Day, then on the immediately preceding Business Day (as adjusted by the Agent after 10:00 a.m. Toronto, Ontario local time to reflect any error in a posted rate of interest or in the posted average annual rate of interest with notice of such adjustment in reasonable detail evidencing the basis for such determination being concurrently provided to the Borrower); provided that if such rates are not available on the Reuters Screen CDOR Page on any particular day, then the CDOR Rate on that day shall be the average of the rates applicable to Canadian Dollar bankers' acceptances for the relevant period quoted for customers in Canada by the Agent as of 10:00 a.m. Toronto, Ontario local time on such day; or if such day is not a Business Day, then on the immediately preceding Business Day; and provided further that the CDOR Rate shall not be less than zero.
"Closing Date" has the meaning ascribed to such term in Section 9.01.
"Collateral" means all property, assets and undertaking of the Secured Companies encumbered by the Security, together with all proceeds of the foregoing.
"Commitment" means, in respect of any Lender, such Lender's commitment to make Advances to the Borrower under all Facilities (or a Facility, if required by the context).
"Companies" means the Borrower and all of its Subsidiaries from time to time; and "Company" means any of them as the context requires.
"Compliance Certificate" means a certificate delivered by the Borrower to the Agent in the form of Exhibit "F".
"Control" is defined in the CBA Model Provisions.
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"Copyrights" means all rights, title and interests (and all related IP Ancillary Rights) arising under any requirement of Law in copyrights and all mask work, database and design rights, whether or not registered or published, all registrations and recordations thereof and all applications in connection therewith.
"Currency Hedge Transaction" mean an agreement made between the Borrower and a Lender for the purpose of hedging currency risk, including a currency exchange agreement or a foreign exchange forward contract.
"Default" is defined in the CBA Model Provisions.
"Defined Benefit Pension Plan" means any Pension Plan which contains a "defined benefit provision" as defined in subsection 147.1(1) of the Income Tax Act (Canada).
"Distribution" in respect of any Person means any amount paid, directly or indirectly, to a shareholder, partner, director, officer or employee of such Person or a Related Person thereto, including any amount paid by way of dividends, distribution of partnership profits, withdrawal of capital, redemption of shares or partnership units, payments of principal, interest or other amounts on account of indebtedness, salary, bonus, commission, management fees, directors' fees or otherwise, or any other direct or indirect payment in respect of earnings or capital of such Person; except that the payment of commercially reasonable salaries, bonuses, commissions and directors' fees from time to time to the officers, employees and directors of such Person in the ordinary course of business shall not be considered Distributions.
"Draw Request" means a notice in the form of Exhibit "B" given by the Borrower to the Agent for the purpose of requesting an Advance.
"EBITDA" means, in respect of any fiscal period, the consolidated net income of the Borrower in such fiscal period determined in accordance with GAAP (but excluding the following: extraordinary or non-recurring income and gains, non-cash gains (such as unrealized foreign exchange gains); plus the following amounts (to the extent such amounts were deducted in determining such consolidated net income, and without duplication)):
(a) Interest, fees and expenses paid or payable in connection with Permitted Funded Debt and any other Funded Debt that was outstanding prior to the Original Closing Date;
(b) income and capital taxes, including current and deferred income tax expense;
(c) depreciation and amortization;
(d) non-cash charges and expenses such as unrealized foreign exchange losses and charges relating to the impairment of goodwill and other intangible assets;
(e) transaction costs incurred in such fiscal period not in excess of the lesser of: (i) [Redacted: Threshold]; and (ii) ten percent (10%) of EBITDA in respect of such fiscal period determined without add-back of such transaction costs;
(f) non-cash share-based compensation;
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(g) non-cash fair value adjustments to biological assets and inventories;
(h) non-cash share of loss from investments in associates and unrealized loss on changes in fair value of contingent consideration;
(i) extraordinary non-recurring expenses or losses to the extent approved by the Required Lenders in writing; and
(j) any other expenses approved in writing by the Required Lenders in their discretion;
and provided further that:
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in respect of each Company which became a Subsidiary of the Borrower in any fiscal period, EBITDA for such fiscal period shall be determined as if such Company had been a Subsidiary of the Borrower throughout the entire said fiscal period; and
-
in respect of each Company which ceased to be a Subsidiary of the Borrower in any fiscal period, EBITDA for such fiscal period shall be determined as if such Company had not been a Subsidiary of the Borrower throughout the entire said fiscal period.
"Equity Issuance" means an issuance or sale by any Company of shares, partnership interests or other equity interests, except any such issuance or sale (i) to any other Company, or (ii) to management or employees of any Company under any employee stock option or stock purchase plan stock appreciation rights plan, phantom stock plan or other employee benefit plan or arrangement in existence from time to time.
"Equivalent Amount" means, in relation to an amount in one currency, the amount in another currency that could be purchased by the amount in the first currency, determined by reference to the applicable Exchange Rate at the time of such determination.
"Event of Default" is defined in Section 10.01.
"Exchange Rate" means, on the date of determination of any amount of Canadian Dollars to be converted into another currency pursuant to this Agreement for any reason, or vice-versa, the spot rate of exchange for converting Canadian Dollars into such other currency or vice-versa, as the case may be, established by the Bank of Canada at approximately 4:30 p.m. (Toronto time) on the date of such determination (or such other date as may be specified herein).
"Facility A" is defined in Section 2.01.
"Facility A Limit" means Two Million Dollars ($2,000,000).
"Facility B" is defined in Section 3.01.
"Facility B Limit" means (i) from the Original Closing Date to and including December 1, 2020, One Hundred Fifteen Million Dollars ($115,000,000), and (ii) thereafter, Sixty Million Dollars ($60,000,000).
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"First-Ranking Security Interest" in respect of any Collateral means a Lien in such Collateral which is registered as required under this Agreement to record and perfect the charges contained therein and which ranks in priority to all other Liens in such Collateral, except for any Permitted Liens which may have priority in accordance with Applicable Law.
"Fiscal Quarter" means a fiscal quarter of the Borrower ending on the last days of November, February, May and August in each year.
"Fiscal Year" means a fiscal year of the Borrower, ending on the last day of August in each year.
"Funded Debt" in respect of any Person means obligations of such Person which are considered to constitute debt in accordance with GAAP, including indebtedness for borrowed money (in the case of the Borrower, specifically including the Outstanding Principal Amount, Subordinated Debt, obligations secured by Purchase-Money Security Interests and obligations under Capital Leases), capitalized interest, and the redemption price of any securities issued by such Person having attributes substantially similar to debt (such as securities which are redeemable at the option of the holder), plus the Aggregate Net Hedge Liability at the time of determination; but excluding the following: accounts payable, payroll accruals, accruals in respect of normal business expenses and future income Taxes (both current and long-term).
"GAAP" means generally accepted accounting principles in Canada as in effect from time to time as set forth in the opinions and pronouncements of the relevant Canadian public and private accounting boards and institutes which are applicable to the relevant Person and the circumstances as of the date of determination, consistently applied including, without limitation, International Financial Reporting Standards adopted by the Accounting Standards Board of the Chartered Professional Accountants of Canada (which have been adopted by the Borrower).
"Governmental Authority" is defined in the CBA Model Provisions, and for greater certainty includes Health Canada.
"Guarantee" means any agreement by which any Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes liable upon, the obligation of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person or otherwise assures any creditor of such Person against loss, and shall include any contingent liability under any letter of credit or similar document or instrument.
"Hazardous Materials" means any contaminant, pollutant, waste or substance that is likely to cause immediately or at some future time harm or degradation to the surrounding environment or risk to human health; and without restricting the generality of the foregoing, including any pollutant, contaminant, waste, hazardous waste or dangerous goods that is regulated by any Requirements of Environmental Law or that is designated, classified, listed or defined as hazardous, toxic, radioactive or dangerous or as a contaminant, pollutant or waste by any Requirements of Environmental Law.
"Hedge Transaction" means an Interest Rate Hedge Transaction or a Currency Hedge Transaction.
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"IFRS 16" means the accounting standard promulgated by the International Accounting Standards Board which provides guidance on accounting for leases, which, with respect to the Borrower, will come into effect on September 1, 2019.
"Indemnitees" means the Lenders, the Agent and their respective successors and permitted assignees, any agent of any of them (specifically including a receiver or receiver-manager) and the respective officers, directors and employees of the foregoing.
"Industrial Hemp" has the meaning ascribed to such term or the term "hemp" (i) under the Applicable Law of any Approved Jurisdiction, including the Industrial Hemp Regulations (Canada) issued under the Cannabis Act; or (ii) under the Agricultural Marketing Act of 1946 (United States).
"Insolvency Event" means, in respect of any Person, the occurrence of any one or more of the following events:
• such Person ceases to carry on its business, commences any proceeding under Insolvency Legislation including a proposal or an assignment in bankruptcy, petitions or applies to any tribunal for, or consents to, the appointment of any receiver, trustee or similar liquidator in respect of all or a substantial part of its property, admits the material allegations of a petition or application filed with respect to it in any proceeding commenced in respect of it under Insolvency Legislation, or takes any corporate action for the purpose of effecting any of the foregoing; or
• any proceeding or filing is commenced against such Person seeking to have an order for relief entered against it as debtor or to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding-up, reorganization, arrangement, adjustment or composition of it or its debts under any Insolvency Legislation, or seeking the appointment of a receiver, trustee, custodian or other similar official for it or any of its property or assets; unless (i) such Person is diligently defending such proceeding in good faith and on reasonable grounds as determined by the Required Lenders, acting reasonably and (ii) such proceeding does not in the reasonable opinion of the Lenders materially adversely affect the ability of such Person to carry on its business and to perform and satisfy all of its obligations.
"Insolvency Legislation" means legislation in any applicable jurisdiction relating to reorganization, arrangement, compromise or re-adjustment of debt, dissolution or winding-up, or any similar legislation, and specifically includes for greater certainty the Bankruptcy and Insolvency Act (Canada), the Companies' Creditors Arrangement Act (Canada) and the Winding-Up and Restructuring Act (Canada).
"Intellectual Property" means all rights, title and interests in intellectual property and all IP Ancillary Rights relating thereto, including all Copyrights, Patents, Trademarks, Internet Domain Names, Trade Secrets, industrial designs, integrated circuit topographies, plant breeders' rights and rights under IP Licenses.
"Interest" means interest on loans, stamping fees in respect of bankers' acceptances, the difference between the proceeds received by the issuers of bankers' acceptances and the amounts payable upon the maturity thereof, issuance fees in respect of letters of credit, and any other charges or fees in connection with the extension of credit which are determined by reference to the amount of credit extended, plus standby fees in respect of the unutilized portion of any credit facility; but excluding capitalized interest (for greater certainty, being interest which is accrued but not paid), agency fees, arrangement fees, structuring fees, fees relating to the granting of consents, waivers, amendments, extensions or restructurings, the reimbursement of costs and expenses, and any similar amounts which may be charged from time to time in connection with the establishment, administration or enforcement of the Facilities.
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"Interest Rate Hedge Transaction" means an agreement made between the Borrower and a Lender for the purpose of hedging interest rate risk, including an interest rate exchange agreement (commonly known as an "interest rate swap") or a forward rate agreement.
"Interim Financial Statements" means, in respect of any Person at any time, the unaudited financial statements of such Person (on a consolidated and unconsolidated basis) in respect of its most recently completed Fiscal Quarter (and also on a year-to-date basis in respect of such Fiscal Quarter and all previous Fiscal Quarters in the same Fiscal Year) prepared in accordance with GAAP except that such financial statements shall not include any notes thereto and shall be subject to normal year-end adjustments.
"Internet Domain Names" means all right, title and interest (and all related IP Ancillary Rights) in internet domain names.
"Investment" means an investment made or held by a Person, directly or indirectly, in another Person (whether such investment was made by the first-mentioned Person in such other Person or was acquired from a third party), including a contribution of capital and including the acquisition or holding of the following: all or substantially all of the assets used in connection with a business; common or preferred shares; debt obligations; partnership interests; and investments in joint ventures; provided however that if a transaction would satisfy the definition of "Capital Expenditure" herein and also the definition of "Investment" herein, it shall be deemed to constitute an Investment and not a Capital Expenditure.
"IP Ancillary Rights" means, with respect to an item of Intellectual Property all foreign counterparts to, and all divisionals, reversions, continuations, continuations-in-part, reissues, re-examinations, renewals and extensions of, such Intellectual Property and all income, royalties, proceeds and liabilities at any time due or payable or asserted under or with respect to any of the foregoing or otherwise with respect to such Intellectual Property, including all rights to sue or recover at Law or in equity for any past, present or future infringement, misappropriation, dilution, violation or other impairment thereof, and, includes in each case, all rights to obtain any other IP Ancillary Right.
"IP License" means all contractual obligations (and all related IP Ancillary Rights), whether written or oral, granting any right, title and interest in any Intellectual Property.
"Issuing Bank" means BMO.
"Laws" means all statutes, codes, ordinances, decrees, rules, regulations, municipal by-laws, judicial or arbitral or administrative or ministerial or departmental or regulatory judgments, orders, decisions, rulings or awards, or any provisions of such laws, including general principles of common and civil law and equity or policies or guidelines, to the extent such policies or guidelines have the force of law, binding on the Person referred to in the context in which such word is used; and "Law" means any of the foregoing.
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"Landlord Agreement" means an agreement in form and substance satisfactory to the Agent given in favour of the Agent by the landlord of a Material Leased Property, which shall include the following provisions: the landlord consents to the granting of a security interest in the lease by the Secured Company which is a tenant thereunder in favour of the Agent and agrees that the Agent may assign the lease to a third party with the landlord's consent which shall not be unreasonably withheld; the landlord agrees to give written notice to the Agent in respect of and a reasonable opportunity to cure any default before terminating the lease; and the landlord agrees to waive (or subordinate and defer the enforcement of) its right of distraint and any other rights and remedies and any security it may hold in respect of any property of the tenant located on such Material Leased Property or affixed to such Material Leased Property which the tenant is entitled to remove under Applicable Law or pursuant to the terms of the lease.
"Lenders" means the lenders identified in Exhibit "A" attached hereto and any other Persons which may from time to time become lenders pursuant to this Agreement; and their respective successors and permitted assigns.
"Lender-Related Distress Event" means, with respect to any Lender or any Person that directly or indirectly Controls such Lender (such Lender and each such Person being individually referred to in this definition as a "distressed person"), (i) the commencement of a voluntary or involuntary proceeding with respect to such distressed person under any Insolvency Legislation, (ii) the appointment of a custodian, conservator, receiver or similar official in respect of such distressed person or any substantial part of its assets, (iii) a forced liquidation, merger, sale or other change of Control of such distressed person supported in whole or in part by Guarantees or other support (including, without limitation, the nationalization or assumption of ownership or operating control of such distressed person by any Governmental Authority), or (iv) such distressed person makes a general assignment for the benefit of its creditors or is otherwise adjudicated as, or determined by any Governmental Authority having regulatory authority over such distressed person or its assets to be, insolvent, bankrupt, or deficient in meeting any capital adequacy or liquidity standard of any such Governmental Authority.
"Letter of Credit" means a stand-by letter of guarantee or documentary letter of credit.
"Lien" means: (i) a lien, charge, mortgage, hypothec, pledge, security interest or conditional sale agreement; (ii) an assignment, lease, consignment, trust or deemed trust that secures payment or performance of an obligation; (iii) a garnishment; (iv) any other encumbrance of any kind; and (v) any commitment or agreement to enter into or grant any of the foregoing.
"Loan Documents" means collectively, this Agreement, the Security, any promissory notes issued by the Borrower to the Agent or the Lenders hereunder, all agreements relating to Hedge Transactions, all Service Agreements, any certificate completed and executed by or on behalf of any Secured Company and all other certificates, instruments, agreements and other documents delivered, or to be delivered, by or on behalf of any Secured Company to the Agent or the Lenders or any of them, as applicable, under or in connection with this Agreement, and specifically including any agreements or letters entered into between the Borrower and the Agent in respect of fees payable to the Agent or the Lenders.
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"Marijuana" has the meaning ascribed to such term (i) under the Applicable Law in any Approved Jurisdiction or (ii) under the Controlled Substances Act (United States).
"MasterCard Line" is defined in Section 4.02.
"Material Adverse Change" means any change or event which: (i) constitutes a material adverse change in the business, operations, financial condition or properties of the Companies taken as a whole; or (ii) materially impairs the Secured Companies' ability, taken as a whole, to timely and fully perform any of their material obligations under the Loan Documents, or (iii) materially impairs the ability of the Agent and the Lenders to enforce their rights and remedies under this Agreement or the Security.
"Material Agreements" means each agreement listed in Schedule 6.01(n) hereto and each other agreement made between any Company and another Person from time to time which if terminated would result, or would have a reasonable likelihood of resulting, in a Default, Event of Default or Material Adverse Change.
"Material Leased Properties" means all Real Property leased by the Secured Companies as tenants from time to time which the Required Lenders acting reasonably consider to be material, specifically including as at the date of this Agreement the leased Real Property described in Schedule 6.01(k) attached hereto, but excluding Real Property leased solely for office purposes.
"Material Permit" means each licence or permit listed in Schedule 6.01(h) hereto and each other licence, permit, approval, registration or qualification granted to or held by any Secured Company which if terminated would result, or would have a reasonable likelihood of resulting, in a Default or Event of Default.
"Maturity Date" means May 31, 2022.
"Non-BA Lender" means a Lender identified in Exhibit "A" attached hereto as a Lender which will make BA Equivalent Loans instead of accepting Bankers' Acceptances hereunder.
"Non-Funding Lender" means any Lender (i) that has failed to fund any payment or Advance required to be made by it hereunder or to purchase all participations required to be purchased by it hereunder and under the Loan Documents, or (ii) that has given verbal or written notice to the Borrower, the Agent or any other Lender, or has otherwise publicly announced, that it believes that it may be unable to fund advances under one or more credit agreements to which it is a party, or (iii) with respect to which one or more Lender-Related Distress Events has occurred, or (iv) with respect to which the Agent believes, acting reasonably, that such Lender has defaulted or may default in fulfilling its obligations (whether as an agent, lender or letter of credit issuer) under one or more other credit agreements to which it is a party, or (v) with respect to which the Agent believes, acting reasonably, that there is a reasonable chance that such Lender will fail to fund any payment or Advance required to be made hereunder.
"Obligations" means, at any time, without duplication, all direct and indirect, contingent and absolute indebtedness, obligations and liabilities of the Borrower to the Agent and the Lenders under or in connection with this Agreement and the other Loan Documents at such time, specifically including the Outstanding Principal Amount and all accrued and unpaid interest thereon, and all obligations owing under or in connection with Service Agreements and Hedge Transactions, together with all fees, expenses and other amounts payable pursuant to this Agreement and the Security; except that if otherwise specified or required by the context, "Obligations" shall mean any portion of the foregoing.
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"Original Closing Date" means May 31, 2019.
"Outstanding Principal Amount" means, at any time, the aggregate of the Advances under the Facilities (or a Facility if the context requires) which have not been repaid or satisfied at such time, determined as follows: (i) in the case of Prime-Based Loans, the principal amount thereof; (ii) in the case of Bankers' Acceptances, BA Equivalent Notes and Letters of Credit, the face amount thereof; and (iii) in the case of Hedge Transactions, the Aggregate Net Hedge Liability.
"Owned Properties" means all Real Property owned by the Secured Companies from time to time, specifically including as at the date of this Agreement the Real Property described in Schedule 6.01(j) attached hereto.
"Patents" means all rights, title and interests (and all related IP Ancillary Rights) arising under any requirement of Law in or relating to patents and applications therefor.
"Pension Plan" means (i) a "pension plan" or "plan" which is subject to the funding requirements of applicable pension benefits legislation in any jurisdiction, or (ii) any pension benefit plan or similar arrangement applicable to employees of any Company.
"Permitted Acquisition" means an Investment that is either an acquisition of shares or other equity interests in a Person (referred to herein as a "share purchase"), or an acquisition of assets of a Person not in the ordinary course of business (referred to herein as an "asset purchase"), in either case if all of the following criteria are satisfied (except to the extent otherwise agreed in writing by the Required Lenders in their discretion):
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the Required Lenders acting reasonably shall have provided their prior written consent to such Acquisition after conducting such due diligence they may consider appropriate in the circumstances (for greater certainty, specifically including in respect of financial matters, the corporate and capital structure of such Person, key management, and business, environmental, regulatory, tax and legal matters, and the Borrower shall provide all information requested by the Required Lenders in connection with such due diligence at least fifteen (15) days prior to the proposed completion of such Acquisition); provided that such prior written consent shall not be required in respect of a Small Acquisition if the purchase price for such Small Acquisition and all other Small Acquisitions in the same Fiscal Year, plus the amount of any Funded Debt assumed in connection with such Small Acquisition and all other Small Acquisitions in the same Fiscal Year, is less than [Redacted: Threshold];
-
such Person is engaged in a business similar to or vertically integrated with the business conducted by the Borrower;
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no portion of the Facilities shall be used, directly or indirectly, in connection with the financing of the acquisition unless approved by the written consent of all Lenders in their discretion;
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if the acquisition involves a hostile or unsolicited take-over, it must be approved by all Lenders in their discretion;
-
in the case of a share purchase, immediately thereafter such Person will be a wholly-owned Subsidiary of the Borrower;
-
in the case of a share purchase, upon the completion of such acquisition (i) all Funded Debt (except Funded Debt which will constitute Permitted Funded Debt hereunder) of such Person shall be repaid and all Liens (except Liens which will constitute Permitted Liens hereunder) affecting the assets of such Person shall be released and discharged; and (ii) such Person shall provide a Guarantee and all other Security required herein to be provided by a Secured Subsidiary of the Borrower hereunder (including registrations, searches, legal opinions and ancillary documentation);
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in the case of an asset purchase, (i) upon the completion of such transaction, all Funded Debt (except Funded Debt which will constitute Permitted Funded Debt hereunder) secured by the acquired assets shall be repaid; and (ii) within thirty (30) days following the completion of such transaction, (A) all Liens (except Liens which will constitute Permitted Liens hereunder) affecting such assets shall be released and discharged; and (B) all Security required herein to be provided to the Agent in respect of such assets (including registrations, searches, legal opinions and ancillary documentation) shall be provided;
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the acquisition does not involve the assumption of any material environmental liabilities, and all representations and warranties contained herein with respect to environmental matters shall be true and correct both immediately before and immediately after such acquisition in all material respects; and if as a result of the acquisition any Company will acquire ownership of any Real Property, the Borrower shall have provided an environmental questionnaire in form and substance satisfactory to the Agent in respect of such Real Property which evidences such material compliance with all such representations and warranties;
-
if the acquired business includes any Cannabis-Related Activities, the Company which will carry on the acquired business will own assets and carry on business only in one or more Approved Jurisdictions;
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the Borrower shall deliver a Compliance Certificate evidencing that it is in compliance in all material respects with all covenants and representations and warranties under this Agreement and will remain in compliance in all material respects after giving effect to such acquisition; and no Default or Event of Default shall have occurred and be continuing or would result from the completion of such acquisition;
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if the Borrower proposes to incur Subordinated Debt to finance all or any portion of such acquisition, the terms and conditions of such Subordinated Debt shall be satisfactory to the Required Lenders, and the holder(s) of such Subordinated Debt shall enter into a subordination and postponement agreement with the Agent containing terms and conditions contemplated in the definition of "Subordinated Debt" herein;
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and provided further that if any such transaction would constitute both a Permitted Acquisition and a Capital Expenditure, it shall be deemed to constitute a Permitted Acquisition and not a Capital Expenditure.
"Permitted Contingent Investment" means the acquisition of an option, warrant, right or other contingent agreement to make an Investment in a Person that is not exercisable, convertible or exchangeable unless and until: (A) all Cannabis-Related Activities carried on by such Person in each jurisdiction are in compliance with all Applicable Law in such jurisdiction, and the Required Lenders have agreed in writing that such jurisdiction will be an Approved Jurisdiction at such time; and (B) if such Investment is in respect of securities which are tradeable on a recognized stock exchange, the Investment has been approved by such stock exchange.
"Permitted Convertible Notes" means unsecured convertible promissory notes or debentures issued by the Borrower pursuant to a trust indenture in form and substance satisfactory to the Required Lenders, having an aggregate principal amount as hereinafter provided, maturing not earlier than six (6) months later than the Maturity Date, and under which no principal payments are required prior to such maturity except upon the occurrence of an event of default (as defined in such trust indenture).
"Permitted Funded Debt" means, without duplication: (i) the Obligations; (ii) indebtedness of any Company to another Company; (iii) Subordinated Debt; (iv) indebtedness of any Company to Atlantic Canada Opportunities Agency not in excess of [Redacted: Threshold]; (v) indebtedness of the Companies secured by Permitted Liens; (vi) unsecured indebtedness of the Companies not exceeding an aggregate amount of [Redacted: Threshold]); and (vii) any guarantee by a Company of indebtedness of any other Company permitted under this Agreement.
"Permitted Issuance" means an Equity Issuance or the incurrence of Subordinated Debt by the Borrower to be completed on or before April 30, 2021, provided that:
(a) such Equity Issuance or incurrence of Subordinated Debt is in connection with [Redacted: Confidential Information];
(b) such Equity Issuance or incurrence of Subordinated Debt does not exceed [Redacted: Threshold] if such Equity Issuance or incurrence of Subordinated Debt is by way of a private placement; and
(c) prior to and immediately after giving effect to such Equity Issuance or incurrence of Subordinated Debt:
i. all representations and warranties herein continue to be true and correct in all material respects; and
ii. no Event of Default shall have occurred and be continuing.
"Permitted Liens" means:
(a) Statutory Liens in respect of any amount which is not at the time overdue;
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(b) Statutory Liens in respect of any amount which may be overdue but the validity of which is being contested in good faith and in respect of which reserves have been established in accordance with GAAP;
(c) Liens or rights of distress reserved in or exercisable under any lease for rent not at the time overdue or for compliance with the terms of such lease not at the time in default; and security deposits given under leases not in excess of six (6) months' rent;
(d) any obligations or duties affecting Real Property due to any public utility or to any municipality or government, or to any statutory or public authority, with respect to any franchise, grant, licence or permit in good standing and any defects in title to structures or other facilities arising solely from the fact that such structures or facilities are constructed or installed on Real Property under government permits, leases or other grants in good standing; which obligations, duties and defects in the aggregate do not materially impair the use of such property, structures or facilities for the purpose for which they are held;
(e) Liens in respect of cash, including cash deposits, granted in the ordinary course of business as security for obligations in connection with contracts, bids, tenders or expropriation proceedings, surety or appeal bonds, costs of litigation when required by law and public and statutory obligations;
(f) warehousemen's, storers', repairers', carriers' and other similar Liens granted in the ordinary course of business;
(g) security given to a public utility or any municipality or government or to any statutory or public authority to secure obligations incurred to such utility, municipality, government or other authority in the ordinary course of business and not at the time overdue;
(h) Liens and privileges arising out of judgments or awards in respect of which: an appeal or proceeding for review has been commenced; a stay of execution pending such appeal or proceedings for review has been obtained; and reserves have been established in accordance with GAAP;
(i) any Lien affecting any Real Property arising in connection with the construction or improvement of such Real Property or arising out of the furnishing of materials or supplies therefor, provided that such Lien secures moneys not at the time overdue (or if overdue, the validity of which is being contested in good faith and in respect of which reserves have been established in accordance with GAAP), notice of such Lien has not been given to the Agent or any Lender and such Lien has not been registered against title to such Real Property;
(j) Liens affecting any Real Property arising in connection with registered restrictions, covenants, land use contracts, building schemes, declarations of covenants, conditions and restrictions, servicing agreements in favour of any Governmental Authority, easements, rights-of-way, servitudes or other similar rights in or with respect to such Real Property (including open space and conservation easements, restrictions or similar agreements and rights of way and servitudes for railways, water, sewer, drainage, gas and oil pipelines, electricity, light, power, telephone, telegraph, internet or cable television services and utilities) granted to or reserved by other Persons or properties, which, in the aggregate, do not materially impair the use of such Real Property for its intended purposes or the operation of the business thereon, and provided that same have been complied with;
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(k) Liens affecting any Real Property arising in connection with site plan agreements, subdivision agreements, development agreements and similar instruments registered or recorded in the ordinary course of business which do not, in the aggregate, materially impair the use of such Real Property for its intended purposes or the operation of the business thereon, and provided that same have been complied with;
(l) Liens affecting any Real Property arising in connection with any right reserved to or vested in any Governmental Authority, by the terms of any permit, licence, certificate, order, grant, classification (including any zoning Laws and ordinances and similar legal requirements), registration or other consent, approval or authorization acquired by such Person from any Governmental Authority or by any Law, to terminate any such permit, licence, certificate, order, grant, classification, registration or other consent, approval or authorization or to require annual or other payments as a condition to the continuance thereof and which, in the aggregate, do not materially impair the use of such Real Property for its intended purposes or the operation of the business thereon, and provided that same have been complied with;
(m) Liens affecting any Real Property arising in connection with the reservations, limitations, provisos and conditions, if any, expressed in any grants of such Real Property from any Governmental Authority, which, in the aggregate, do not materially impair the use of such Real Property for its intended purposes or the operation of the business thereon, and provided that same have been complied with;
(n) the exceptions and qualifications contained in Section 44(1) of the Land Titles Act (Ontario), save and except paragraph 11 thereof;
(o) reservations, conditions and restrictions in respect of any Real Property contained in the original grant of land from the Crown, as varied by statute;
(p) Liens existing as of the date of this Agreement which are permitted exceptions under any title insurance policies delivered to and accepted by the Agent in respect of the Property;
(q) Permitted Purchase-Money Security Interests;
(r) Liens securing Subordinated Debt;
(s) the Specific Permitted Liens;
(t) Liens granted by the Unsecured Subsidiaries;
(u) the Security; and
(v) any other Lien in respect of which the Lenders in their discretion provide their written consent;
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provided that the use of the term "Permitted Liens" to describe the foregoing Liens shall mean that such Liens are permitted to exist (whether in priority to or subsequent in priority to the Security, as determined by Applicable Law); and for greater certainty such Liens shall not be entitled to priority over the Security by virtue of being described in this Agreement as "Permitted Liens".
"Permitted Purchase-Money Security Interests" means Purchase-Money Security Interests incurred or assumed in connection with the purchase, leasing or acquisition of capital equipment in the ordinary course of business, provided that the aggregate amount of the Companies' liability under Purchase Money Security Interest incurred or assumed thereunder does not at any time exceed Ten Million Dollars ($10,000,000), and provided further that such capital equipment does not become affixed to any Real Property.
"Person" means a natural person, corporation, limited liability company, unlimited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.
"Phase One" means the first phase of development of the Property, consisting of [Redacted: Confidential Information].
"Phase Two" means the second phase of development of the Property, [Redacted: Confidential Information].
"Phase Three" means the third phase of development of the Property, [Redacted: Confidential Information].
"Phase Four" means the fourth phase of development of the Property, [Redacted: Confidential Information].
"Phase Five" means the fifth phase of development of the Property, [Redacted: Confidential Information];
"Prime-Based Loan" means a loan made by a Lender to the Borrower in Canadian Dollars in respect of which interest is determined by reference to the Prime Rate, but excluding Advances in the form of BA Equivalent Loans.
"Prime Rate" means the greater of the following: (i) the rate of interest announced from time to time by BMO as its reference rate then in effect for determining rates of interest on Canadian dollar loans to its customers in Canada and designated as its prime rate; and (ii) the thirty (30) day CDOR Rate plus one-half percent (0.5%) per annum.
"Previous Credit Agreement" means the credit agreement made among the Borrower, the Agent and the Lenders, dated as of May 31, 2019 (as amended, restated, supplemented, replaced or otherwise modified from time to time up to, but not including, the Closing Date).
"Proceeds of Realization" means all amounts received by the Agent or any Lender in connection with: (i) any realization in respect of the Security or any portion thereof, whether occurring as a result of enforcement or otherwise, (ii) any sale, expropriation, loss or damage or other disposition of collateral or any portion thereof (except any such disposition permitted pursuant to Section 7.02(d), and also excluding any insurance proceeds which are released to the Companies in accordance with Section 8.08), and (iii) any other amount paid by or recovered from any Secured Company, including as a result of its dissolution, liquidation, bankruptcy or winding-up or any other distribution of its assets to creditors; together with all other amounts which are expressly deemed to constitute "Proceeds of Realization" in this Agreement.
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"Professional Advisor" means an independent third-party advisor appointed by the Agent on behalf of the Lenders, from time to time.
[Redacted: Confidential Information].
"Property" means the Real Property municipally known as 35 English Drive and 320 Edinburgh Drive, Moncton, New Brunswick, and legally described as [Redacted: Confidential Information].
"Property Lending Value" means, in respect of any Advance under Facility B, the lending value attributed by the Lenders in their discretion to the Property immediately before such Advance, taking into consideration (i) in respect of Phase One, Phase Two and Phase Three, costs incurred and an Acceptable Appraisal on an "as-is" basis; and (ii) in respect of Phase Four and Phase Five, costs incurred and to be incurred and an Acceptable Appraisal on an "as completed" basis.
"Proportionate Share" in respect of any Lender means:
-
in the context of such Lender's obligation to make Advances under Facility A, such Lender's Commitment to make Advances under Facility A divided by the aggregate amount of all Lenders' Commitments to make Advances under Facility A;
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in the context of such Lender's obligation to make Advances under Facility B, such Lender's Commitment to make Advances under Facility B divided by the aggregate amount of all Lenders' Commitments to make Advances under Facility B;
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in the context of such Lender's entitlement to receive a portion of the standby fee in respect of Facility A, such Lender's Commitment to make Advances under Facility A divided by the aggregate amount of all Lenders' Commitments to make Advances under Facility A;
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subject to Section 11.03, in the context of any Lender's entitlement to receive payments of principal, interest or fees (other than standby fees) under Facility A, the Outstanding Principal Amount due to such Lender under Facility A divided by the aggregate amount of the Outstanding Principal Amount due to all Lenders under Facility A;
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subject to Section 11.03, in the context of any Lender's entitlement to receive payments of principal, interest or fees under Facility B, the Outstanding Principal Amount due to such Lender under Facility B divided by the aggregate amount of the Outstanding Principal Amount due to all Lenders under Facility B; and
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in any other context, such Lender's Commitment divided by the aggregate of all Lenders' Commitments.
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"Purchase-Money Security Interest" means (i) a Capital Lease; or (ii) a Lien on any property or asset which is created, issued or assumed to secure the unpaid purchase price thereof, provided that such Lien is restricted to such property or asset (and all additions thereto and replacements and proceeds thereof) and secures an amount not in excess of the purchase price thereof and any interest and fees payable in respect thereof.
"Qualified Currency" means the legal tender of any Approved Jurisdiction.
"Real Property" means a freehold or leasehold interest in real property, and includes all buildings and other improvements situated thereon and all fixtures attached thereto.
"Related Person" in relation to any Person means a Subsidiary, Affiliate, Associate or employee of such Person.
"Repayment" means a repayment by the Borrower on account of the Outstanding Principal Amount.
"Repayment Notice" means a notice delivered by the Borrower to the Agent committing it to make a Repayment, in the form of Exhibit "E".
"Required Lenders" means (i) at any time prior to the occurrence of an Event of Default which is continuing, any two or more Lenders which have issued Commitments hereunder representing two-thirds (2/3) or more of the total amount of credit available under the Facilities; and (ii) at any time after the occurrence of an Event of Default which is continuing, any two or more Lenders holding two-thirds (2/3) or more of the Outstanding Principal Amount under the Facilities; except that if at any time there are only two (2) Lenders under this Agreement, "Required Lenders" shall mean both Lenders, and if at any time there is only one (1) Lender under this Agreement, "Required Lenders" shall mean such Lender.
"Requirements of Environmental Law" means: (i) obligations under common law; (ii) requirements imposed by or pursuant to statutes, regulations and by-laws whether presently or hereafter in force; (iii) directives, policies and guidelines issued or relied upon by any Governmental Authority to the extent such directives, policies or guidelines have the force of law; (iv) permits, licenses, certificates and approvals from Governmental Authorities which are required in connection with air emissions, discharges to surface or groundwater, noise emissions, solid or liquid waste disposal, the use, generation, storage, transportation or disposal of Hazardous Materials; and (v) requirements imposed under any clean-up, compliance or other order made pursuant to any of the foregoing, in each and every case relating to environmental, health or safety matters including all such obligations and requirements which relate to (A) solid, gaseous or liquid waste generation, handling, treatment, storage, disposal or transportation of Hazardous Materials and (B) exposure to Hazardous Materials.
"Responsible Person" means (i) an officer or director of any Company or (ii) any other Person required to hold a security clearance pursuant to the Cannabis Act or the Cannabis Regulations.
"Rollover" means the renewal of an Availment Option upon its maturity in the same form.
"Rollover Notice" means a notice substantially in the form of Exhibit "C" given by the Borrower to the Agent for the purpose of requesting a Rollover.
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"Sanctions" means the sanctions laws, regulations, embargoes or restrictive measures administered, enacted or enforced by any Sanctions Authority.
"Sanctions Authority" means Canada or any other country having jurisdiction over any of the Companies or the respective Governmental Authorities of any of the foregoing.
"Sanctioned Entity" means (a) a country or a government of a country, (b) an agency of the government of a country, (c) an organization directly or indirectly controlled by a country or its government, (d) a Person resident in or determined to be resident in a country, in each case, that is subject to a sanctions program administered and enforced by a Sanctions Authority.
"Sanctioned Person" means a Person that is, or is owned or Controlled by Persons that are, the subject of any Sanctions.
"Secured Companies" means the Borrower and the Secured Subsidiaries.
"Secured Subsidiaries" means all present and future Subsidiaries of the Borrower, other than the Unsecured Subsidiaries.
"Security" means the Guarantees, security agreements, mortgages, debentures and other documents required to be provided pursuant to Article VIII and all other documents and agreements delivered by the Secured Companies or any other Persons to the Agent or the Lenders from time to time as security for the payment and performance of the Obligations, and the Liens constituted by the foregoing.
"Service Agreements" is defined in Section 4.03.
"Small Acquisition" means an Acquisition in respect of which the aggregate of the purchase price for such Acquisition plus the amount of any Funded Debt assumed in connection therewith is less than [Redacted: Threshold].
"Solvent" means, with respect to any Person as of the date of determination, (i) the aggregate property of such Person is sufficient, if disposed of at a fairly conducted sale under legal process, to enable payment of all its obligations, due and accruing due; (ii) such Person is able to meet its obligations as they generally become due; and (iii) such Person has not ceased paying its current obligations in the ordinary course of business as they generally become due; for purposes of this definition, the amount of any contingent obligation at such time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.
"Specific Permitted Liens" means the Liens described in Schedule 6.01(i), as such Liens may be amended or replaced from time to time on substantially similar terms and conditions provided that the principal amount of the indebtedness secured thereby is not increased.
"Statutory Lien" means a Lien in respect of any property or assets of a Company created by or arising pursuant to any Applicable Law in favour of any Governmental Authority to secure any obligation, including a Lien for the purpose of securing such Company's obligation to deduct and remit employee source deductions, goods and services tax and harmonized sales tax pursuant to the Income Tax Act (Canada), the Excise Tax Act (Canada), the Canada Pension Plan (Canada), the Employment Insurance Act (Canada) and any legislation in any jurisdiction similar to or enacted in replacement of the foregoing from time to time.
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"Subordinated Debt" means (i) the Borrower's indebtedness under the Permitted Convertible Notes (if any); and (ii) any other indebtedness of any Company to any Person in respect of which the holder thereof has entered into a subordination, postponement and standstill agreement in favour of the Agent in form and substance satisfactory to the Agent and registered in all places where necessary or desirable to protect the priority of the Security, which shall provide (among other things) that: (A) the maturity date of such indebtedness is later than the Maturity Date; (B) the holder of such indebtedness may not receive any payments on account of principal or interest thereon (except to the extent, if any, expressly permitted therein); (C) any security held in respect of such indebtedness is subordinated to the Security; (D) the holder of such indebtedness may not take any enforcement action in respect of any such security (except to the extent, if any, otherwise expressly provided therein) without the prior written consent of the Agent; and (E) any enforcement action taken by the holder of such indebtedness will not interfere with the enforcement action (if any) being taken by the Agent in respect of the Security.
"Subsidiary" means a Person (other than a natural person) which is Controlled, directly or indirectly, by another Person (other than a natural person); and for greater certainty includes a Subsidiary of a Subsidiary.
"Substitution" means the substitution of one Availment Option for another, and does not constitute a fresh or new Advance.
"Substitution Notice" means a notice substantially in the form of Exhibit "D" given by the Borrower to the Agent for the purposes of requesting a Substitution.
"Tangible Net Worth" means the shareholders' equity of the Borrower on a consolidated basis determined in accordance with GAAP (specifically including for greater certainty any accumulated retained earnings and contributed surplus), plus or minus any unrealized foreign currency gains or losses, plus any Subordinated Debt which has also been assigned by the holders thereof in favour of the Agent as security for the Obligations, less any amounts payable to the Borrower by the Unsecured Subsidiaries, and less any value attributed to assets considered by the Lenders to be intangible assets such as, but not limited to, goodwill, long-term Investments, leasehold improvements, Intellectual Property, licenses, and deferred charges.
"Taxes" is defined in the CBA Model Provisions.
"Total Funded Debt" means, at any time, the Funded Debt of the Borrower on a consolidated basis at such time, specifically including for greater certainty the Outstanding Principal Amount and all Subordinated Debt of the Companies.
"Total Funded Debt to EBITDA Ratio" means, at any time, the ratio of (i) Total Funded Debt at such time to (ii) EBITDA in the immediately preceding twelve (12) month period.
"Trade Secrets" means all right, title and interest (and all related IP Ancillary Rights) arising under any requirement of Law in or relating to trade secrets.
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"Trademarks" means all right, title and interest (and all related IP Ancillary Rights) in trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers and, in each case, all goodwill associated therewith, all registrations and recordations thereof and all applications in connection therewith.
"Unrestricted Cash" the amount of all monies standing to the credit of the Secured Companies that is in bank accounts or deposit instruments maintained by the Secured Companies in accordance with this Agreement that are (A) (i) not subject to any Lien (other than a Permitted Lien), and (ii) not subject to any restriction (specifically including for greater certainty any restriction under a Permitted Lien) which would prevent the Secured Companies from using such monies for operating purposes in the ordinary course of business; less (B) the Outstanding Principal Amount under Facility A at such date. For greater certainty, Unrestricted Cash shall include the Cash Collateral pledged pursuant to Section 8.01(i) herein.
"Unsecured Subsidiaries" is defined in Section 8.09(a).
"Year-end Financial Statements" means, in respect of any Person at any time, the audited financial statements of such Person (on a consolidated and unconsolidated basis) in respect of its most recently completed Fiscal Year prepared in accordance with GAAP, including the notes thereto and an unqualified opinion of its auditor with respect thereto.
1.02 Accounting Principles
Except as otherwise provided herein, (i) each financial term in this Agreement shall be interpreted in accordance with GAAP in effect on the date of such interpretation; and (ii) where the character or amount of any asset or liability or item of revenue or expense is required to be determined, or any consolidation or other computation is required to be made for the purpose of this Agreement, such determination or calculation shall be made in accordance with GAAP in effect on the date of such determination. If any accounting changes occur and such changes result in a material change in the calculation of the financial covenants, standards or terms used in this Agreement, then the Borrower, the Agent and the Lenders agree to discuss whether they wish to amend such provisions with the desired result that the criteria for evaluating the financial condition of the applicable Secured Companies shall be substantially similar after such accounting changes as if such accounting changes had not been made; Any such amendments shall become effective upon the execution and delivery of an amendment to this Agreement executed by the Borrower and the Required Lenders; and for greater certainty any such amendment executed by the Borrower and the Required Lenders shall be sufficient to bind all Lenders. If the Borrower and the Required Lenders do not execute and deliver such amendment within thirty (30) days following the date of implementation of any such accounting changes, then all calculations of financial covenants and other standards and terms in this Agreement and the other Loan Documents shall continue to be prepared, delivered and made without regard to such accounting changes and the Borrower shall, in connection with the delivery of any financial statements under this Agreement, provide a management-prepared reconciliation of the financial covenants to such financial statements to such accounting changes. For the avoidance of doubt, notwithstanding any changes in GAAP after the Original Closing Date that would require lease obligations that would be treated as operating leases as of the Original Closing Date to be classified and accounted for as Capital Leases or otherwise reflected on the Borrower's consolidated balance sheet, such lease obligations, whether incurred prior to or at any time after the Original Closing Date, shall continue to be excluded from the definition of Funded Debt and shall not constitute Funded Debt but shall continue to be treated as operating leases in a manner consistent with such treatment prior to such change.
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1.03 Currency References
All amounts referred to in this Agreement are in Canadian Dollars unless otherwise noted.
1.04 Extended Meanings
Except to the extent otherwise expressly provided herein:
(a) terms defined in the singular have the same meaning when used in the plural, and vice-versa; and words importing gender include all genders;
(b) when used in the context of a general statement followed by a reference to one or more specific items or matters, the term "including" shall mean "including, without limitation", and the term "includes" shall mean "includes, without limitation";
(c) each reference herein to a statute or regulations made pursuant to a statute shall be deemed to include all amendments to such statute or regulations from time to time and all statutes or regulations which may come into effect from time to time substantially in replacement for the said statutes or regulations;
(d) any reference herein to the exercise of discretion by the Agent and the Lenders (including phrases such as "in the discretion of", "in the opinion of", "to the satisfaction of" and similar phrases shall mean that such discretion is absolute and unfettered; and
(e) references to a time of day or date mean the local time or date in the City of Toronto, Ontario.
1.05 Exhibits and Schedules
The following Exhibits and Schedules are attached to this Agreement and incorporated herein by reference (but with respect to Exhibit "H", subject to Section 12.01 hereof):
Exhibits
"A" - Lenders and Lenders' Commitments
"B" - Draw Request
"C" - Rollover Notice
"D" - Substitution Notice
"E" - Repayment Notice
"F" - Compliance Certificate
"G" - Form of BA Equivalent Note
"H" - CBA Model Provisions
Schedules
6.01(b) - Companies Information
6.01(h) - Material Permits
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6.01(i) - Specific Permitted Liens
6.01(j) - Owned Properties
6.01(k) - Material leased Properties
6.01(l) - Intellectual Property
6.01(n) - Material Agreements
6.01(o) - Labour Agreements
6.01(p) - Environmental Matters
6.01(q) - Litigation
6.01(r) - Pension Plans
7.02(iii) - Investments existing on the Closing Date
ARTICLE II - FACILITY A
2.01 Establishment of Facility A
Subject to the terms and conditions in this Agreement, each Lender hereby establishes a committed, revolving credit facility for the Borrower in the maximum principal amount indicated opposite such Lender's name in Exhibit "A" under the heading "Facility A Commitments". The said credit facilities are established by the Lenders severally and not jointly, and are hereinafter collectively referred to as "Facility A". Each Advance by a Lender under Facility A shall be made in its Proportionate Share of Facility A.
2.02 Purpose
Advances under Facility A shall be used by the Borrower for working capital purposes and other general corporate purposes.
2.03 Revolving Nature
Facility A is a revolving facility. For greater certainty, the Borrower shall be entitled to obtain Advances under Facility A from time to time and repay all or any portion of the Outstanding Principal Amount under Facility A from time to time; provided that the Outstanding Principal Amount under Facility A shall not exceed the Facility A Limit in effect at such time.
2.04 Repayment
The Obligations under Facility A shall become due and payable on the earlier of: (i) the Acceleration Date; and (ii) the Maturity Date.
2.05 Availment Options
Subject to the restrictions contained in this Agreement (and in particular, Sections 5.02 and 5.03), the Borrower may receive Advances under Facility A from each Lender by any one or more of the following Availment Options (or any combination thereof):
(a) Prime Based Loans; or
(b) Bankers' Acceptances from BA Lenders with a maturity between 28 and 182 days (inclusive), subject to availability; or
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(c) BA Equivalent Loans from Non-BA Lenders with a maturity between 28 and 182 days (inclusive), subject to availability; or
(d) Letters of Credit, subject to Section 2.09.
Bankers' Acceptances and BA Equivalent Loans will not be issued with a maturity date later than the Maturity Date. The Borrower may convert all or any portion of the Outstanding Principal Amount under Facility A in the form of any above Availment Option into another form of Availment Option denominated in the same currency, subject to and in accordance with the terms and conditions of this Agreement (but for greater certainty, Bankers' Acceptances and BA Equivalent Loans may not be converted into another Availment Option prior to the maturity thereof).
2.06 Interest and Fees
In respect of Advances under Facility A, the Borrower agrees to pay the following to the Agent on behalf of the Lenders (or if specified below, to the Issuing Bank for its own account):
(a) interest on Prime Based Loans at the Prime Rate plus the Applicable Margin per annum, payable monthly in arrears on the last day of each and every month;
(b) in respect of each Bankers' Acceptance, a stamping fee equal to the Applicable Margin, multiplied by the face amount of the Bankers' Acceptance with the product thereof further multiplied by the number of days to maturity of the Bankers' Acceptance and divided by 365, payable at the time of acceptance;
(c) in respect of each BA Equivalent Note, a stamping fee equal to the Applicable Margin multiplied by the face amount of the BA Equivalent Note with the product thereof further multiplied by the number of days to maturity of the BA Equivalent Note and divided by 365, payable at the time of acceptance;
(d) the following fees in respect of each Letter of Credit: (i) in respect of the period from the date of issuance of such Letter of Credit to the last day of the then current Fiscal Quarter, a fee equal to the Applicable Margin in effect on the date of issuance multiplied by the face amount of such Letter of Credit multiplied by the number of days in such period (including the first day but excluding the last day of such period) and divided by three hundred and sixty-five (365), payable on the last Business Day of such Fiscal Quarter; (ii) in respect of each subsequent Fiscal Quarter (other than the Fiscal Quarter in which the Letter of Credit shall expire), a fee equal to the Applicable Margin in effect on the first day of such Fiscal Quarter multiplied by the face amount of such Letter of Credit multiplied by the number of days in such Fiscal Quarter (including the first day but excluding the last day) and divided by three hundred and sixty-five (365), payable on the last Business Day of such Fiscal Quarter; and (iii) in respect of the Fiscal Quarter in which such Letter of Credit shall expire, a fee equal to the Applicable Margin in effect on the first day of such Fiscal Quarter multiplied by the face amount of such Letter of Credit multiplied by the number of days in the period prior to and excluding the date on which such Letters of Credit expires and divided by three hundred and sixty-five (365), payable on the last Business Day of such Fiscal Quarter;
(e) an administrative fee in respect of each Letter of Credit payable to the Issuing Bank for its own account as follows: (i) in respect of the period from the date of issuance of such Letter of Credit to the last day of the then current Fiscal Quarter, a fee equal to one-quarter of one percent (0.25%) multiplied by the face amount of such Letter of Credit multiplied by the number of days in such period (including the first day but excluding the last day of such period) and divided by three hundred and sixty-five (365), payable on the last Business Day of such Fiscal Quarter; (ii) in respect of each subsequent Fiscal Quarter (other than the Fiscal Quarter in which the Letter of Credit shall expire), a fee equal to one-quarter of one percent (0.25%) multiplied by the face amount of such Letter of Credit multiplied by the number of days in such Fiscal Quarter (including the first day but excluding the last day) and divided by three hundred and sixty-five (365), payable on the last Business Day of such Fiscal Quarter; and (iii) in respect of the Fiscal Quarter in which such Letter of Credit shall expire, a fee equal to one-quarter of one percent (0.25%) multiplied by the face amount of such Letter of Credit multiplied by the number of days in the period prior to and excluding the date on which such Letters of Credit expires and divided by three hundred and sixty-five (365), payable on the last Business Day of such Fiscal Quarter;
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(f) administrative fees payable to the Issuing Bank for its own account in accordance with its usual practice in respect of the issuance, amendment and renewal of Letters of Credit; and
(g) a standby fee payable in Canadian Dollars with respect to the unused portion of Facility A, calculated on a daily basis as being the difference between (i) the Facility A Limit (less the Commitments of any Non-Funding Lenders under Facility A) and (ii) the Outstanding Principal Amount under Facility A , multiplied by the Applicable Margin and divided by three hundred and sixty-five (365); which standby fee shall be payable quarterly in arrears on the last Business Day of each Fiscal Quarter based on the number of days in such Fiscal Quarter (including the first day and excluding the last day in such Fiscal Quarter) and on the Maturity Date.
2.07 Letters of Credit
Letters of Credit shall be issued only under Facility A and shall be subject to the following additional terms and conditions:
(a) Letters of Credit may be issued in all Qualified Currencies. Letters of Credit will not be issued for the purpose of guaranteeing obligations of any Person (except obligations incurred by any Company in the ordinary course of business). Each Letter of Credit shall have a term not in excess of one (1) year. The Equivalent Amount expressed in Canadian Dollars of the aggregate face amount of all Letters of Credit outstanding at any time may not exceed Two Million Dollars ($2,000,000).
(b) If a Letter of Credit is issued in a Qualified Currency other than Canadian Dollars, each fee in respect of such Letter of Credit payable pursuant to Section 2.06 herein shall be payable in Canadian Dollars in accordance with Section 5.06.
(c) Each request for the issuance of a Letter of Credit shall be delivered by the Borrower to the Issuing Bank in accordance with the notice requirements in Section 5.02(a) herein, together with the Issuing Bank's customary form of application and indemnity agreement completed to its satisfaction and the proposed form of the Letter of Credit (which shall be satisfactory to the Issuing Bank) and such other certificates, documents and other information as the Issuing Bank may reasonably request.
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(d) The obligation of the Borrower to reimburse the Issuing Bank for all drawings under Letters of Credit shall be absolute, unconditional and irrevocable and shall be satisfied strictly in accordance with their terms, irrespective of:
(i) any lack of validity or enforceability of any Letter of Credit;
(ii) the existence of any claim, setoff, defence or other right which the Borrower or any other Person may at any time have against the beneficiary under any Letter of Credit, the Issuing Bank or any Lender (other than the defence of payment in accordance with the terms of this Agreement or a defence based on the negligence or wilful misconduct of the Issuing Bank or any Lender) or any other Person in accordance with this Agreement or other transaction;
(iii) any draft or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; and
(iv) any other circumstance or event whatsoever, whether or not similar to any of the foregoing.
(e) In making any payment under any Letter of Credit (i) the Issuing Bank's exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever and (ii) any non-compliance in any immaterial respect of the documents presented under such Letter of Credit with the terms thereof shall, in each case, not be deemed wilful misconduct or negligence of the Issuing Bank.
(f) The Issuing Bank and its correspondents may accept and act upon the name, signature, or act of any party purporting to be the executor, administrator, receiver, trustee in bankruptcy or other legal representative of any party designated in any Letter of Credit in the place of the name, signature, or act of such party.
(g) Concurrently with each request for the issuance of a Letter of Credit the Agent shall notify each Lender of the principal amount, the reference number and the expiration date thereof and the amount of such Lender's participation therein. By the issuance of a Letter of Credit hereunder and without further action on the part of the Issuing Bank or the Lenders, each said Lender hereby accepts from the Issuing Bank a participation (which participation shall be without recourse to the Issuing Bank) in such Letter of Credit in such Lender's Proportionate Share of Facility A, effective upon the issuance of such Letter of Credit. Each Lender hereby absolutely and unconditionally assumes, as primary obligor and not as a surety, and agrees to pay and discharge and to indemnify and hold the Issuing Bank harmless from liability in respect of, such Lender's said Proportionate Share of the amount of any drawing under a Letter of Credit. Each said Lender acknowledges and agrees that its obligation to acquire participations in each Letter of Credit issued by the Issuing Bank and its obligation to make the payments specified herein, and the right of the Issuing Bank to receive the same, in the manner specified herein, are absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or Event of Default hereunder, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. The Issuing Bank shall review each draft and any accompanying documents presented under a Letter of Credit and shall notify each said Lender of any such presentment. Promptly after it shall have ascertained that any draft and any accompanying documents presented under such Letter of Credit appear on their face to be in substantial conformity with the terms and conditions of the Letter of Credit, the Issuing Bank shall give notice to each said Lender and the Borrower of the receipt and amount of such draft and the date on which payment thereon will be made, and each said Lender shall, by 11:00 a.m. Toronto time on the date such payment is to be made, pay its said Proportionate Share of the amount so drawn under the Letter of Credit in immediately available funds, and the Issuing Bank shall make the appropriate payment to the beneficiary of such Letter of Credit. The Borrower agrees to immediately reimburse each said Lender in an amount equal to the said payment by such Lender with interest thereon payable at the same rate and in the same manner as Prime Rate Loans under Facility A.
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(h) On or before the Maturity Date the Borrower shall (i) arrange for the cancellation and return of all outstanding Letters of Credit to the Issuing Bank or (ii) provide cash collateral in favour of the Agent in respect of all outstanding Letters of Credit in an amount equal to the aggregate of the face amounts of all such Letters of Credit, plus an additional amount estimated by the Issuing Bank in respect of its anticipated fees and expenses associated with the settlement of such Letters of Credit. For greater certainty, the Agent shall have no obligation to release all or any portion of the Security unless and until all Letters of Credit are cancelled or such cash collateral is provided in respect thereof to the satisfaction of the Issuing Bank.
2.08 Cancellation
The Borrower may from time to time upon two (2) Business Days' prior written notice to the Agent, permanently cancel any unadvanced portion of Facility A in a minimum amount of One Hundred Thousand Dollars ($100,000) without payment of any penalty or fee (provided that such required minimum amount shall not apply in the case of a cancellation of Facility A in its entirety). The Facility A Limit shall be automatically and permanently reduced by the amount so cancelled and each Lender's Commitment under Facility A shall be reduced by its Proportionate Share of the amount so cancelled.
ARTICLE III - FACILITY B
3.01 Establishment of Facility B
Subject to the terms and conditions in this Agreement, each Lender hereby establishes a committed, non-revolving credit facility for the Borrower in the maximum principal amount indicated opposite such Lender's name in Exhibit "A" under the heading "Facility B Commitments". The said credit facilities are established by the Lenders severally and not jointly, and are hereinafter collectively referred to as "Facility B". Each Advance by a Lender under Facility B shall be made in its Proportionate Share of Facility B. The aggregate principal amount of all Advances under Facility B shall not exceed the Facility B Limit.
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3.02 Purpose
Advances under Facility B shall be used by the Borrower solely to: (i) refinance the existing Indebtedness of the Borrower in respect of the Property, and (ii) to finance specific capital expenditures from time to time as may be approved in writing by the Required Lenders.
3.03 Non-Revolving Nature; Advances
Facility B is a non-revolving facility, and any Repayment under Facility B may not be reborrowed. The Borrower shall be entitled to request not more than eight (8) Advances under Facility B. The amount of the first Advance under Facility B shall not exceed [Redacted: Threshold]. The amount of each Advance (for greater certainty, specifically including the first Advance) under Facility B shall not exceed an amount equal to (i) fifty percent (50%) of the Property Lending Value at the time of such Advance, less (ii) the aggregate of all previous Advances under Facility B.
3.04 Repayment
(a) The Borrower shall make a Repayment under Facility B in an amount equal to Fifty Five Million ($55,000,000) on December 1, 2020.
(b) On the last Business Day of each Fiscal Quarter commencing with the first Fiscal Quarter ending February 28, 2021, the Borrower shall make a Repayment under Facility B in an amount equal to two and one-half percent (2.5%) of the Outstanding Principal Amount under Facility B on December 1, 2020; after giving effect to the repayment required under Section 3.04(a) and the remaining balance of the Outstanding Principal Amount under Facility B shall be due and payable on the Maturity Date.
(c) The following Repayments shall be required in addition to all other Repayments required under this Agreement:
(i) If any Company receives net proceeds from a policy of insurance (other than from a liability insurance policy as a result of a legal claim or settlement of a lawsuit that one used to pay for settlement costs and legal expenses), the Borrower shall make a Repayment in an amount equal to such net proceeds within three (3) Business Days after such net proceeds are received, except to the extent that such proceeds are permitted to be retained as provided in Section 8.08.
(ii) If any Company receives net proceeds from an Equity Issuance or a transaction involving the creation of Subordinated Debt (other than the issuance of Permitted Convertible Notes), within five (5) days after receipt of such net proceeds the Borrower shall make a Repayment in an amount equal to the portion of such net proceeds, except: (i) net proceeds from the Permitted Issuance; and (ii) to the extent (if any) otherwise consented to in writing by the Agent upon the instructions of the Required Lenders acting reasonably. If any portion of such Repayment cannot be applied against the Outstanding Principal Amount until the maturity of one or more outstanding Bankers' Acceptances, the Agent shall deposit such portion of the Repayment in an interest-bearing account in the name of the Borrower and apply such portion (including accrued interest thereon) against the Outstanding Principal Amount upon the maturity of such Bankers' Acceptances.
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(iii) If any Company receives net proceeds equal to or greater than [Redacted: Threshold] from a transaction involving the sale, leasing or other disposition of any individual asset or group of related assets in one or a series of related transactions (other than sales in the ordinary course of business or the disposition of Investments permitted hereunder), within one hundred eighty (180) days after receipt of such net proceeds the Borrower shall make a Repayment in an amount equal to the portion of such net proceeds which have not been applied (a) to purchase similar assets (other than current assets) or (b) in respect of Capital Expenditures incurred in accordance with Section 7.02(r).
As used herein, "net proceeds" in respect of any above transaction means the gross amount payable in respect of such transaction less any Taxes, sales commissions and other reasonable expenses incurred in connection with the transaction, usual and reasonable adjustments in connection with the transaction and any other amount specifically approved in writing by the Required Lenders acting reasonably.
(d) Each Repayment under paragraph (b) above shall be applied against the Borrower's obligation to make the remaining scheduled Repayments under Facility B in reverse chronological order. In addition, if a Repayment is required under paragraph (b) above and all Obligations under Facility B have been repaid in full, such Repayment shall be applied against the Outstanding Principal Amount under Facility A, but for greater certainty such Repayment shall not reduce the Facility A Limit and the Borrower shall thereafter be entitled to receive further Advances under Facility A upon the satisfaction of all applicable conditions precedent.
3.05 Availment Options
Subject to the restrictions contained in this Agreement (and in particular, Sections 5.02 and 5.03), the Borrower may receive Advances under Facility B by any one or more of the following Availment Options (or any combination thereof):
(a) Prime-Based Loans; or
(b) Bankers' Acceptances from BA Lenders with a maturity between 28 and 182 days (inclusive), subject to availability; or
(c) BA Equivalent Loans from Non-BA Lenders with a maturity between 28 and 182 days (inclusive), subject to availability.
Bankers' Acceptances and BA Equivalent Loans will not be issued with a maturity date later than the Maturity Date. The Borrower may convert all or any portion of the Outstanding Principal Amount under Facility B in the form of any above Availment Option into another form of Availment Option, subject to and in accordance with the terms and conditions of this Agreement (but for greater certainty, Bankers' Acceptances and BA Equivalent Loans may not be converted into another Availment Option prior to the maturity thereof).
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3.06 Interest and Fees
In respect of Advances under Facility B, the Borrower agrees to pay the following:
(a) interest on Prime-Based Loans at the Prime Rate plus the Applicable Margin per annum, payable monthly in arrears on the last day of each and every month;
(b) in respect of each Bankers' Acceptance, a stamping fee equal to the Applicable Margin, multiplied by the face amount of the Bankers' Acceptance with the product thereof further multiplied by the number of days to maturity of the Bankers' Acceptance and divided by three hundred and sixty five (365), payable at the time of acceptance; and
(c) in respect of each BA Equivalent Note, a stamping fee equal to the Applicable Margin multiplied by the face amount of the BA Equivalent Note with the product thereof further multiplied by the number of days to maturity of the BA Equivalent Note and divided by three hundred and sixty five (365), payable at the time of acceptance.
Except as otherwise provided in this Agreement, such payments shall be made to the Agent on behalf of the Lenders; and the Agent shall promptly remit to each Lender its Proportionate Share of each such payment.
3.07 Voluntary Repayments
Upon not less than one (1) Business Days' prior written notice to the Agent, the Borrower may make a Repayment on account of the Outstanding Principal Amount under Facility B (except Bankers' Acceptances and BA Equivalent Loans prior to the maturity thereof) in a minimum amount of One Hundred Thousand Dollars ($100,000) without payment of any penalty or fee, provided that the Borrower shall also concurrently unwind Hedge Transactions to the extent necessary such that the aggregate notional amount of all outstanding Hedge Transactions does not exceed the Outstanding Principal Amount under Facility B at such time. Any such voluntary Repayment shall be applied against the Borrower's obligations to make scheduled Repayments under Facility B (including the final Repayment of the Outstanding Principal Amount on the Maturity Date) in reverse chronological order; and the Facility B Limit shall be automatically and permanently reduced by any such voluntary Repayment. The Agent shall promptly remit to each Lender its Proportionate Share of any such voluntary Repayment. For greater certainty however, Bankers' Acceptances and BA Equivalent Loans may not be repaid prior to the maturity thereof.
ARTICLE IV - ANCILLARY CREDIT PRODUCTS
4.01 Hedge Transactions
(a) BMO (for greater certainty, in its capacity as a Lender hereunder and not in its capacity as the Agent) shall act as lead arranger for all Hedge Transactions to be entered into between the Borrower and the Lenders hereunder, and shall offer each Lender an opportunity to participate in a pro-rata portion of such Hedge Transactions pursuant to such arrangements as may be agreed between BMO and the respective Lenders. Each Hedge Transaction entered into between the Borrower and a Lender shall be upon such terms as may be offered by such Lender in its discretion, subject to the terms of this Agreement.
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(b) Hedge Transactions may not be entered into for speculative purposes. Without limiting the generality of the foregoing, Hedge Transactions will not be entered into which could result in the aggregate notional amount of all Hedge Transactions outstanding at any time being in excess of the Outstanding Principal Amount under Facility B at such time. The Borrower shall promptly take all actions which may be necessary or desirable from time to time to unwind one or more Interest Rate Hedging Agreements in whole or in part to the extent necessary in order that the aggregate notional amount of all Hedge Transactions outstanding at such time does not exceed the Outstanding Principal Amount under the Facilities at such time.
(c) Currency Hedge Transactions may only be entered into in respect of Qualified Currencies. The term of each Currency Hedge Transaction shall expire not later than the earlier of (a) twelve (12) months from the date of such Currency Hedge Transaction, and (b) the Maturity Date.
(d) The term of each Interest Rate Hedge Transaction shall expire not later than the Maturity Date.
(e) In respect of each Hedge Transaction entered into between the Borrower and a Lender, the Borrower agrees to execute and deliver to such Lender all agreements as it may reasonably require (for greater certainty, specifically including an ISDA master agreement).
(f) The Security shall secure all obligations owing under or in respect of each Hedge Transaction; and the priority of such obligations shall rank on a pari passu basis with all other Obligations.
(g) The Borrower will not enter into or be a party to any Hedge Transactions with any Persons other than the Lenders.
(h) Each Hedge Transaction between the Borrower and a Lender shall include such Lender's standard early termination events. Without limiting the generality of the foregoing, each Hedge Transaction shall also stipulate that the termination of all or any of the Facilities shall constitute an Early Termination Event (as defined in the applicable ISDA Master Agreement) and the Affected Party (as defined in such ISDA Agreement) shall be the counter-party to the Lender in such contract. The Lender shall have the right to choose the payment measure and the payment method (as such terms are understood in the ISDA Master Agreement) in respect of such Early Termination Event.
4.02 MasterCard Line
Subject to the terms and conditions of this Agreement, BMO may in its discretion establish a line of credit for the Borrower in such principal amount as may be agreed between BMO and the Borrower from time to time, in respect of corporate MasterCards in Qualified Currencies issued by BMO to the Borrower`s employees to be used for corporate purposes only in Approved Jurisdictions, including purchasing supplies and funding miscellaneous business expenses (the "MasterCard Line"). BMO shall issue MasterCards upon request by the Borrower from time to time upon the completion of, and in accordance with, the credit card agreements and other documents customarily required by BMO in connection with the issuance of corporate MasterCards. The Borrower shall pay interest and fees in connection with loans and advances made under the MasterCard Line at the rates and at the times set out in such credit card agreements and other documents, and the Borrower`s indebtedness thereunder, including accrued and unpaid interest thereon, shall mature and become due and payable in full by the Borrower on the earlier of (i) the date specified in the such agreements, and (ii) the Maturity Date.
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4.03 Service Agreements
BMO may in its discretion from time to time enter into agreements with the Borrower or any other Company in respect of cash management, payroll or other banking services (collectively, "Service Agreements"). The Borrower hereby agrees to indemnify and save harmless BMO in respect of all losses which it may suffer in respect of the failure of any Company to observe and perform its obligations under any Service Agreement except to the extent that such failure is due to BMO's gross negligence or wilful misconduct, and for all purposes of this Agreement such Service Agreement shall be deemed to have been entered into between BMO and the Borrower. The Borrower agrees to pay to BMO (for its own account) fees in respect of Service Agreements as they may agree in writing from time to time.
ARTICLE V - GENERAL CONDITIONS
5.01 Matters relating to Interest
(a) Unless otherwise indicated, interest on any outstanding principal amount and all other amounts payable hereunder (including unpaid interest) shall be calculated daily and shall be payable monthly in arrears on the last day of each and every month; and if the maturity date of a Facility is not the end of a month, all accrued and unpaid interest in respect of such Facility shall be paid on such maturity date. If any day on which interest is payable is not a Business Day, the interest payment due on such day shall be made on the next Business Day, and interest shall continue to accrue on the said principal amount and shall also be paid on such next Business Day. Interest shall accrue from and including the day upon which an Advance is made or is deemed to have been made, and ending on but excluding the day on which such Advance is repaid or satisfied. Any change in the Prime Rate shall cause an immediate adjustment of the interest rate applicable to Prime-Based Loans without the necessity of any notice to the Borrower.
(b) Unless otherwise stated, in this Agreement if reference is made to a rate of interest, fee or other amount "per annum" or a similar expression is used, such interest, fee or other amount shall be calculated on the basis of a year of three hundred and sixty-five (365) or three hundred and sixty-six (366) days, as the case may be. If the amount of any interest, fee or other amount is determined or expressed on the basis of a period of less than one (1) year of three hundred and sixty-five (365) or three hundred and sixty-six (366) days, as the case may be, the equivalent yearly rate is equal to the rate so determined or expressed, divided by the number of days in the said period, and multiplied by the actual number of days in that calendar year. The Agent agrees that promptly upon request by the Borrower from time to time it will advise the Borrower of the Prime Rate and CDOR in effect at such time (or during any other period prior to such time), and will assist the Borrower in calculating the effective annual rate of interest required to be disclosed pursuant to section 4 of the Interest Act (Canada). The Borrower hereby irrevocably agrees not to plead or assert, whether by way of defence or otherwise, in any proceeding relating to this Agreement or any other Loan Documents, that the interest payable thereunder and the calculation thereof has not been adequately disclosed to the Borrower, whether pursuant to section 4 of the Interest Act (Canada) or any other Law.
(c) Notwithstanding any other provisions of this Agreement, if the amount of any interest, premium, fees or other monies or any rate of interest stipulated for, taken, reserved or extracted under the Loan Documents would otherwise contravene the provisions of section 347 of the Criminal Code (Canada), section 4 or section 8 of the Interest Act (Canada) or any successor or similar legislation, or would exceed the amounts which any Lender is legally entitled to charge and receive under any Law to which such compensation is subject, then such amount or rate of interest shall be reduced to such maximum amount as would not contravene such provision; and to the extent that any excess has been charged or received such Lender shall apply any such excess amount against the Outstanding Principal Amount under Facility A and refund such further excess amount to the Borrower.
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5.02 Notice Periods
(a) The Borrower shall provide written notice to the Agent in respect of Advances, Rollovers, Substitutions and Repayments as set out below:
(i) one (1) Business Day's notice is required before 10:00 a.m. Toronto time in respect of an Advance, Rollover or Substitution relating to a Prime Based Loan;
(ii) two (2) Business Days' notice is required before 10:00 a.m. Toronto time in respect of an Advance, Rollover or Substitution relating to a Bankers' Acceptance or a BA Equivalent Note;
(iii) three (3) Business Days' notice is required before 10:00 a.m. Toronto time in respect of the issuance of a Letter of Credit;
(iv) notice is required for each voluntary Repayment under Facility B in accordance with Section 3.07, as applicable; and
(v) except as provided in clauses (i), (ii) and (iii) above:
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two (2) Business Days' notice is required before 10:00 a.m. Toronto time in respect of any Advance, Rollover, Substitution or voluntary Repayment if the amount is equal to or less than $25,000,000; and
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three (3) Business Days' notice is required before 10:00 a.m. Toronto time in respect of any Advance, Rollover, Substitution or voluntary Repayment if the amount is greater than $25,000,000;
(b) Notice of any Advance, Rollover or Substitution referred to in paragraph (a) above shall be given in the form of a Draw Request, Rollover Notice or Substitution Notice, as the case may be, attached hereto as Exhibits, and shall be given to the Agent at its address in Section 13.08.
(c) If notice is not provided as contemplated herein with respect to the maturity of any Bankers' Acceptance or BA Equivalent Loan, the Agent may in its discretion convert such Bankers' Acceptance or BA Equivalent Loan upon its maturity into a Prime-Based Loan.
(d) Any conversion from one form of Availment Option to another shall be subject to satisfaction of all of terms and conditions applicable to the form of the new Availment Option.
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5.03 Minimum Amounts, Multiples and Procedures re Draws, Substitutions and Repayments
(a) Each request by the Borrower for an Advance or Substitution in the form of a Prime-Based Loan shall be in a minimum amount of $500,000 and a multiple of $100,000.
(b) Each request by the Borrower for an Advance by way of Bankers' Acceptances and BA Equivalent Notes shall be for an aggregate face amount of Bankers' Acceptances and BA Equivalent Notes of not less than $5,000,000 and in a multiple of $100,000, and in such amount as will result in the face amount of each Bankers' Acceptance or BA Equivalent Note issued by a Lender being in a multiple of $1,000.
(c) Upon receipt of a Draw Request, the Agent shall promptly notify each Lender of the contents thereof and such Lender's Proportionate Share of the Advance. Such Draw Request shall not thereafter be revocable.
(d) Each Advance shall be made by the applicable Lenders to the Agent at its address referred to in Section 13.08 or such other address as the Agent may designate by notice in writing to the Lenders from time to time. Each Lender shall make available its Proportionate Share of each said Advance to the Agent. Unless the Agent determines that any condition of the Advance has not been satisfied or waived, the Agent shall make the funds so received from the Lenders available to the Borrower by 2:00 p.m. (Toronto time) on the requested date of the Advance. No Lender shall be responsible for any other Lender's obligation to make available its Proportionate Share of the said Advance.
(e) The Borrower agrees to deliver in favour of each Lender such other agreements and documentation as such Lender may reasonably require (not inconsistent with this Agreement) in respect of such Lender's requirements for the acceptance of Bankers' Acceptances or the issuance of BA Equivalent Notes.
(f) All payments of principal, interest and other amounts made by the Borrower to the Agent in respect of the Outstanding Principal Amount shall be paid by the Agent to the respective Lenders, each in accordance with its Proportionate Share. For greater certainty, however, stamping fees in respect of Bankers' Acceptances and BA Equivalent Notes shall be received and retained by the respective Lenders which issued or accepted such Bankers' Acceptances and BA Equivalent Notes.
5.04 Place of Repayments
(a) All payments of principal, interest and other amounts to be made by the Borrower to the Agent pursuant to this Agreement shall be made at its address noted in Section 13.08 or to such other address as the Agent may direct in writing from time to time. All such payments received by the Agent on a Business Day before 2:00 p.m. (Toronto time) shall be treated as having been received by the Agent on that day; payments made after such time on a Business Day shall be treated as having been received by the Agent on the next Business Day.
(b) Whenever any payment shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. Interest shall continue to accrue and be payable thereon as provided herein, until the date on which such payment is received by the Agent.
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(c) The Borrower hereby authorizes and directs the Agent to debit automatically, by mechanical, electronic or manual means, any bank account maintained by it with the Agent for all amounts due and payable by it under this Agreement, including the repayment of principal and the payment of interest, fees and all charges relating to the operation of such bank account. The Agent shall notify the Borrower as to the particulars of such debits in accordance with its usual practice.
5.05 Evidence of Obligations (Noteless Advances)
The Agent shall open and maintain, in accordance with its usual practice, accounts evidencing the Obligations; and the information entered in such accounts shall constitute prima facie evidence of the Obligations. The Agent may, but shall not be obliged to, request the Borrower to execute and deliver promissory notes from time to time as additional evidence of the Obligations, in form and substance satisfactory to the Agent acting reasonably.
5.06 Determination of Equivalent Amounts
Whenever it is necessary or desirable at any time to determine the Equivalent Amount in Canadian Dollars of an amount expressed in any other Qualified Currency, or vice-versa (specifically including for greater certainty the determination of whether the Outstanding Principal Amount under Facility A exceeds the Facility A Limit), the Equivalent Amount shall be determined by reference to the Exchange Rate on the date of such determination. Notwithstanding the foregoing, however, for the purpose of determining fees applicable to Letters of Credit issued under Facility A and the standby fee applicable to Facility A, the Agent shall make such determination based upon the Exchange Rate in effect on the first (1st) Business Day of the month in which such determination is made.
5.07 Commitment to Purchase Bankers' Acceptances and BA Equivalent Notes
(a) In connection with the issuance of each Bankers' Acceptance or BA Equivalent Note, the amount payable by the purchaser thereof to the Borrower shall be determined in accordance with the following formula:
_____F_____
1 + (D x T/365)
where:
F means the face amount of such Bankers' Acceptance or BA Equivalent Note,
D means the discount rate, and
T means the number of days to maturity of such Bankers' Acceptance or BA Equivalent Note,
with the amount as so calculated being rounded up or down to the fifth decimal place and with 0.000005 being rounded up.
(b) Each BA Lender which is a bank listed in Schedule I of the Bank Act (Canada) agrees to purchase those Bankers' Acceptances which it has accepted at a discount from the face amount thereof equal to the CDOR Rate for the relevant period in effect on the issuance date thereof; provided however that if BMO is the only BA Lender under a Facility, the discount rate shall be the applicable discount rate established by BMO on the issuance date thereof.
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(c) Each BA Lender which is a bank listed in Schedule II or Schedule III of the Bank Act (Canada) agrees to purchase those Bankers' Acceptances which it has accepted at a discount from the face amount thereof equal to the CDOR Rate for the relevant period in effect on the issuance date thereof plus a premium determined by such BA Lender not in excess of one-tenth of one percent (0.10%) per annum.
(d) Each Non-BA Lender agrees to purchase BA Equivalent Notes issued by it hereunder at a discount from the face amount thereof equal to the CDOR Rate for the relevant period in effect on the issuance date thereof.
(e) The discount applicable to each Bankers' Acceptances and BA Equivalent Note shall be determined on the basis of a year of three hundred and sixty five (365) days.
5.08 Bankers' Acceptances
The following provisions are applicable to Bankers' Acceptances issued by the Borrower and accepted by any BA Lender hereunder:
Payment of Bankers' Acceptances
(a) The Borrower agrees to provide for each Bankers' Acceptance by payment of the face amount thereof to the Agent on behalf of the BA Lender on the maturity of the Bankers' Acceptance or, prior to such maturity, on the Acceleration Date; and the Agent shall remit the said amount to such BA Lender and such BA Lender shall in turn remit such amount to the holder of the Bankers' Acceptance. If the Borrower fails to provide for the payment of the Bankers' Acceptance accordingly, any amount not so paid shall be immediately payable by the Borrower to the Agent on behalf of the BA Lender together with interest on such amount calculated daily and payable monthly at the rate and in the manner applicable to Prime-Based Loans. The Borrower agrees not to claim any days of grace for the payment at maturity of any Bankers' Acceptance and agrees to indemnify and save harmless the BA Lender in connection with all payments made by the BA Lender (or by the Agent on its behalf) pursuant to Bankers' Acceptances accepted by the BA Lender, together with all reasonable costs and expenses incurred by the BA Lender in this regard. The Borrower hereby waives any defences to payment which might otherwise exist if for any reason a Bankers' Acceptance is held by the BA Lender for its own account at maturity.
Availability of Bankers' Acceptances
(b) If at any time and from time to time the Agent determines that there no longer exists a market for Bankers' Acceptances for the term requested by the Borrower, or at all, the Agent shall so advise the Borrower, and in such event the BA Lenders shall not be obliged to accept and the Borrower shall not be entitled to issue Bankers' Acceptances.
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Power of Attorney
(c) The Borrower hereby appoints each BA Lender as its true and lawful attorney to complete and issue Bankers' Acceptances on behalf of the Borrower in accordance with written (including facsimile) transmitted instructions provided by the Borrower to the Agent on behalf of such BA Lender, and the Borrower hereby ratifies all that its said attorney may do by virtue thereof except anything done that constitutes negligence or wilful misconduct by the BA Lender. The Borrower agrees to indemnify and hold harmless the Agent and the BA Lenders and their respective directors, officers and employees from and against any charges, complaints, costs, damages, expenses, losses or liabilities of any kind or nature which they may incur, sustain or suffer, arising from or by reason of acting, or failing to act, as the case may be, in reliance upon this power of attorney, except to the extent caused by the negligence or wilful misconduct of the Agent or the BA Lender or their respective directors, officers and employees. The Borrower hereby agrees that each Bankers' Acceptance completed and issued and accepted in accordance with this Section by a BA Lender on behalf of the Borrower is a valid, binding and negotiable instrument of the Borrower as drawer and endorser. The Borrower agrees that each BA Lender's accounts and records will constitute prima facie evidence of the execution and delivery by the Borrower of Bankers' Acceptances. This power of attorney shall continue in force until the earlier of (i) delivery of written notice of revocation by the Borrower to the Agent on behalf of the BA Lender at the Agent's address provided in Section 13.08, and (ii) the termination of this Agreement.
5.09 BA Equivalent Notes
Each Non-BA Lender will not accept Bankers' Acceptances hereunder, and shall instead from time to time make BA Equivalent Loans to the Borrower. Each BA Equivalent Loan shall be evidenced by a non-interest bearing promissory note payable by the Borrower to the Non-BA Lender substantially in the form of Exhibit "H" attached hereto, which will be purchased by the Non-BA Lender. Each BA Equivalent Note shall be negotiable by the Non-BA Lender without notice to or the consent of the Borrower, and the holder thereof shall be entitled to enforce such BA Equivalent Note against the Borrower free of any equities, defences or rights of set-off that may exist between the Borrower and the Non-BA Lender. In this Agreement, all references to a BA Equivalent Note shall mean the loan evidenced thereby if required by the context; and all references to the "issuance" of a BA Equivalent Note by a Non-BA Lender and similar expressions shall mean the making of a BA Equivalent Loan by the Non-BA Lender which is evidenced by a BA Equivalent Note. The following provisions are applicable to each BA Equivalent Loan made by a Non-BA Lender to the Borrower hereunder:
Payment of BA Equivalent Notes
(a) The Borrower agrees to provide for each BA Equivalent Note by payment of the face amount thereof to the Agent on behalf of the Non-BA Lender on the maturity of the BA Equivalent Note or, prior to such maturity, on the Acceleration Date; and the Agent shall remit the said amount to such Non-BA Lender and such Non-BA Lender shall in turn remit such amount to the holder of the BA Equivalent Note. If the Borrower fails to provide for the payment of the BA Equivalent Note accordingly, any amount not so paid shall be immediately payable by the Borrower to the Agent on behalf of the Non-BA Lender together with interest on such amount calculated daily and payable monthly at the rate and in the manner applicable to Prime-Based Loans. The Borrower agrees not to claim any days of grace for the payment at maturity of any BA Equivalent Note and agrees to indemnify and save harmless the Non-BA Lender in connection with all payments made by the Non-BA Lender (or by the Agent on its behalf) pursuant to BA Equivalent Notes accepted by the Non-BA Lender, together with all reasonable costs and expenses incurred by the Non-BA Lender in this regard. The Borrower hereby waives any defences to payment which might otherwise exist if for any reason a BA Equivalent Note is held by the Non-BA Lender for its own account at maturity.
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Availability of BA Equivalent Loans
(b) The Non-BA Lender shall have no obligation to make BA Equivalent Loans during any period in which the BA Lenders' obligation to issue Bankers' Acceptances is suspended pursuant to section 3.5 of the CBA Model Provisions.
Power of Attorney
(c) The Borrower hereby appoints the Non-BA Lender as its true and lawful attorney to complete BA Equivalent Notes on behalf of the Borrower in accordance with written (including facsimile) transmitted instructions delivered by the Borrower to the Agent, and the Borrower hereby ratifies all that its said attorney may do by virtue thereof except anything done that constitutes negligence or wilful misconduct by the Non-BA Lender. The Borrower agrees to indemnify and hold harmless the Agent and the Non-BA Lender and their respective directors, officers and employees from and against any charges, complaints, costs, damages, expenses, losses or liabilities of any kind or nature which they may incur, sustain or suffer, arising from or by reason of acting, or failing to act, as the case may be, in reliance upon this power of attorney except to the extent caused by the negligence or wilful misconduct of the Agent or the Non-BA Lender or their respective directors, officers and employees. The Borrower hereby agrees that each BA Equivalent Note completed by the Non-BA Lender on behalf of the Borrower is a valid, binding and negotiable instrument of the Borrower as drawer and endorser. The Borrower agrees that the Non-BA Lender's accounts and records will constitute prima facie evidence of the execution and delivery by the Borrower of BA Equivalent Notes. This power of attorney shall continue in force until the earlier of (i) delivery of written notice of revocation by the Borrower to the Agent on behalf of the Non-BA Lender at the Agent's address provided in Section 13.08, and (ii) the termination of this Agreement.
5.10 No Repayment of Certain Availment Options
The Borrower acknowledges that Bankers' Acceptances and BA Equivalent Loans may not be repaid prior to the maturity thereof. If prior to the maturity of such Availment Option the Agent receives any funds from the Borrower or any other Person which are intended to be applied as a Repayment thereof, the Agent may retain such funds without any obligation to invest such funds or pay interest thereon, and shall apply such funds against such Availment Option on the scheduled maturity date thereof.
5.11 Illegality
The obligation of any Lender to make Advances shall be suspended if and for so long as it is unlawful or impossible for such Lender to maintain its Commitment or make Advances hereunder as a result of the adoption of any Applicable Law or any change in any Applicable Law, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender with any request or directive (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency.
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5.12 Anti-Money Laundering
The Borrower acknowledges that pursuant to AML Legislation the Agent and the Lenders may be required to obtain, verify and record information regarding the Companies and their respective directors, authorized signing officers, direct or indirect shareholders, partners or other persons in control of the Companies and the transactions contemplated hereby. The Borrower shall promptly provide all such information, including any supporting documentation and other evidence, as may be requested by the Agent or any Lender, or any prospective assignee or participant of a Lender or the Agent, in order to comply with any applicable AML Legislation, whether now or hereafter in existence. If the Agent has ascertained the identity of any Company, or any authorized signatories of any Company, for the purposes of applicable AML Legislation, then the Agent shall:
(a) be deemed to have done so as an agent for each Lender, and this Agreement shall constitute a "written agreement" in such regard between each Lender and the Agent within the meaning of applicable AML Legislation; and
(b) provide each Lender with copies of all information obtained in such regard without any representation or warranty as to its accuracy or completeness.
Notwithstanding the foregoing each Lender acknowledges and agrees that the Agent has no obligation to ascertain the identity of any Company, or any authorized signatories of any Company, on behalf of such Lender or to confirm the completeness or accuracy of any information that the Agent obtains from any Company, or any such authorized signatory, in doing so.
5.13 Terrorist Lists
Each Company is and will remain in compliance in all material respects with all Canadian economic sanctions laws and implementing regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), the Criminal Code (Canada), the United Nations Act (Canada) and all similar applicable anti-money laundering and counter-terrorism financing provisions and regulations issued pursuant to any of the foregoing. No Company (i) is a Person designated by the Canadian government on any list set out in the United Nations Al-Qaida and Taliban Regulations, the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism or the Criminal Code (collectively, the "Terrorist Lists") with which a Canadian Person cannot deal with or otherwise engage in business transactions, (iii) is a Person who is otherwise the target of Canadian economic sanctions laws or (iv) is controlled by (including without limitation by virtue of such Person being a director or owning voting shares or interests), or acts, directly or indirectly, for or on behalf of, any Person or entity on a Terrorist List or a foreign government that is the target of Canadian economic sanctions prohibitions such that the entry into, or performance under, this Agreement or any other Loan Document would be prohibited under Canadian Law.
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ARTICLE VI - REPRESENTATIONS AND WARRANTIES
6.01 Representations and Warranties
The Borrower hereby represents and warrants to the Agent and the Lenders as follows:
(a) Status - Each Company has been duly incorporated (or amalgamated) and organized and is validly subsisting under the Laws of its jurisdiction of incorporation and is up-to-date in respect of all material corporate filings.
(b) Corporate Information - Schedule 6.01(b) attached hereto contains a list of the Companies (and each such Company shall be identified as the Borrower, a Secured Subsidiary or an Unsecured Subsidiary, as applicable) and the following information in respect of each Company: prior names and corporate predecessors, governing jurisdiction and all prior governing jurisdictions, registered office and principal place of business, all Approved Jurisdictions and all locations therein, the number and classes of its issued and outstanding shares, and (except in the case of the Borrower) a list of its shareholders including the number and class of shares held by each.
(c) Solvency - Each Company is Solvent.
(d) No Pending Changes - No Person has any agreement or option or any right or privilege (whether by Law, pre-emptive or contractual) capable of becoming an agreement, including convertible securities, warrants or convertible obligations of any nature, for the purchase of any properties or assets of any Company out of the ordinary course of business or for the purchase, subscription, allotment or issuance of any debt or equity securities of any Company.
(e) No Conflicting Agreements - Neither the execution and delivery of the Security, nor compliance with the terms, provisions and conditions of this Agreement or the Security will conflict with, result in a breach of, or constitute a default under the charter documents or by-laws of any Company or any agreement or instrument to which it is a party or is otherwise bound, and does not require the consent or approval of any Person, other than those which have been obtained.
(f) No Conflict with Charter Documents - There are no provisions in the charter documents, constitution or by-laws of any Company of or in any unanimous shareholder agreement affecting it which restrict or limit its powers to borrow money, issue debt obligations, guarantee the payment or performance of the obligations of others, or otherwise encumber all or any of its property, now owned or subsequently acquired.
(g) Loan Documents - The Borrower has the corporate capacity, power, legal right and authority to borrow from the Lenders, perform its obligations under this Agreement and provide the Security required to be provided by it hereunder; and each Secured Subsidiary has the corporate capacity, power, legal right and authority to guarantee payment to the Agent and the Lenders of the Borrower's Obligations and provide the Security required to be provided by it hereunder. The execution and delivery of the Loan Documents by the Secured Companies and the performance of their respective obligations therein have been duly authorized by all necessary corporate action. This Agreement and the other Loan Documents constitute legal, valid and binding obligations of the Secured Companies party thereto, enforceable against them in accordance with the terms and provisions thereof, subject to Laws of general application affecting creditors' rights (including Insolvency Legislation) and the discretion of the court in awarding equitable remedies.
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(h) Conduct of Business; Material Permits - The Companies do not own assets or carry on business in any jurisdiction which is not an Approved Jurisdiction. Each Company is in compliance in all material respects with all Applicable Laws of each jurisdiction in which it owns assets or carries on business and is duly licensed, registered and qualified to do business and is in good standing in each such jurisdiction; and all such licences, registrations and qualifications are valid and subsisting and in good standing. Attached hereto as Schedule 6.01(h) is a true and complete list of all Material Permits as at the Closing Date.
(i) Ownership of Assets; Specific Permitted Liens - The Companies own all assets required in order to carry on their businesses as presently conducted. Each Company owns, and possesses its assets free and clear of any and all Liens except for Permitted Liens. No Company has any commitment or obligation (contingent or otherwise) to grant any Liens except for Permitted Liens. No event has occurred which constitutes, or which with the giving of notice, lapse of time or both would constitute, a material default under any Lien which has been granted by any of the Companies. Schedule 6.01(i) attached hereto contains a true and complete list of all Specific Permitted Liens as at the Closing Date.
(j) Owned Properties - The Borrower is the registered and beneficial owner of the Property free and clear of any and all Liens except for Permitted Liens and Schedule 6.01(j) attached hereto is a complete list of the Owned Properties.
(k) Material Leased Properties - There are no Material Leased Properties other than those listed in Schedule 6.01(k) attached hereto. Schedule 6.01(k) attached hereto contains a true and complete list of all Material Leased Properties including in respect of each applicable lease the names of the parties, the municipal address and legal description of the Material Leased Property, the rent payable under the lease, the term of the lease and all renewal options, and the existence of any purchase option or right of first refusal in respect of the purchase of the Material Leased Property.
(l) Intellectual Property - Each Company possesses or has the right to use all Intellectual Property material to the conduct of its business, each of which is in good standing in all material respects; and has the right to use such Intellectual Property without violation of any material rights of others with respect thereto. Attached hereto as Schedule 5.01(l) is a list of all such material Intellectual Property held by the Companies as at the Closing Date, including a description of the nature of such rights. No Person has asserted any claim in respect of the validity of such Intellectual Property or the Companies' rights therein, and the Borrower is not aware of any basis for the assertion of any such claims. The Borrower is not aware of any material infringement of the Companies' rights under such Intellectual Property by other Persons. The conduct and operations of the businesses of each Company do not infringe, misappropriate, dilute or violate any Intellectual Property rights held by any other Person.
(m) Insurance - The Companies have obtained insurance which satisfies all requirements in Section 7.01(h) herein.
(n) Material Agreements - Each Material Agreement to which any Company is a party is in good standing and in full force and effect; and none of the Companies, or, to the best of the Borrower's knowledge, any of the other parties thereto, is in material breach of any of the terms or conditions contained therein. Attached hereto as Schedule 6.01(n) is a true and complete list of all Material Agreements to which the Companies are party as at the Closing Date.
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(o) Labour Agreements - Schedule 6.01(o) attached hereto contains a true and complete list of all contracts with labour unions and employee associations to which the Companies are a party as at the Closing Date, and the Borrower is not currently in discussions to enter into any other contracts with labour unions or employee associations or to establish any other labour union or employee association.
(p) Environmental Laws - Except to the extent disclosed in Schedule 6.01(p) attached hereto:
(i) each Company and its business, operations, assets, equipment, property, leaseholds and other facilities is in compliance in all material respects with all Requirements of Environmental Law, specifically including all Requirements of Environmental Law concerning the storage and handling of Hazardous Materials;
(ii) each Company holds all material permits, licenses, certificates and approvals from Governmental Authorities which are required in connection with air emissions, discharges to surface or groundwater, noise emissions, solid or liquid waste disposal, the use, generation, storage, transportation or disposal of Hazardous Materials and all other Requirements of Environmental Law;
(iii) there has been no material emission, spill, release, or discharge into or upon the air, soils (or any improvements located thereon), surface water or groundwater or the sewer, septic system or waste treatment, storage or disposal system servicing the premises, of any Hazardous Materials at or from any of the Properties;
(iv) no written complaint, order, directive, claim, citation, or notice from any Governmental Authority or any other Person has been received by any Company with respect to any of the Properties in respect of air emissions, spills, releases, or discharges to soils or improvements located thereon, surface water, groundwater or the sewer, septic system or waste treatment, storage or disposal systems servicing any of the Properties, noise emissions, solid or liquid waste disposal, the use, generation, storage, transportation, or disposal of Hazardous Materials or other Requirements of Environmental Law affecting the Properties;
(v) there are no legal or administrative proceedings, investigations or claims now pending, or to the Borrower's knowledge, threatened in writing, with respect to the presence on or under, or the discharge, emission, spill, radiation or disposal into or upon any of the Properties, the atmosphere, or any watercourse or body of water, of any Hazardous Material; nor are there any material matters under discussion between any Company and any Governmental Authority relating thereto; and there is no factual basis for any such proceedings, investigations or claims; and
(vi) the Companies have no material indebtedness, obligation or liability, absolute or contingent, matured or not matured, with respect to the storage, treatment, cleanup or disposal of any Hazardous Materials, including without limitation any such indebtedness, obligation, or liability under any Requirements of Environmental Law regarding such storage, treatment, cleanup or disposal.
(q) Litigation - There are no actions, suits or proceedings pending, or to the knowledge of the Borrower threatened, against any Company in any court or before or by any federal, provincial, municipal or other Governmental Authority except: (i) the litigation disclosed in Schedule 6.01(q) attached hereto; and (ii) other litigation in which all amounts claimed against the Companies do not in the aggregate exceed Five Hundred Thousand Dollars ($500,000).
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(r) Pension Plans - Schedule 6.01(r) attached hereto contains a true and complete list of all Pension Plans established by the Companies as at the Closing Date. The Companies are not party to any Defined Benefit Pension Plans. No steps have been taken to terminate any such Pension Plan (in whole or in part), no contribution failure has occurred with respect to any such Pension Plan sufficient to give rise to a Lien under any Applicable Laws of any jurisdiction, and no condition exists and no event or transaction has occurred with respect to any such Pension Plan which might result in the incurrence by any Company of any material liability, fine or penalty. Each such Pension Plan is in compliance in all material respects with all applicable pension benefits and tax Laws, (i) all contributions (including employee contributions made by authorized payroll deductions or other withholdings) required to be made to the appropriate funding agency in accordance with all Applicable Laws and the terms of such Pension Plan have been made in accordance with all Applicable Laws and the terms of such Pension Plan, (ii) to the extent applicable, all liabilities under such Pension Plan are funded, on a going concern and solvency basis, in accordance with the terms of the respective Pension Plans, the requirements of applicable pension benefits laws and of applicable regulatory authorities and the most recent actuarial report filed with respect to the Pension Plan, and (iii) no event has occurred and no conditions exist with respect to any such Pension Plan that has resulted or could reasonably be expected to result in such Pension Plan having its registration revoked or refused for the purposes of any applicable pension benefits or tax Laws or being placed under the administration of any relevant pension benefits regulatory authority or being required to pay any Taxes or penalties under any applicable pension benefits or tax Laws.
(s) Financial Statements - The most recent Year-end Financial Statements and Interim Financial Statements of the Borrower delivered to the Agent and the Lenders have been prepared in accordance with GAAP (except in the case of the Interim Financial Statements, subject to normal adjustments and the absence of footnotes) on a basis which is consistent with the previous fiscal period, and present fairly:
(i) the assets and liabilities (whether accrued, absolute, contingent or otherwise) and financial condition of the Borrower on a consolidated basis as at the dates therein specified;
(ii) the sales, earnings and results of operations of the Borrower on a consolidated basis during the periods covered thereby; and
(iii) in the case of the Year-end Financial Statements, the changes in financial position of the Borrower on a consolidated basis;
and the Companies have no material liabilities (whether accrued, absolute, contingent or otherwise) except as disclosed therein and liabilities incurred in the ordinary course of business which do not directly or indirectly pertain to financing activities; and since the dates of the said Year-end Financial Statements and Interim Financial Statements, as the case may be, no material liabilities have been incurred by the Companies except in the ordinary course of business and no Material Adverse Change has occurred.
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(t) Financial and Other Information - All financial and other information provided by or in respect of the Companies to the Agent and the Lenders was true, correct and complete in all material respects when provided. No information, exhibit, or report furnished by the Companies to the Agent or the Lenders contains any material misstatement of fact or omits to state a material fact or any fact necessary to make the statement contained therein not materially misleading in the circumstances in which it was made.
(u) No Guarantees - No Guarantees have been granted by any Company except for (i) Guarantees which comprise part of the Security; and (ii) Guarantees in respect of Permitted Funded Debt incurred by any other Company.
(v) Tax Returns - Each Company has duly and timely filed all tax returns required to be filed by it, and has paid all Taxes which are due and payable by it except for Taxes being contested in good faith and in respect of which reserves have been established in accordance with GAAP. Each Company has also paid all other Taxes, charges, penalties and interest due and payable under or in respect of all assessments and re-assessments of which it has received written notice except for Taxes being contested in good faith and in respect of which reserves have been established in accordance with GAAP. There are no actions, suits, proceedings, investigations or claims pending, or to the knowledge of the Borrower threatened in writing, against any Company in respect of Taxes, governmental charges or assessments except for any such actions, suits, proceedings, investigations or claims which are being contested in good faith and in respect of which reserves have been established in accordance with GAAP.
(w) Statutory Liens - Each Company has remitted on a timely basis all amounts required to have been withheld and remitted (including withholdings from employee wages and salaries relating to income tax, employment insurance and Canada Pension Plan contributions), goods and services tax and all other amounts which if not paid when due could result in the creation of a Statutory Lien against any of its property, except for Permitted Liens.
(x) Sanctions, etc. - Each Company and each of its Affiliates, and each of their respective directors, officers, employees and agents (i) is not a Sanctioned Person; and (ii) is not located, organized or resident in a country or territory that is or whose government is a Sanctioned Entity, and (iii) does not own or control any assets located in a country or territory that is or whose government is a Sanctioned Entity except for products sold to customers in any such country or territory in the ordinary course of business in compliance with applicable Sanctions laws. Each Company and each of its Affiliates does not knowingly derive any revenues from investments in, or transactions with Sanctioned Persons or Sanctioned Entities, except in compliance with applicable Sanctions laws. No proceeds of any Advance will be used to fund any operations in, finance any investments or activities in, or make any payments to, a Sanctioned Person or a Sanctioned Entity, except in compliance with applicable Sanctions laws.
(y) No Default, etc. - No Default or Event of Default has occurred and is continuing.
(z) Transactions with Related Persons - The Companies are not party to any contract, commitment or transaction (including by way of loan) with any Related Person, except (i) for the Material Agreements listed in Schedule 5.01(n) or (ii) on terms that are fair and reasonable and no less favourable to it than it would obtain in any comparable arm's length transaction with a Person that is not a Related Person.
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(aa) Full Disclosure - There are no facts known to the Borrower which could reasonably be expected to materially adversely affect the Secured Companies' ability to observe and perform their respective obligations under the Loan Documents.
6.02 Survival of Representations and Warranties
The Borrower acknowledges that the Agent and the Lenders shall rely upon the representations and warranties contained in this Article in connection with the establishment and continuation of the Facilities and also in connection with the entering into by any Lender of any Hedge Transaction with the Borrower. Notwithstanding any investigations which may be made by the Agent or the Lenders, the said representations and warranties shall survive the execution and delivery of this Agreement until full and final payment and satisfaction of the Obligations.
ARTICLE VII - COVENANTS
7.01 Positive Covenants
The Borrower hereby covenants and agrees with the Agent and the Lenders that it will, and will cause each of its Subsidiaries to:
(a) Prompt Payment - in the case of the Borrower, pay all principal, interest and other amounts due hereunder at the times and in the manner specified herein;
(b) Preservation of Corporate Existence, Material Permits, etc. - subject to Section 7.02(j), maintain its corporate existence in good standing, continue to carry on its business, preserve its rights, powers, licences, privileges, franchises and goodwill, including all Material Permits in all applicable jurisdictions, maintain all qualifications to carry on business in each applicable jurisdiction, and conduct its business in a proper and efficient manner so as to protect its property and income, in each case, in all material respects;
(c) Compliance with Laws - comply in all material respects with all Applicable Laws (specifically including, for greater certainty, all applicable Requirements of Environmental Law) and use the proceeds of all Advances hereunder for legal and proper purposes; and without limiting the generality of the foregoing the Borrower shall and shall cause each other Company to:
(i) manage and operate its business in all material respects in accordance with all Applicable Laws;
(ii) engage in Cannabis-Related Activities only to the extent that such Cannabis-Related Activities are (A) in an Approved Jurisdiction, and (B) in compliance with all Applicable Laws in such Approved Jurisdiction (including, without limitation on a federal, state, provincial, territorial and municipal basis);
(iii) ensure that all activities of the Companies relating to the cultivation, production and processing of Cannabis and Cannabis-related products occur solely in facilities licensed by Governmental Authorities in Approved Jurisdictions; and
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(iv) ensure that all activities of the Companies relating to the sale of Cannabis and Cannabis-related products occur solely in facilities licensed by Governmental Authorities in Approved Jurisdictions or between entities licensed by Governmental Authorities in Approved Jurisdictions;
(d) Payment of Taxes, etc. - pay when due all rents, Taxes, rates, levies, assessments and governmental charges, fees and dues lawfully levied, assessed or imposed in respect of its property which are material to the conduct of its business, and deliver to the Agent upon request receipts evidencing such payments; except for rents, Taxes, rates, levies, assessments and governmental charges, fees or dues in respect of which an appeal or review proceeding has been commenced, a stay of execution pending such appeal or review proceeding has been obtained or reserves have been established in accordance with GAAP; and the amounts in question do not in the aggregate materially detract from the ability of the Companies to carry on their businesses and to perform and satisfy all of their respective obligations hereunder;
(e) Maintain Records - maintain adequate books, accounts and records in accordance with GAAP;
(f) Maintenance of Assets - keep its property and assets (except obsolete assets) in good repair and working condition;
(g) Inspection - permit the Agent and its employees and agents to enter upon and inspect its properties, assets, books and records from time to time during normal business hours upon reasonable prior notice and in a manner which does not materially interfere with its business, and make copies of and abstracts from such books and records and discuss its affairs, finances and accounts with any of its officers, directors, accountants and auditors, and execute and deliver all consents and further assurances as may be necessary or desirable in order for the Agent and its agents to obtain information from Governmental Authorities and other third parties with respect to environmental matters;
(h) Insurance - obtain and maintain, from insurance companies acceptable to the Agent and the Lenders, acting reasonably, liability insurance, all-risks property insurance on a replacement cost basis (less a reasonable deductible not to exceed amounts customary in the industry for similar businesses and properties), builders' risk (or "course of construction") insurance in respect of any construction relating to the Property, business interruption insurance, product recall and liability insurance coverage in an amount of not less than Ten Million Dollars ($10,000,000), and insurance in respect of such other risks as are customary in the industry for similar businesses and properties (and having regard to the availability of insurance coverage in the market); all of which policies of insurance shall be in such amounts as are customary in the industry for similar businesses and properties; and the Borrower shall cause the interest of the Agent to be noted on property insurance policies as first mortgagee and loss payee (which policies shall include the standard mortgage clause approved by the Insurance Bureau of Canada (or an equivalent clause in other applicable jurisdictions)) and as an additional insured under liability insurance policies; and the Borrower shall provide the Agent with certificates of insurance and certified copies of such policies from time to time upon request;
(i) Insurance Report - within 30 days of the Original Closing Date cause the insurance consultant retained by the Agent (at the expense of the Borrower) to provide to the Agent an updated insurance report which includes confirmation by the insurance consultant that (A) the Agent's address has been corrected to its address set out in Section 13.08 herein on all policies of insurance; and (B) the improved property insurance policy includes a "stated amount" co-insurance clause;
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(j) Perform Obligations - fulfil all covenants and obligations required to be performed by it under those Loan Documents to which it is a party;
(k) Notice of Certain Events - provide written notice to the Agent of each of the following promptly after the occurrence thereof:
(i) any Default or Event of Default;
(ii) a material default by any Company under any agreement relating to Funded Debt in excess of $3,000,000;
(iii) receipt by any Company of notice of the termination or suspension of, or a material default under, any Material Agreement or Material Permit;
(iv) all amendments to Material Permits;
(v) all material correspondence and notices received from any Governmental Authority or stock exchange with respect to any Material Permit or any regulatory or other investigations into the Companies' business practices;
(vi) any changes in the identity of Responsible Persons, together with satisfactory evidence of security clearances for such Responsible Persons under the Cannabis Act or the Cannabis Regulations; and any rejection notice for new or renewal security clearance applications for each Responsible Person;
(vii) (a) the results of any facility audit by any Governmental Authority to the extent such results are material and negative; and (b) any warning document, letter or notice from any Governmental Authority that would have a material and negative impact on any Material Permit, together with the Company's action plan with respect thereto;
(viii) the issuance of any management letter to the Borrower by its auditor; and
(ix) the incorrectness of any representation or warranty contained herein in any material respect;
(l) Bank Accounts and Service Agreements - on or after August 31, 2020, maintain all of its bank accounts and Service Agreements with BMO and its Affiliates, except for bank accounts having an aggregate principal balance of less than [Redacted: Threshold] and in respect of which deposit account control agreements have been provided in favour of the Agent to the extent requested by the Agent upon the instructions of the Required Lenders;
(m) Use of Advances - utilize the proceeds of all Advances for the Companies' own business purposes; and not permit such proceeds to be used, directly or indirectly, by any other Person or for any other purpose;
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(n) Environmental Information - if requested by the Agent from time to time upon the instructions of the Required Lenders, acting reasonably: (i) provide the Agent with an environmental questionnaire in the Agent's standard form completed by a knowledgeable officer of the Borrower in respect of any Property; and (ii) if the information contained therein is inconsistent in any material respect with the representations in Section 6.01(p) herein, provide the Agent with a phase I environmental report in respect of such Property (and if recommended in such phase I report, a phase II environmental report), and promptly take all such action as may be required to comply with all reasonable recommendations contained in such report(s);
(o) Cash Collateral - in the case of the Borrower, (i) establish and maintain a bank account with the Agent and deposit and maintain cash collateral in such account, or (ii) deposit with the Agent deposit instruments in the name of the Secured Companies, in each case, in the amount of [Redacted: Threshold] at all times (the "Cash Collateral"); and
(p) Further Assurances - provide the Agent with such further information, financial data, documentation and other assurances as the Agent or the Lenders may reasonably require from time to time.
7.02 Negative Covenants
The Borrower hereby covenants and agrees with the Agent and the Lenders that it will not, and will ensure that each of its Subsidiaries does not, without the prior written consent of the Agent on behalf of the Required Lenders (or if required pursuant to Section 11.01, all Lenders acting unanimously), which consent may be withheld in their discretion unless otherwise expressly provided herein:
(a) Funded Debt - create, incur or assume any Funded Debt, except Permitted Funded Debt;
(b) Guarantees - become obligated under Guarantees, except: (i) Guarantees which comprise part of the Security; and (ii) Guarantees in respect of Permitted Funded Debt incurred by any other Secured Company;
(c) Liens - grant or suffer to exist any Lien in respect of any of its property, except Permitted Liens;
(d) Disposition of Assets - directly or indirectly sell, transfer, assign, lease or otherwise dispose of any of its assets (including, without limitation, Intellectual Property), except that:
(i) each Company may sell inventory and other assets in the ordinary course of business (but for greater certainty, a sale and leaseback transaction shall not be considered to be in the ordinary course of business);
(ii) each Company may sell or otherwise dispose of Investments listed in clauses (iii), (iv), (v) and (vi) of Section 7.02(e) in the ordinary course of business;
(iii) each Company may sell or transfer assets to any other Company, provided that the transferee has provided all Security required to be provided by it hereunder and no Default or Event of Default has occurred and is continuing or would exist immediately thereafter; and
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(iv) each Company may sell or otherwise dispose of assets (not including assets sold in the ordinary course of business) from time to time, provided that the fair market value of the assets which are the subject of each such disposition (in one or a series of related transactions) does not exceed [Redacted: Threshold] unless the proceeds from such sale are used to purchase similar assets within one hundred and eighty (180) days of receipt by such Company of such proceeds and no Default or Event of Default has occurred and is continuing or would exist immediately thereafter; and for greater certainty the Borrower shall be required to make a Repayment in connection with each such disposition to the extent required pursuant to Section 3.04;
(e) Investments - make or acquire any Investments, except that the following Investments may be made or acquired if both immediately before and immediately after each such Investment no Default or Event of Default has occurred and is continuing:
(i) Permitted Acquisitions;
(ii) Investments in the Secured Companies;
(iii) Investments in the Unsecured Companies in the maximum aggregate amount of [Redacted: Threshold];
(iv) the Investments listed in Schedule 7.02(iii) attached hereto;
(v) Investments in Cash Equivalents; and
(vi) other Investments in the aggregate maximum amount of [Redacted: Threshold];
(f) Certain Activities and Investments - directly or indirectly own assets or carry on business in any jurisdiction which is not an Approved Jurisdiction, except for Permitted Contingent Investments;
(g) Distributions - make any Distribution, without the prior written consent of the Agent.
(h) Certain Payments - make any payment in respect of principal, interest, fees or any other amounts in respect of:
(i) the Permitted Convertible Notes, except for regularly scheduled payments of interest in accordance with the terms thereof; or
(ii) any other Subordinated Debt, except to the extent expressly permitted herein or under the subordination and postponement agreement relating thereto;
(i) Permitted Convertible Notes -
(i) issue any Permitted Convertible Notes unless the following requirements have been satisfied: (A) the Borrower shall have provided a certificate to the Agent and the Lenders, together with such financial projections and other information as the Lenders may reasonably require, confirming that the Total Funded Debt to EBITDA Ratio will not exceed of 4.00:1 at the time of issuance of the Permitted Convertible Notes or at any time thereafter up to and including the Maturity Date; and (B) the trustee under the trust indenture in respect of the Permitted Convertible Notes shall have executed and delivered to the Agent an acknowledgement confirming the subordination and postponement provisions contained in such trust indenture; and
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(ii) after the issuance of the Permitted Convertible Notes (if any), agree to any material amendments to the terms and conditions thereof or the trust indenture relating thereto;
(j) Corporate Changes - materially change its capital structure or the nature of its business, or enter into any transaction whereby all or a substantial portion of its property, assets and undertaking would become the property of any other Person (other than a Company), whether by way of reconstruction, reorganization, recapitalization, consolidation, amalgamation, merger, transfer, sale or otherwise; provided however that any Unsecured Company which does not carry on business or own material assets may be dissolved;
(k) Material Agreements - agree or consent to any material amendment or termination of any Material Agreement;
(l) Defined Benefit Pension Plans - establish, assume or otherwise become a party to or liable under any Defined Benefit Pension Plan;
(m) New Subsidiaries - create or acquire any Subsidiary unless (i) all of the issued and outstanding shares in the capital of such Subsidiary are owned directly or indirectly by the Borrower; (ii) such new Subsidiary provides a Guarantee in respect of the Obligations and all Security required to be provided by it hereunder; and (iii) all of the issued and outstanding shares of such new Subsidiary are pledged to the Agent, and in each case accompanied by legal opinions as contemplated herein;
(n) Fiscal Year - change its Fiscal Year;
(o) Auditors - change its auditors to a firm that is not a nationally recognized auditing firm;
(p) Dealing with Related Persons - enter into any contract, carry out any transaction or otherwise have any dealings with Related Persons except (i) pursuant to and in accordance with the Material Agreements listed in Schedule 6.01(n) or (ii) on terms that are fair and reasonable and no less favourable to it than it would obtain in any comparable arm's length transaction with a Person that is not a Related Person;
(q) Use of Advances - use the proceeds of any Advance for any purposes other than those expressly contemplated in this Agreement; and without limiting the generality of the foregoing, the proceeds of any Advance will not be used, directly or indirectly, to lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture partner or other Person, to fund any operations in, finance any investments, business or activities in, or make any payments to, a Sanctioned Person or a Sanctioned Entity if such funding, financing or paying would result in a violation of Sanctions by any Person (including any Person participating in such Advance, whether as underwriter, advisor, investor or otherwise), or in any other manner that would result in a violation of Sanctions by any Person. The Agent and the Lenders in their sole and unfettered discretion may refuse to make any Advance or delay, block or refuse to process any transaction which they believe may result in a contravention of the foregoing covenant; or
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(r) Capital Expenditures - for the Fiscal Quarter ending August 31, 2020, to and including the Fiscal Quarter ending November 30, 2021, make any Capital Expenditures, except the Companies may make Capital Expenditures provided that no Default or Event of Default shall have occurred and be continuing or would exist immediately thereafter and such Capital Expenditures are financed by proceeds from (i) an Equity Issuance; (ii) an Advance under Facility B; or (iii) the disposition of assets or Investments of the Companies in accordance with this Agreement, to the extent that such proceeds are not required to be applied as a Repayment pursuant to Section 3.04(b)(ii) or Section 3.04(b)(iii);
7.03 Financial Covenants
The Borrower agrees to maintain on a consolidated basis, the amounts or financial ratios, as applicable, listed below:
1. the EBITDA of the Borrower shall not be less than the following amounts at the following times:
(a) for the Fiscal Quarter ending February 28, 2021: negative $4,000,000;
(b) for the Fiscal Quarter ending May 31, 2021: negative $3,000,000;
(c) for the Fiscal Quarter ending August 31, 2021: negative $1,750,000;
(d) for the Fiscal Quarter ending November 30, 2021: $2,750,000;
(e) for the Fiscal Quarter ending February 28, 2022: $4,300,000; and
(f) for the Fiscal Quarter ending May 31, 2022: $4,300,000.
2. The ratio of Total Funded Debt to Tangible Net Worth shall not exceed 0.50:1 at any time.
3. The Borrower shall maintain with the Agent not less than Twenty Million ($20,000,000) of Unrestricted Cash at all times (which, for greater certainty, shall include the Cash Collateral pledged pursuant to Section 8.01(i) herein).
7.04 Reporting Requirements
The Borrower agrees to deliver, or cause to be delivered (by email in accordance with Section 13.08), the following financial and other information to the Agent at the times indicated below:
(a) quarterly:
(i) within forty-five (45) days after the end of each Fiscal Quarter other than the last Fiscal Quarter in each Fiscal Year (or such other time period permitted under applicable Canadian securities laws) the Interim Financial Statements of the Borrower in respect of such Fiscal Quarter, together with a Compliance Certificate in respect of such Fiscal Quarter certified by the Chief Executive Officer, Chief Financial Officer or other senior officer of the Borrower acceptable to the Agent; and
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(ii) within (10) Business Days after the receipt by the Agent and the Lenders of the Interim Financial Statements of the Borrower in respect each Fiscal Quarter other than the last Fiscal Quarter, the consolidated financial forecast of the Borrower updated in respect of the most recently completed Fiscal Quarter, including projections in respect of profit and loss, balance sheet, cash flow, Capital Expenditures and financial covenant calculations, including disclosure of all material assumptions utilized and accompanied by management's discussion and analysis;
(b) annually:
(i) within ninety (90) days after the end of each Fiscal Year (or such other time period permitted under applicable Canadian securities laws) the Year-End Financial Statements of the Borrower in respect of such Fiscal Year, accompanied by a copy of the Borrower's auditor's letter to management; together with a Compliance Certificate in respect of such Fiscal Year certified by the Chief Executive Officer, Chief Financial Officer or other senior officer of the Borrower acceptable to the Agent; and
(ii) within (10) Business Days after the receipt by the Agent and the Lenders of the Year-End Financial Statements of the Borrower the annual consolidated operating budget of the Borrower for such Fiscal Year including projections in respect of profit and loss, balance sheet, cash flow, Capital Expenditures and financial covenant calculations, including disclosure of all material assumptions utilized and accompanied by management's discussion and analysis;
(c) annually, within one hundred and twenty (120) days after the end of each Fiscal Year, the unaudited, accountant prepared year-end financial statements of each Subsidiary of the Borrower;
(d) annually, not later than sixty (60) days after the commencement of each Fiscal Year:
(i) the annual consolidated operating budget of the Borrower for such Fiscal Year; and
(ii) evidence that all municipal and business taxes and assessments in respect of the Property are paid in full;
(e) concurrently with the delivery of all financial statements referred to above, a management-prepared reconciliation and all other information reasonably requested by the Lenders showing all adjustments required to reflect Adjusted GAAP;
(f) within five (5) Business Days following the completion of each Permitted Acquisition which is a Small Acquisition, a certificate of an officer of the Borrower containing details of such Permitted Acquisition and confirming that such acquisition constitutes a Permitted Acquisition;
(g) such additional information and documents as the Agent (upon the instructions of the Required Lenders) may reasonably require from time to time.
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ARTICLE VIII - SECURITY
8.01 Security to be Provided by the Companies
The Borrower agrees to provide (and to cause the Secured Subsidiaries to provide, as applicable) the security listed below as continuing security for the payment of the Obligations, specifically including for greater certainty all obligations of the Borrower to the respective Lenders pursuant to or arising in connection with Hedge Transactions and all other obligations of the Borrower arising under or in respect of this Agreement and the other Loan Documents:
(a) unlimited Guarantees in respect of the Obligations from all present and future Secured Subsidiaries;
(b) general security agreements creating a First-Ranking Security Interest in respect of all present and future property, assets and undertaking of the Secured Companies (for greater certainty, specifically including all shares and other equity interests held by each Secured Company in any other Company, provided that the certificates evidencing such shares and other equity interests, shall not be required to be delivered to the Agent unless and until requested in writing by the Agent upon the instructions of the Required Lenders), excluding non-transferable and non-assignable licenses and agreements;
(c) a collateral mortgage or debenture creating a First-Ranking Security Interest in respect of the Property in a maximum principal amount of not less than Two Hundred Million Dollars ($200,000,000) as security for all Obligations;
(d) to the extent requested by the Agent upon the instructions of the Required Lenders acting reasonably, security agreements creating a specific assignment and First-Ranking Security Interest in all or any of the Material Agreements, together with acknowledgements and consents from the other parties thereto; provided however that if the assignment of any Material Agreement as security requires the consent of the other contracting party thereto, the Borrower shall use reasonable commercial efforts to obtain such consent but if such consent is not provided the assignment of such Material Agreement as security shall not be required;
(e) to the extent requested by the Agent upon the instructions of the Required Lenders acting reasonably, security agreements creating a specific assignment and First-Ranking Security Interest in all or any of the Material Permits to the extent a security interest may be obtained therein, together with acknowledgements and consents from the issuers thereof to the extent available;
(f) to the extent requested by the Agent upon the instructions of the Required Lenders acting reasonably, and to the extent assignable by law, security agreements creating an assignment and First-Ranking Security Interest in respect of Intellectual Property of the Secured Companies which the Required Lenders consider to be material, together with any necessary consents from other Persons which may be required in connection with the granting of said assignments and security interests;
(g) to the extent requested by the Agent upon the instructions of the Required Lenders acting reasonably, assignments of bank accounts maintained by the Secured Companies with financial institutions other than BMO, including deposit account control agreements in favour of the Agent;
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(h) assignments all policies of insurance in respect of the Secured Companies (which requirement shall be satisfied if the Agent's interest as first mortgagee and loss payee is recorded on such policies);
(i) a pledge agreement from the Borrower creating a First-Ranking Security Interest in the Cash Collateral, together with a set off agreement in respect thereof; and
(j) such other security and further assurances as the Agent may reasonably require from time to time.
8.02 Security to be Provided by Others
The Borrower agrees to obtain and provide to the Agent the following (and it shall constitute an Event of Default if any item of listed below is not provided to the Agent):
(a) acknowledgement provided by the trustee under the trust indenture in respect of the Permitted Convertible Notes (if any) confirming the subordination and postponement provisions contained therein, prior to or concurrently with the issuance of such Permitted Convertible Notes;
(b) a subordination, postponement and standstill agreement from each holder of any other indebtedness which is intended to constitute Subordinated Debt, prior to or concurrently with the issuance of such Subordinated Debt; and
(c) if requested by the Agent upon the instructions of the Required Lenders from time to time, a Landlord Agreement in respect of any Material Leased Property, reasonably promptly following a written request by the Agent.
8.03 General Provisions re Security; Registration
The Security shall be in form and substance satisfactory to the Agent and the Required Lenders in their discretion. The Security shall be held by the Agent for the benefit of the Lenders. The Agent may require that any item of Security be governed by the Laws of the jurisdiction where the property subject to such item of Security is located. The Security shall be registered by the Borrower where necessary or desirable to record and perfect the charges contained therein, as determined by the Agent in its discretion, specifically including registrations in the Canadian Intellectual Property Office and, to the extent required by the Agent upon the instructions of the Required Lenders, fixture filings in respect of any personal property of the Secured Companies affixed to Real Property. To the extent requested in writing by the Agent upon the instructions of the Required Lenders, all share certificates evidencing issued and outstanding shares in the capital of each Secured Company (other than the Borrower) shall be delivered to the Agent, together with stock transfer powers of attorney executed in blank.
8.04 Opinions re Security
The Borrower shall cause to be delivered to the Agent the opinions of the solicitors for the Secured Companies regarding their corporate status, the due authorization, execution and delivery of the Security provided by them, all registrations in respect of the Security, the results of all corporate, personal property security and other customary searches in respect of the Secured Companies, title to the Properties and the results of all customary off-title enquiries relating thereto (such results to be satisfactory to the Agent and the Lenders) and the enforceability of such Security; all such opinions to be in form and substance satisfactory to the Agent and its counsel. In lieu of title opinions, the Borrower may at its option arrange for title insurance in respect of all of any of the Properties, the form and substance of which shall be satisfactory to the Agent and the Lenders.
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8.05 After-Acquired Property, Further Assurances
The Borrower shall execute and deliver from time to time, and cause each other Secured Company to execute and deliver from time to time, all such further documents and assurances as may be reasonably required by the Agent from time to time, not inconsistent with the terms of this Agreement, in order to provide the Security contemplated hereunder, specifically including: supplemental or additional security agreements, assignments and pledge agreements which shall include lists of specific assets to be subject to the security interests required hereunder.
8.06 Security for Hedge Transactions
If a Lender continues to be a party to one or more Hedge Transactions with the Borrower after all other indebtedness and obligations of the Borrower to such Lender hereunder have been repaid and satisfied in full (or assigned by such Lender to an assignee), for greater certainty such Lender shall continue to be a Lender for all purposes of this Agreement and the obligations under such Hedge Transactions shall continue to be secured by the Security as provided herein, but such Lender shall not thereafter be a "Required Lender" as such term is defined herein.
8.07 Agent May Obtain Insurance
If the Borrower does not provide the Agent with evidence of continuing insurance coverage which satisfies the requirements of this Agreement, the Agent may, but shall have no obligation to, purchase such insurance in order to protect the interests of the Agent and the Lenders in the Collateral. Such insurance may also, but need not, protect the Secured Companies' interests in the Collateral. The Borrower agrees to immediately reimburse the Agent upon demand for all costs and expenses incurred by the Agent in respect of the purchase of any such insurance, and until so paid such expenses shall constitute part of the Obligations, shall bear interest as provided in Section 10.09 and shall be secured by the Security.
8.08 Insurance Proceeds
If insurance proceeds become payable in respect of loss of or damage to any property owned by a Company, such proceeds shall be applied against the Obligations subject to the following exception. If no Event of Default has occurred and is continuing at such time, and if such proceeds are less than [Redacted: Threshold], the Lenders shall consent to the payment of such proceeds to such Company provided that:
(a) such property has been repaired or replaced within one hundred eighty (180) days after the event giving rise to the proceeds and the proceeds will reimburse such Company for payments it has made for such purpose; or
(b) the Borrower confirms in writing to the Agent that it will forthwith cause such proceeds to be used to repair or replace such property.
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8.09 Unsecured Subsidiaries
(a) The Borrower may by written notice to the Agent from time to time advise of its intention to designate, establish or acquire one or more Subsidiaries which the Borrower proposes to be exempted from the requirement to provide a Guarantee and Security pursuant to this Article VIII (collectively the "Unsecured Subsidiaries").
(b) As of the Closing Date, the Unsecured Subsidiaries are set out in Schedule 6.01(b).
(c) Notwithstanding the provisions of this Article VIII or any other provisions of this Agreement, the Unsecured Subsidiaries shall not be required to provide Guarantees and Security if all the following conditions are satisfied:
(i) no Default, Event of Default or Material Adverse Change has occurred and is continuing;
(ii) the aggregate value of the assets of all Unsecured Subsidiaries is less than five percent (5%) of the aggregate value of the assets of all Companies;
(iii) the earnings before deduction of interest, taxes, depreciation and amortization of the Unsecured Subsidiaries (determined in the same manner as EBITDA is determined in respect of the Companies on a consolidated basis) in the immediately preceding twelve (12) month fiscal period is less than five percent (5%) of the EBITDA of the Companies on a consolidated basis in such fiscal period; and
(iv) the Unsecured Subsidiaries do not carry on business and have no material assets, except to the extent as the Required Lenders otherwise agreed by in their discretion.
(d) The Borrower agrees to provide written notice to the Agent immediately if any one or more of the conditions listed in paragraph (c) are not satisfied at any time. If any one or more of the conditions listed in paragraph (c) are not satisfied at any time (and regardless of whether the Borrower has provided written notice in respect thereof), the Agent may, if instructed by the Required Lenders, in their discretion, by written notice to the Borrower require that Guarantees and Security be provided by any or all of the Unsecured Subsidiaries, but only to the extent necessary such that the conditions listed in paragraph (c) are satisfied. Upon receipt of such written notice the Borrower shall immediately take all such actions to cause the Unsecured Subsidiaries designated in such notice to provide Guarantees and Security in favour of the Agent, together with all ancillary documentation and legal opinions, required pursuant to this Article VIII.
(e) The designation of any Company as an Unsecured Subsidiary shall be reflected in Schedule 6.01(b).
ARTICLE IX - CONDITIONS PRECEDENT
9.01 Conditions Precedent to effectiveness of this Agreement
The amendments to the Previous Credit Agreement reflected in this Agreement shall become effective on the date (the "Closing Date") on which all of the following conditions have been satisfied (to the extent that such conditions have not previously been satisfied), in each case to the satisfaction of the Agent and the Lenders in their discretion:
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(a) The Agent shall have received a fully executed copy of this Agreement;
(b) The Agent shall have received a fully executed copy of a confirmation of all Security provided by each Secured Company prior to the Closing Date;
(c) the Agent shall have received an officer's certificate and certified copies of resolutions of the board of directors of the Borrower concerning the due authorization, execution and delivery of the Loan Documents to which it is a party, and such related matters as the Agent and the Lenders may reasonably require;
(d) the Agent shall have received a certificate of status, certificate of compliance or similar certificate for each Secured Company issued by its governing jurisdiction and each other jurisdiction in which it carries on business or holds any material assets;
(e) the Agent and the Lenders shall have received opinions from the solicitors for the Borrower regarding its corporate status, the due authorization, execution, delivery and enforceability of the Loan Documents provided by it, and such other matters as the Agent and the Lenders may reasonably require, in form and substance satisfactory to the Agent and the Lenders; and
(f) all applicable conditions precedent in Section 9.02 shall have been satisfied.
9.02 Conditions Precedent to all Advances
The Lenders shall have no obligation to make an Advance under any Facility unless, at the time of each such Advance, all of the following conditions have been satisfied, in each case to the satisfaction of the Agent and the Lenders:
(a) the representations and warranties in Section 6.01 shall be true and correct in all material respects as if made on the date of such Advance except to the extent such representations and warranties are made in respect of or as of a specific date or in respect of a specific period of time;
(b) all additional Security, if any, required to be provided at the time of such Advance shall have been executed and delivered and all registrations necessary or desirable in connection therewith shall have been made, and any other documentation required by the Agent shall have been executed and delivered, all in form and substance satisfactory to the Agent;
(c) the Borrower shall have given a Draw Request to the Agent in accordance with the notice requirements provided herein;
(d) no Default or Event of Default shall have occurred and be continuing, nor shall the making of the Advance result in the occurrence of a Default or Event of Default; and
(e) in respect of an Advance under Facility A the Borrower shall have provided a satisfactory a Compliance Certificate in respect of the most recent Fiscal Quarter.
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ARTICLE X - DEFAULT AND REMEDIES
10.01 Events of Default
The occurrence of any one or more of the following events, after the expiry of any applicable cure period set out below, shall constitute an event of default under this Agreement (an "Event of Default"):
(a) the Borrower or any other Secured Company fails to pay any (i) principal or interest payable under this Agreement or any other Loan Document when due; or (ii) fees or other obligations (other than principal and interest) under this Agreement or any other Loan Document when due and such non-payment continues for a period of three (3) Business Days;
(b) any representation or warranty provided by a Secured Company to the Agent or the Lenders herein or in any other Loan Document was incorrect in any material respects on the date which such representation or warranty was when made;
(c) the Borrower fails to perform or comply with any of the covenants in Section 7.03;
(d) any Secured Company fails to perform or comply with any of its covenants or obligations contained in this Agreement, the Security or any other agreement made between it and any Lenders (other than those in paragraphs (a), (b), and (c) above) after receipt of notice of such non-compliance from the Agent; provided that if such non-compliance is capable of remedy within thirty (30) days and such Secured Company diligently attempts to remedy such non-compliance and informs the Agent of its efforts in this regard, and such non-compliance is remedied within such period, then such non-compliance shall be deemed not to constitute an Event of Default;
(e) any Secured Company is in default in the payment or performance of any of its indebtedness or obligations under any agreement relating to Funded Debt (other than the Outstanding Principal Amount after the expiry of any grace or cure periods relating thereto) which in the aggregate principal amount then outstanding is in excess of Three Million Dollars ($3,000,000) and which results in such Funded Debt becoming due prior to its scheduled maturity;
(f) an Insolvency Event occurs in respect of any Secured Company;
(g) any Secured Company is in default in any material respect under any Material Agreement (after the expiry of any grace period or cure periods relating thereto), or agrees to the surrender or termination of any Material Agreement prior to the expiry date expressly set out therein, unless (i) such Secured Party is in discussions with the other party to such Material Agreement in order to cure such default and such other party has agreed in writing with such Secured Party that it will not terminate such Material Agreement or take any actions to enforce its rights and remedies thereunder and will continue to observe and perform its obligations thereunder as if such default had not occurred, or (ii) such Material Agreement is immediately replaced by a substantially similar Material Agreement containing terms satisfactory to the Lenders;
(h) any Secured Company is in default in any material respect under any Material Permit (after the expiry of any grace period or cure periods relating thereto), or agrees to the surrender or termination of any Material Permit prior to the expiry date expressly set out therein, unless (i) such Secured Party is in discussions with the issuer of such Material Permit in order to cure such default and such issuer has agreed in writing with such Secured Party that it will not terminate such Material Permit or take any actions to enforce its rights and remedies thereunder and will continue to observe and perform its obligations thereunder as if such default had not occurred, or (ii) such Material Permit is immediately replaced by a substantially similar Material Permit containing terms satisfactory to the Lenders;
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(i) any document constituting part of the Security shall for any reason (other than the fault of the Agent or any Lender) cease to be in full force and effect or shall be declared in a final judgment of a court of competent jurisdiction to be null and void; or any Secured Company contests the validity or enforceability thereof or denies it has any further liability or obligation thereunder; or any document (other than a Guarantee) constituting part of the Security shall for any reason (other than the fault of the Agent or any Lender) fail to create a valid and perfected First-Ranking Security Interest in and to the property purported to be subject thereto;
(j) any Person which has provided a Guarantee in respect of the Obligations terminates or purports to terminate its liability under such Guarantee or its liability thereunder in respect of any future Advances, or disputes the validity or enforceability of such Guarantee or any Security provided by it;
(k) any Person takes possession of any property of a Secured Company with a value in excess of Three Million Dollars ($3,000,000) by way of or in contemplation of enforcement of security, or a distress or execution or similar process is levied or enforced against any such property, and such possession continues in effect and is not released, satisfied, vacated, stayed, or discharged within sixty (60) days or such longer period during which entitlement to the use of such property continues with the applicable Secured Company, and such Secured Company is contesting the same in good faith and by appropriate proceedings, provided that such grace period will cease to apply if the property is removed from the use of the Secured Company;
(l) one or more final judgments or decrees for the payment of money shall have been obtained or entered against any one or more of the Secured Companies in excess of Three Million Dollars ($3,000,000) in the aggregate and shall remain unpaid for a period in excess of forty-five (45) days; unless such judgement is fully covered by insurance (subject to a reasonable deductible amount) and the insurer thereof has confirmed such coverage in writing;
(m) any Governmental Authority shall take any action to condemn, seize or appropriate any property of any Secured Company with a value in excess of Three Million Dollars ($3,000,000) unless such Governmental Authority has paid a fair and reasonable expropriation amount; and such expropriation or seizure continues in effect and is not terminated or stayed or within forty-five (45) days or such longer period during which entitlement to the use of such property continues with the applicable Secured Company, and such Secured Company is contesting the same in good faith and by appropriate proceedings, provided that such grace period will cease to apply if the property is removed from the use of the Secured Company;
(n) any Person or group of Persons acting in concert, assumes Control of the Borrower at any time;
(o) the Borrower's auditors include any going-concern or other adverse qualification in their audit opinion relating to the Year-End Financial Statements of the Borrower;
(p) the Cannabis Act is repealed and not replaced with similar legislation; or
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(q) a Material Adverse Change occurs which is continuing.
10.02 Acceleration, etc.
(a) Upon the occurrence of an Event of Default which is continuing the Agent shall, upon the instructions of the Required Lenders, issue a written notice to the Borrower (an "Acceleration Notice") declaring all of the Obligations to be immediately due and payable.
(b) Upon receipt of an Acceleration Notice the Borrower shall immediately pay and satisfy the Obligations, including payment to the Agent of the following amounts (without duplication): (i) the Outstanding Principal Amount and all accrued and unpaid interest, fees and other amounts relating thereto; (ii) the Aggregate Net Hedge Liability; (iii) an amount equal to the face amount of all Bankers' Acceptances and BA Equivalent Loans then outstanding; and (iv) the aggregate maximum amount payable under all outstanding Letters of Credit. The Agent shall hold all such amounts paid by the Borrower in respect of such Hedge Transactions, Bankers' Acceptances, BA Equivalent Loans and Letters of Credit as security for the Borrower's obligations thereunder.
(c) At any time on or after the Acceleration Date the Agent may exercise any and all rights and remedies hereunder and under any other Loan Documents, including the enforcement of all or any portion of the Security.
(d) From and after the date of the occurrence of an Event of Default and for so long as such Event of Default continues, both before and after the Acceleration Date, the Outstanding Principal Amount shall bear interest or fees at the rates otherwise applicable plus two percent (2%) per annum in order to compensate the Lenders for the additional risk.
10.03 Acceleration of Certain Contingent Obligations
Upon the occurrence of an Event of Default which is continuing, any Lender which has issued a Bankers' Acceptance, BA Equivalent Note or Letter of Credit or entered into a Hedge Transaction with the Borrower may make a Prime-Based Loan to the Borrower in an amount equal to the face amount of such Bankers' Acceptance, BA Equivalent Note or Letter of Credit or the amount required to unwind such Hedge Transaction (such amount to be determined in accordance with the terms thereof), as the case may be; and the proceeds of any such Prime-Based Loan shall be held by such Lender and used to satisfy the Lender's obligations under the said Bankers' Acceptance, BA Equivalent Note or Letter of Credit as such becomes due, or to effect the unwinding of such Hedge Transaction. Any such Prime-Based Loan shall bear interest at the rate and in the manner applicable to Prime-Based Loans under the Facilities.
10.04 Combining Accounts; Set-Off
Upon the occurrence and during the continuation of an Event of Default, in addition to and not in limitation of any rights now or hereafter granted under Applicable Law, each Lender may at any time and from time to time:
(a) combine, consolidate or merge any or all of the deposits or other accounts maintained with such Lender by a Secured Company (whether term, notice, demand or otherwise and whether matured or unmatured) and such Company's obligations to such Lender hereunder; and
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(b) set off, apply or transfer any or all sums standing to the credit of any such deposits or accounts in or towards the satisfaction of such obligations.
Each Lender may exercise any rights pursuant to this Section 10.04 without prior notice to the Borrower or such Company, but agrees to provide written notice to the Agent and the Borrower promptly after exercising any such rights.
10.05 Appropriation of Monies
After the occurrence and during the continuation of an Event of Default the Agent may from time to time, but subject to Section 11.03, apply any Proceeds of Realization against any portion or portions of the Obligations, and the Borrower may not require any different application. The taking of a judgment or any other action or dealing whatsoever by the Agent or the Lenders in respect of the Security shall not operate as a merger of any of the Obligations hereunder or in any way affect or prejudice the rights, remedies and powers which the Agent or the Lenders may have, and the foreclosure, surrender, cancellation or any other dealing with any Security or the said obligations shall not release or affect the liability of the Borrower or any other Person in respect of the remaining portion of the Obligations.
10.06 No Further Advances
The Lenders shall not be obliged to make any further Advances (including honouring any cheques drawn by the Borrower which are presented for payment) from and after the earliest to occur of the following: (i) delivery by the Agent to the Borrower of a written notice that a Default or Event of Default has occurred and is continuing and that as a result thereof no further Advances will be made (regardless of whether an Acceleration Notice is issued); (ii) the occurrence of an Insolvency Event; and (iii) receipt by the Agent or any Lender of any garnishment notice, notice of a Statutory Lien or other notice of similar effect in respect of any Company pursuant to the Income Tax Act (Canada), the Excise Tax Act (Canada) or any similar notice under any other statute in effect in any jurisdiction.
10.07 Judgment Currency
If for the purposes of obtaining judgment against the Borrower in any court in any jurisdiction with respect to this Agreement it becomes necessary for a Lender to convert into the currency of such jurisdiction (in this Section called the "Judgment Currency") any amount due to the Lender by the Borrower hereunder in any currency other than the Judgment Currency, the conversion shall be made at the Exchange Rate prevailing on the Business Day before the day on which judgment is given. In the event that there is a change in the Exchange Rate prevailing between the Business Day before the day on which the judgment is given and the date of payment of the amount due, the Borrower will, on the date of payment, pay such additional amounts (if any) or be entitled to receive reimbursement of such amount, if any, as may be necessary to ensure that the amount paid on such date is the amount in the Judgment Currency which when converted at the Exchange Rate prevailing on the date of payment is the amount then due under this Agreement in such other currency. Any additional amount due by the Borrower under this Section will be due as a separate debt and shall not be affected by judgment being obtained for any other sums due under or in respect of this Agreement.
10.08 Remedies Cumulative
All rights and remedies granted to the Agent and the Lenders in this Agreement, and any other documents or instruments in existence between the parties or contemplated hereby, and any other rights and remedies available to the Agent and the Lenders at Law or in equity, shall be cumulative. The exercise or failure to exercise any of the said remedies shall not constitute a waiver or release thereof or of any other right or remedy, and shall be non-exclusive.
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10.09 Performance of Covenants by Agent
If the Borrower fails to perform any covenant or obligation to be performed by it pursuant to this Agreement, the Agent may in its discretion perform any of the said obligations but shall be under no obligation to do so; and any amounts expended or advanced by the Agent for such purpose shall be payable by the Borrower upon demand together with interest at the highest rate then applicable to the Facilities.
10.10 Appointment of Professional Advisor
The Borrower hereby acknowledges that the Agent, may, upon the instructions of the Required Lenders, at any time and from time to time after the occurrence of and during the continuation of an Event of Default, engage a Professional Advisor, at the sole cost and expense of the Borrower, to monitor the Companies' operations, business, financial and other affairs, to review any reporting provided by the Borrower to the Agent pursuant to the terms of this Agreement or the other Loan Documents, and to provide such other reports and other advice as the Agent and the Lenders may require from time to time in respect thereof. The Borrower agrees to, and to cause each of its Subsidiaries to, co-operate fully with such Professional Advisor and provide such Professional Advisor with all information reasonably requested by it or the Agent in connection with the foregoing.
ARTICLE XI - THE AGENT AND THE LENDERS
11.01 Decision-Making
(a) Any amendment to this Agreement relating to the following matters, and the granting of any waiver or written consent by the Lenders in respect of such matters, shall require the unanimous agreement of the Lenders:
(i) changes to the interest rates and fees;
(ii) increases in the maximum amount of credit available;
(iii) extensions of the Maturity Date;
(iv) changes to the scheduled dates or the scheduled amounts for Repayments hereunder;
(v) the establishment of any Availment Option in U.S. Dollars or any other currency which is not a Qualified Currency;
(vi) releases of all or any portion of the Security, except to the extent provided in paragraph (c) below;
(vii) the definitions of "Required Lenders" and "Proportionate Share" in Section 1.01;
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(viii) any provision of this Agreement which expressly states that the unanimous consent of the Lenders is required in connection with any action to be taken or consent to be provided by the Lenders; and
(ix) this Section 11.01.
(b) Except for the matters described in paragraph (a) above, any amendment to this Agreement shall be effective if made among the Borrower, the Agent and the Required Lenders, and for greater certainty any such amendment which is agreed to by the Required Lenders shall be final and binding upon all Lenders.
(c) The Agent may from time to time without notice to or the consent of the Lenders execute and deliver partial releases of the Security in respect of any item of Collateral (whether or not the proceeds of sale thereof are received by the Agent) which the Companies are permitted to dispose of pursuant to this Agreement without obtaining the prior written consent of the Lenders; and in releasing any such security the Agent may rely upon and assume the correctness of all information contained in any certificate or document provided by the Borrower, without further enquiry. Otherwise, any release or discharge in respect of the Security or any portion thereof shall require the written consent of the Lenders acting unanimously.
(d) Except for the matters which require the unanimous consent of the Lenders as set out in the foregoing paragraphs of this Section 11.01, and except as otherwise specifically provided in this Agreement, any action to be taken or decision to be made by the Lenders pursuant to this Agreement (specifically including for greater certainty the issuance of written notice to the Borrower of the occurrence of a Default or Event of Default, the issuance of a demand for payment of the Obligations, a decision to make an Advance despite any condition precedent relating thereto not being satisfied, the provision of any waiver in respect of a breach of any covenant or the granting of any consent) shall be effective if approved in writing by the Required Lenders; and any such decision or action shall be final and binding upon all the Lenders.
(e) Any action to be taken or decision to be made by the Lenders pursuant to this Agreement which is required to be unanimous shall be made at a meeting of the Lenders called by the Agent pursuant to Section 11.06(k) or by a written instrument executed by all of the Lenders. Any action to be taken or decision to be made by the Lenders pursuant to this Agreement which is required to be made by the Required Lenders shall be made at a meeting of the Lenders called by the Agent pursuant to Section 11.06(k) or by a written instrument executed by the Required Lenders. Any such instrument may be executed by facsimile or pdf and in counterparts.
11.02 Security
(a) Except to the extent provided in paragraph (b), the Security shall be granted in favour of and held by the Agent for and on behalf of the Lenders in accordance with the provisions of this Agreement. The Agent shall, in accordance with its usual practices in effect from time to time, take all steps required to perfect and maintain the Security, including: taking possession of the certificates representing the securities required to be pledged hereunder; filing renewals and change notices in respect of such Security; and ensuring that the name of the Agent is noted as loss payee or mortgagee on all property insurance policies covering the Collateral. If the Agent becomes aware of any matter concerning the Security which it considers to be material, it shall promptly inform the Lenders. The Agent shall comply with all instructions provided by the Lenders in connection with the enforcement or release of the Security which it holds. The Agent agrees to permit each Lender to review and make photocopies of the original documents comprising the Security from time to time upon reasonable notice.
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(b) If any Company has provided security in favour of any Lender directly, such Lender agrees to pay to the Agent all amounts received by it in connection with the enforcement of such security, and all such amounts shall be deemed to constitute Proceeds of Realization and shall be dealt with as provided in Section 11.03. Each Lender which holds any such Security agrees that it shall not enforce such security unless and until the Required Lenders have made a determination to enforce the Security pursuant to Section 11.01(d).
11.03 Application of Proceeds of Realization
Notwithstanding any other provision of this Agreement, the Proceeds of Realization of the Security or any portion thereof shall be distributed in the following order:
(a) first, in payment of all costs and expenses incurred by the Agent and the Lenders in connection with such realization, including legal, accounting, Professional Advisors and receivers' fees and disbursements;
(b) second, against the remaining Obligations (except those referred to in paragraph (c) below), on a pari passu basis among the Lenders to whom such Obligations are payable;
(c) third, to pay any Obligations owed to Non-Funding Lenders, on a pari passu basis among the Non-Funding Lenders to whom such Obligations are payable; and
(d) fourth, if all obligations of the Borrower listed above have been paid and satisfied in full, any surplus Proceeds of Realization shall be paid in accordance with Applicable Law.
11.04 Payments by Agent
(a) The following provisions shall apply to all payments made by the Agent to the Lenders hereunder:
(i) the Agent shall be under no obligation to make any payment (whether in respect of principal, interest, fees or otherwise) to any Lender until an amount in respect of such payment has been received by the Agent from the Borrower;
(ii) if the Agent receives a payment of principal, interest, fees or other amount owing by the Borrower which is less than the full amount of any such payment due, the Agent shall distribute such amount received among the Lenders in each Lender's Proportionate Share;
(iii) if any Lender has advanced more or less than its Proportionate Share of its Commitment, such Lender's entitlement to such payment shall be increased or reduced, as the case may be, in proportion to the amount actually advanced by such Lender;
(iv) if a Lender's Proportionate Share of an Advance has been advanced for less than the full period to which any payment by the Borrower relates, such Lender's entitlement to receive a portion of any payment of interest or fees shall be reduced in proportion to the length of time such Lender's Proportionate Share has actually been outstanding (unless such Lender has paid all interest required to have been paid by it to the Agent pursuant to the CBA Model Provisions);
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(v) the Agent acting reasonably and in good faith shall, after consultation with the Lenders in the case of any dispute, determine in all cases the amount of all payments to which each Lender is entitled and such determination shall be deemed to be prima facie correct;
(vi) upon request, the Agent shall deliver a statement detailing any of the payments to the Lenders referred to herein;
(vii) all payments by the Agent to a Lender hereunder shall be made to such Lender at its address set out herein unless notice to the contrary is received by the Agent from such Lender; and
(viii) if the Agent has received a payment from the Borrower on a Business Day (not later than the time required for the receipt of such payment as set out in this Agreement) and fails to remit such payment to any Lender entitled to receive its Proportionate Share of such payment on such Business Day, the Agent agrees to pay interest on such late payment at a rate determined by the Agent in accordance with prevailing banking industry practice on interbank compensation.
(b) The Agent may in its discretion from time to time make adjustments in respect of any Lender's share of a Drawdown, Substitution, Rollover or Repayment in order that the Advances made by such Lender under such Facility shall be approximately in accordance with such Lender's Proportionate Share.
11.05 Protection of Agent
(a) Unless the Agent has actual knowledge or actual notice to the contrary, it may assume that each Lender's address set out in Exhibit "A" attached hereto is correct, unless and until it has received from such Lender a notice designating a different address.
(b) The Agent may engage and pay for the advice or services of any lawyers, accountants or other experts whose advice or services may to it seem necessary, expedient or desirable and rely upon any advice so obtained (and to the extent that such costs are not recovered from the Borrower pursuant to this Agreement, each Lender agrees to reimburse the Agent in such Lender's Proportionate Share of such costs).
(c) Unless the Agent has actual knowledge or actual notice to the contrary, it may rely as to matters of fact which might reasonably be expected to be within the knowledge of any Company upon a statement contained in any Loan Document.
(d) Unless the Agent has actual knowledge or actual notice to the contrary, it may rely upon any communication or document believed by it to be genuine.
(e) The Agent may refrain from exercising any right, power or discretion vested in it under this Agreement unless and until instructed by the Required Lenders as to whether or not such right, power or discretion is to be exercised and, if it is to be exercised, as to the manner in which it should be exercised (provided that such instructions shall be required to be provided by all of the Lenders in respect of any matter for which the unanimous consent of the Lenders is required as set out herein).
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(f) The Agent may refrain from exercising any right, power or discretion vested in it which would or might in its sole and unfettered opinion be contrary to any Law of any jurisdiction or any directive or otherwise render it liable to any Person, and may do anything which is in its opinion in its discretion necessary to comply with any such Law or directive.
(g) The Agent may delegate any of its duties and responsibilities hereunder to any other Person as it shall determine to be appropriate.
(h) The Agent may refrain from acting in accordance with any instructions of the Required Lenders to begin any legal action or proceeding arising out of or in connection with this Agreement or take any steps to enforce or realize upon any Security, until it shall have received such security as it may reasonably require (whether by way of payment in advance or otherwise) against all costs, claims, expenses (including legal fees) and liabilities which it will or may expend or incur in complying with such instructions.
(i) The Agent shall not be bound to disclose to any Person any information relating to the Companies or any Related Person if such disclosure would or might in its opinion in its discretion constitute a breach of any Law or regulation or be otherwise actionable at the suit of any Person.
(j) The Agent shall not accept any responsibility for the accuracy and/or completeness of any information supplied in connection herewith or for the legality, validity, effectiveness, adequacy or enforceability of any Loan Document and shall not be under any liability to any Lender as a result of taking or omitting to take any action in relation to any Loan Document except in the case of the Agent's negligence or wilful misconduct.
11.06 Duties of Agent
The Agent shall:
(a) as a non-fiduciary agent for the Borrower, maintain a record of the Outstanding Principal Amount owing to each Lender, which record shall conclusively be presumed to be correct and accurate, absent manifest error;
(b) hold and maintain the Security to the extent provided in Section 11.02;
(c) provide to each Lender copies of all financial information received from the Borrower promptly after receipt thereof, and copies of any Draw Requests, Substitution Notices, Rollover Notices, Repayment Notices and other notices received by the Agent from the Borrower upon request by any Lender;
(d) promptly advise each Lender of Advances required to be made by it hereunder and disburse all Repayments to the Lenders hereunder in accordance with the terms of this Agreement;
(e) promptly notify each Lender of the occurrence of any Default or Event of Default of which the Agent has actual knowledge or actual notice;
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(f) at the time of engaging any agent, receiver, receiver-manager, consultant, monitor or other party in connection with the Security or the enforcement thereof, obtain the agreement of such party to comply with the applicable terms of this Agreement in carrying out any such enforcement activities and dealing with any Proceeds of Realization;
(g) account for any monies received by it in connection with this Agreement, the Security and any other agreement delivered in connection herewith or therewith;
(h) each time the Borrower requests the written consent of the Lenders (or the Required Lenders, as the case may be) in connection with any matter, use its best efforts to obtain and communicate to the Borrower the response of the Lenders (or the Required Lenders) in a reasonably prompt and timely manner having due regard to the nature and circumstances of the request;
(i) give written notice to the Borrower in respect of any other matter in respect of which notice is required in accordance with or pursuant to this Agreement, promptly or promptly after receiving the consent of the Lenders, if required under the terms of this Agreement;
(j) except as otherwise provided in this Agreement, act in accordance with any instructions given to it by the Required Lenders;
(k) refrain from exercising any right, power or discretion vested in it under this Agreement or any document incidental thereto if so instructed by the Required Lenders (in respect of any matter which requires the consent of the Required Lenders), or by all of the Lenders (in respect of any matter which requires the unanimous consent of the Lenders); and
(l) call a meeting of the Lenders at any time not earlier than five (5) days and not later than thirty (30) days after receipt of a written request for a meeting provided by any Lender.
11.07 Lenders' Obligations Several; No Partnership
The obligations of each Lender under this Agreement are several. The failure of any Lender to carry out its obligations hereunder shall not relieve the other Lenders of any of their respective obligations hereunder. No Lender shall be responsible for the obligations of any other Lender hereunder. Neither the entering into of this Agreement nor the completion of any transactions contemplated herein shall constitute the Lenders a partnership.
11.08 Sharing of Information
The Agent and the Lenders may share among themselves any information they may have from time to time concerning the Companies whether or not such information is confidential; but shall have no obligation to do so (except for any obligations of the Agent to provide information to the extent required in this Agreement).
11.09 Acknowledgement by Borrower
The Borrower hereby acknowledges notice of the terms of the provisions of this Article X and agrees to be bound hereby to the extent of its obligations hereunder.
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11.10 Amendments to Article XI
The Agent and the Lenders may amend any provision in this Article XI, except Section 11.01, without prior notice to or the consent of the Borrower, and the Agent shall provide a copy of any such amendment to the Borrower reasonably promptly thereafter; provided however if any such amendment would materially adversely affect any rights, entitlements, obligations or liabilities of the Borrower, such amendment shall not be effective until the Borrower provides its written consent thereto, such consent not to be unreasonably withheld or arbitrarily delayed.
11.11 Deliveries, etc.
As between the Companies on the one hand, and the Agent and the Lenders on the other hand:
(a) all statements, certificates, consents and other documents which the Agent purports to deliver to a Company on behalf of the Lenders shall be binding on each of the Lenders, and none of the Companies shall be required to ascertain or confirm the authority of the Agent in delivering such documents;
(b) all certificates, statements, notices and other documents which are delivered by a Company to the Agent in accordance with this Agreement shall be deemed to have been duly delivered to each of the Lenders; and
(c) all payments which are delivered by the Borrower to the Agent in accordance with this Agreement shall be deemed to have been duly delivered to each of the Lenders.
11.12 Agency Fee
(a) The Borrower agrees to pay to the Agent an annual agency fee in such amount as may be agreed in writing from time to time between the Borrower and the Agent, payable in advance on the Original Closing Date and annually on each anniversary of the Original Closing Date thereafter during the term of this Agreement.
(b) Each Lender which assigns all or any portion of its Commitment hereunder to another Person agrees to pay to the Agent an assignment fee of Five Thousand Dollars ($5,000).
11.13 Non-Funding Lender
(a) Each Non-Funding Lender shall be required to provide to the Agent, immediately upon receipt of a written request from the Agent,(A) cash in an amount equal to one hundred and five percent (105%) of such Non-Funding Lender's Proportionate Share of the face amount of outstanding Letters of Credit; and (B) cash in an amount, as shall be determined from time to time by the Agent in its discretion, equal to all other obligations of such Non-Funding Lender to the Agent that are owing or may become owing pursuant to this Agreement, including, without limitation, such Non-Funding Lender's obligation to pay its Proportionate Share of any indemnification or expense reimbursement amounts not paid by the Borrower. Such cash shall be held by the Agent in one or more accounts in the name of the Agent and shall not be required to be interest-bearing. The Agent shall be entitled to apply such cash from time to time in satisfaction of all or any portion of such obligations of such Non-Funding Lender, as determined by the Agent in its discretion.
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(b) The Agent shall be entitled to set off any Non-Funding Lender's Proportionate Share of all payments received from the Borrower against such Non-Funding Lender's obligations to fund payments and Advances required to be made by it and to purchase participations required to be purchased by it in each case under this Agreement and the other Loan Documents. The Agent shall be entitled to withhold and deposit in one or more non-interest bearing accounts in the name of the Agent all amounts (whether principal, interest, fees or otherwise) received by the Agent from the Borrower and due to such Non-Funding Lender pursuant to this Agreement, which amounts shall be used by the Agent (A) first, to reimburse the Agent for any amounts owing to it by such Non-Funding Lender pursuant to this Agreement or any other Loan Document, (B) second, to reimburse the other Lenders in respect of any Advances which may have been made by them in their discretion in order to fund, in whole or in part, any shortfall in Advances which were required to have been made by such Non-Funding Lender (and to the extent that any said Advance made by a Lender is so reimbursed, such Advance shall be deemed to have been assigned by such Lender to the Non-Funding Lender), (C) third, to be held in such account and applied by the Agent from time to time against all other obligations of such Non-Funding Lender to the Agent owing pursuant to this Agreement in such amount as shall be determined from time to time by the Agent in its discretion including, without limitation, such Non-Funding Lender's obligation to pay its Proportionate Share of any indemnification or expense reimbursement amounts not paid by the Borrower, and (D) fourth, at the Agent's discretion, to fund from time to time such Non-Funding Lender's Proportionate Share of Advances.
(c) A Non-Funding Lender shall have no voting or consent rights with respect to matters under this Agreement or the other Loan Documents, unless and until it is no longer a Non-Funding Lender. Accordingly, the Commitments and the portion of the Outstanding Principal Amount owing to any Non-Funding Lender shall be disregarded in the determination of the Required Lenders.
(d) Neither the Agent nor any of its Affiliates nor any of their respective officers, directors, employees, agents or representatives shall be liable to any Lender (including, without limitation, a Non-Funding Lender) for any action taken or omitted to be taken by them in connection with amounts payable by the Borrower to a Non-Funding Lender and received by the Agent and applied in accordance with the provisions of this Agreement, save and except for the negligence or wilful misconduct of the Agent as determined by a final non-appealable judgment of a court of competent jurisdiction.
ARTICLE XII - CBA MODEL PROVISIONS
12.01 CBA Model Provisions Incorporated by Reference
The CBA Model Provisions (except for the footnotes contained therein) form part of this Agreement and are incorporated herein by reference, subject to the following variations:
(a) Each term set out below which is used as a defined term in the CBA Model Provisions shall be deemed to have been replaced as set out below; and for greater certainty the said replacement term shall have the meaning ascribed thereto in Section 1.01 of this Agreement:
• "Administrative Agent" shall be replaced by "Agent";
• "Applicable Percentage" shall be replaced by "Proportionate Share";
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• "Loans" shall be replaced by "Advances";
• "Obligors" shall be replaced by "Secured Companies" (and all necessary changes required by the context shall be deemed to have been made); and
• "Provisions" shall be replaced by "CBA Model Provisions".
(b) "Pro rata share", "rateably" and similar terms in the CBA Model Provisions shall have the meaning ascribed to the term "Proportionate Share" as defined in Section 1.01 of this Agreement, if the context requires.
(c) The terms "Related Parties" and "Related Party" in the CBA Model Provisions shall be deemed to have the meanings ascribed to the defined terms "Related Persons" and "Related Person" in this Agreement, respectively.
(d) In the third line of subsection 7.7(1) of the CBA Model Provisions, the phrase "…in consultation with the Borrower…" is hereby amended to read "…after consultation with the Borrower".
(e) The parties hereby acknowledge and agree that the indemnity contained in clause 9(b)(iii) of the CBA Model Provisions is in addition to and not in substitution for the indemnity contained in Section 13.05 of this Agreement.
(f) In addition to the restrictions contained in paragraph 10(b) of the CBA Model Provisions relating to the ability of Lenders to assign their Commitments in whole or in part, if a Lender proposes to assign less than its entire Commitment under any Facility, it may do so only if it retains a Commitment under such Facility in a principal amount of at least Five Million Dollars ($5,000,000).
12.02 Inconsistencies with CBA Model Provisions
To the extent that there is any inconsistency between a provision of this Agreement and a provision of the CBA Model Provisions, the provision of this Agreement shall govern. For greater certainty, a provision of this Agreement and a provision of the CBA Model Provisions shall be considered to be inconsistent if both relate to the same subject-matter and the provision in the CBA Model Provisions imposes more onerous obligations or restrictions than the corresponding provision in this Agreement.
ARTICLE XIII - GENERAL
13.01 Waiver
The failure or delay by the Agent or any Lender in exercising any right or privilege with respect to the non-compliance with any provisions of this Agreement by the Borrower and any course of action on the part of the Agent or any Lender, shall not operate as a waiver of any rights of the Agent or such Lender unless made in writing by the Agent or such Lender. Any such waiver shall be effective only in the specific instance and for the purpose for which it is given and shall not constitute a waiver of any other rights and remedies of the Agent or such Lender with respect to any other or future non-compliance.
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13.02 Expenses of Agent and Lenders
Whether or not the transactions contemplated by this Agreement are completed or any Advance has been made, the Borrower agrees to pay on demand by the Agent from time to time all reasonable expenses incurred by the Agent or any Lender in connection with this Agreement, the Security and all documents contemplated hereby, specifically including: reasonable expenses incurred by the Agent and the Lenders in respect of due diligence, appraisals, insurance consultations, credit reporting and responding to demands of any Governmental Authority; reasonable legal expenses incurred by the Agent and the Lenders in connection with the preparation and interpretation of this Agreement and the Security and the administration of the Facilities generally, including the preparation of waivers and partial discharges of Security; and all reasonable legal expenses incurred by the Agent and the Lenders in connection with the protection and enforcement of the Security; and all fees of Professional Advisors as contemplated herein.
13.03 Debit Authorization
The Borrower hereby authorizes the Agent to debit any account maintained by the Borrower with the Agent, and to set off and compensate against any and all accounts, credits and balances maintained by the Borrower with the Agent, in order to pay (i) any interest or other amounts payable by the Borrower from time to time pursuant to this Agreement when due; and (ii) any expenses referred to in Section 11.02 which are not paid by the Borrower within thirty (30) days after receipt by the Borrower of a written request from the Agent for payment of such expenses. The Agent agrees to give written notice to the Borrower of any such debit promptly thereafter.
13.04 General Indemnity
In addition to any other liability of the Borrower hereunder, the Borrower hereby agrees to indemnify and save harmless the Indemnitees from and against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (including reasonable legal and Professional Advisors' fees) of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Indemnitees (except to the extent arising from the negligence or wilful misconduct of such Indemnitees) which relate or arise out of or result from:
(a) any failure by the Borrower to pay and satisfy its obligations hereunder including, without limitation, any costs or expenses incurred by reason of the liquidation or re-employment in whole or in part of deposits or other funds required by the Lenders to fund or maintain the Facilities or as a result of the Borrower's failure to take any action on the date required hereunder or specified by it in any notice given hereunder;
(b) any investigation by Governmental Authorities or any litigation or other similar proceeding related to any use made or proposed to be made by the Borrower of the proceeds of any Advance; and
(c) any instructions given to any Lender to stop payment on any cheque issued by the Borrower or to reverse any wire transfer or other transaction initiated by such Lender at the request of the Borrower.
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13.05 Environmental Indemnity
In addition to any other liability of the Borrower hereunder, the Borrower hereby agrees to indemnify and save harmless the Indemnitees from and against:
(a) any losses suffered by the Indemnitees for, in connection with, or as a direct or indirect result of, the failure of any Company to comply with all Requirements of Environmental Law;
(b) any losses suffered by the Indemnitees for, in connection with, or as a direct or indirect result of, the presence of any Hazardous Material situated in, on or under any property owned by any of the Companies or upon which any of them carries on business; and
(c) any and all liabilities, losses, damages, penalties, expenses (including reasonable legal fees) and claims which may be paid, incurred or asserted against the Indemnitees for, in connection with, or as a direct or indirect result of, any legal or administrative proceedings with respect to the presence of any Hazardous Material on or under any property owned by any of the Companies or upon which any of them carries on business, or the discharge, emission, spill, radiation or disposal by any of them of any Hazardous Material into or upon any Real Property, the atmosphere, or any watercourse or body of water; including the costs of defending and/or counterclaiming or claiming over against third parties in respect of any action or matter and any cost, liability or damage arising out of a settlement entered into by the Indemnitees of any such action or matter;
except to the extent arising from the negligence or willful misconduct of such Indemnitees.
13.06 Survival of Certain Obligations despite Termination of Agreement
The termination of this Agreement shall not relieve the Borrower from its obligations to the Agent and the Lenders arising prior to such termination, such as obligations arising as a result of or in connection with any breach of this Agreement, any failure to comply with this Agreement or the inaccuracy of any representations and warranties made or deemed to have been made prior to such termination, and obligations arising pursuant to all indemnity obligations contained herein. Without limiting the generality of the foregoing, the obligations of the Borrower to the Agent and the Lenders arising under or in connection with Sections 13.04 and 13.05 of this Agreement and Section 3.2 of the CBA Model Provisions shall continue in full force and effect despite any termination of this Agreement.
13.07 Interest on Unpaid Costs and Expenses
If the Borrower fails to pay when due any amount in respect of costs or expenses incurred by the Agent or any other amount incurred by the Agent and required to be paid by it hereunder (other than principal or interest on any Advance), it shall pay interest on such unpaid amount from the time such amount is due until paid at the rate equal to the highest rate of interest then applicable under the Facilities.
13.08 Notice
Without prejudice to any other method of giving notice, all communications provided for or permitted hereunder shall be in writing and delivered to the addressee by prepaid private courier or sent by electronic mail to the applicable address and to the attention of the officer of the addressee as follows:
(a) to the Borrower:
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Organigram Holdings Inc.
Bay Adelaide Centre
333 Bay Street, Suite 1250
Toronto, ON, M5H 2R2
Attention: [Redacted: Personal Information]
Email: [Redacted: Personal Information]
With a copy to:
Goodmans LLP
Bay Adelaide Centre
333 Bay Street, Suite 3400
Toronto, ON M5H 2S7
Attention: [Redacted: Personal Information]
Email: [Redacted: Personal Information]
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(b) to the Agent:
Bank of Montreal
Agent Bank Services
250 Yonge St., 11th Floor
Toronto, Ontario
M5B 2L7
Attention: [Redacted: Personal Information]
email: [Redacted: Personal Information]
fax no.: [Redacted: Personal Information]
(c) to any Lender, at its address noted on Exhibit "A" attached hereto.
Any communication transmitted by prepaid private courier shall be deemed to have been validly and effectively given or delivered on the Business Day after which it is submitted for delivery. Any communication transmitted by electronic mail shall be deemed to have been validly and effectively given or delivered on the day on which it is transmitted, if transmitted on a Business Day on or before 5:00 p.m. (local time of the intended recipient), and otherwise on the next following Business Day. Any party may change its address for service by notice given in the foregoing manner.
13.09 Severability
Any provision of this Agreement which is illegal, prohibited or unenforceable in any jurisdiction, in whole or in part, shall not invalidate the remaining provisions hereof; and any such illegality, prohibition or unenforceability in any such jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
13.10 Further Assurances
The Borrower shall, at its expense, promptly execute and deliver or cause to be executed and delivered to the Agent upon request, acting reasonably, from time to time all such other and further documents, agreements, opinions, certificates and instruments in compliance with this Agreement, or if necessary or desirable to more fully record or evidence the obligations intended to be entered into herein.
13.11 Time of the Essence
Time shall be of the essence of this Agreement.
13.12 Promotion and Marketing
For the purpose of promotion and marketing, the Borrower hereby authorizes and consents to the reproduction, disclosure and use by the Lenders and the Agent of its name, identifying logo and the Facilities, provided that the Lenders and the Agent comply with all Applicable Law, the Borrower is provided an opportunity to review and approve any such reproduction, disclosure or use and the amount of the Facilities shall not be disclosed. The Borrower acknowledges and agrees that the Lenders shall be entitled to determine, in their discretion, whether to use such information; that no compensation will be payable by the Lenders or the Agent in connection therewith; and that the Lenders and the Agent shall have no liability whatsoever to it or any of its employees, officers, directors, affiliates or shareholders in obtaining and using such information as contemplated herein except where such liability arises as a result of the gross negligence or wilful misconduct of the Agent or any Lender.
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13.13 Amendment and Restatement
(a) This Agreement amends, restates, consolidates and supplements certain provisions of the Previous Credit Agreement and shall not be considered a novation thereof. Any provision hereof which differs from or is inconsistent with any provision contained the Previous Credit Agreement shall constitute an amendment thereto, with such amendment being effective as and from the date hereof. The provisions of the Previous Credit Agreement as amended hereby have been consolidated and restated in this Agreement. This Agreement will not discharge or constitute a novation of any debt, obligation, covenant or agreement contained in the Previous Credit Agreement or in any security, agreements, certificates and other documents executed and delivered by or on behalf of any Person in respect thereof or in connection therewith, all of which shall remain in full force and effect except to the extent amended by the provisions of this Agreement. All representations and warranties set out in this Agreement are freshly made on the date hereof. The Borrower hereby represents, warrants, acknowledges and agrees with the Agent that all Security Agreements executed and delivered by it to the Agent prior to the date of this Agreement continues in full force and effect and remains valid and enforceable in accordance with its terms. Any reference to the Previous Credit Agreement in any Security Agreement delivered pursuant to the Previous Credit Agreement shall be a reference to this Agreement.
13.14 Entire Agreement; Waivers and Amendments to be in Writing
(a) This Agreement supersedes all discussion papers, term sheets and other writings which may have been issued by the Agent or the Lenders prior to the date hereof relating to the Facilities, which shall have no further force or effect. This Agreement and any other documents or instruments contemplated herein or therein shall constitute the entire agreement and understanding among the Borrower, the Lenders and the Agent relating to the subject-matter hereof.
(b) Subject to Section 11.01(b) and Section 11.10, no provision of this Agreement, or any other document or instrument in existence among the parties may be modified, waived or terminated except by an instrument in writing executed by the party against whom such modification, waiver or termination is sought to be enforced.
13.15 Inconsistencies with Security
To the extent that there is any inconsistency between a provision of this Agreement and a provision of any document constituting part of the Security, the provision of this Agreement shall govern. For greater certainty, a provision of this Agreement and a provision of the Security shall be considered to be inconsistent if both relate to the same subject-matter and the provision in the Security imposes more onerous obligations or restrictions than the corresponding provision in this Agreement.
13.16 Confidentiality
The Agent and the Lenders agree that all documentation and other information made available by the Borrower to them under or in connection with this Agreement shall (except to the extent such documentation or other information is publicly available or hereafter becomes publicly available other than by their actions, or was theretofore known or hereinafter becomes known to them independently of any disclosure by the Companies) be held in confidence by them and used solely in the evaluation, administration and enforcement of the Advances and all matters related to this Agreement and the Security and the transactions contemplated hereby and thereby, and in the prosecution of defence of legal proceedings arising in connection herewith and therewith. Notwithstanding the foregoing, nothing contained herein shall be construed to prevent the Agent or the Lenders from (a) making disclosure of any information (i) if required to do so by Applicable Law, (ii) to any Governmental Authority having or claiming to have authority to regulate or oversee any aspect of the business of the Agent, the Lenders or the Companies in connection with the exercise of such authority or claimed authority and that compels or requires the disclosure of such information, (iii) pursuant to any subpoena or if otherwise compelled in connection with any litigation or administrative proceeding, (iv) to any prospective participant or assignee of all or any portion of the rights and obligations or the Agent or any Lender hereunder provided that such prospective assignee executes and delivers to the Borrower a confidentiality agreement in form and substance acceptable to it, acting reasonably, or (v) to the extent that the Agent or its counsel deems necessary or appropriate, acting reasonably, to effect or preserve its Security or to enforce any remedy provided in this Agreement or the Security or otherwise available by Law; or (b) making, on a confidential basis, such disclosures as the Agent and the Lenders reasonably deem necessary or appropriate to their legal counsel, accountants or other advisers, agents or representatives (including outside auditors).
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13.17 Governing Law
This Agreement shall be interpreted in accordance with the Laws of the Province of Ontario. Without prejudice to the right of the Agent and the Lenders to commence any proceedings with respect to this Agreement in any other proper jurisdiction, the parties hereby attorn and submit to the jurisdiction of the courts of the Province of Ontario.
13.18 Execution by Fax and Counterparts
This Agreement may be executed in several counterparts, each of which, when so executed, shall be deemed to be an original and which counterparts together shall constitute one and the same Agreement. This Agreement may be executed by facsimile or pdf, and any signature contained hereon by facsimile or pdf shall be deemed to be equivalent to an original signature for all purposes.
13.19 Binding Effect
This Agreement shall be binding upon and shall enure to the benefit of the parties and their respective successors and permitted assigns; "successors" includes any corporation resulting from the amalgamation of any party with any other corporation.
[The remainder of this page is intentionally blank. Signature page follows.]
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IN WITNESS WHEREOF the parties hereto have executed this Agreement.
|
|
ORGANIGRAM HOLDINGS INC. By:___Greg Engel_________________________ name: Greg Engel title: Chief Executive Officer
By:____Derrick West_______________________ name: Derrick West title: Chief Financial Officer |
|
BANK OF MONTREAL,
By:___Francois Wentzel____________________ name: Francois Wentzel title: Managing Director
By: ___Heather Rashotte___________________ name: Heather Rashotte title: Associate Director |
BANK OF MONTREAL, as a Lender
By: ___Heather Rashotte___________________ name: Heather Rashotte title: Associate Director
By:___Francois Wentzel____________________ name: Francois Wentzel title: Managing Director
|
|
CANADIAN WESTERN BANK, as a Lender
By: ____Craig Preiksaitis___________________ name: Craig Preiksaitis title: Senior Manager, Corporate Lending
By: _____John Cherian_____________________ name: John Cherian title: MD & Head, Corporate Lending
|
CONCENTRA BANK, as a Lender
By: ____Casey Fox______________________ name: Casey Fox title: Commercial Banking Director
By: ____Todd Kemp______________________ name: Todd Kemp title: Syndicated Lending Director
|
|
FARM CREDIT CANADA, as a Lender
By:____Kent Cunningham___________________ name: Kent Cunnington title: Senior Corporate & Commercial Credit Manager
By:____________________________________ name: title:
|
|
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EXHIBIT A - LENDERS AND LENDERS' COMMITMENTS
|
Lender |
Revolver |
Term |
Total |
Share (%) |
|
Bank of Montreal |
$930,000 |
$27,900,000 |
$28,830,000 |
46.50% |
|
Farm Credit Canada |
$530,000 |
$15,900,000 |
$16,430,000 |
26.50% |
|
Canadian Western Bank |
$290,000 |
$8,700,000 |
$8,990,000 |
14.50% |
|
Concentra Bank |
$250,000 |
$7,500,000 |
$7,750,000 |
12.50% |
|
Total |
$2,000,000 |
$60,000,000 |
$62,000,000 |
100.00% |
BA Lenders
Bank of Montreal
Non-BA Lenders
Concentra Bank
Farm Credit Canada
Canadian Western Bank
Lenders' Addresses
|
1. |
Bank of Montreal Corporate Finance 18th Floor, First Canadian Place Toronto, Ontario M5X 1A1 Attention: [Redacted: Personal Information] Fax: [Redacted: Personal Information]
|
|
2. |
Canadian Western Bank Suite 100, 12230 Jasper Avenue, Attention: [Redacted: Personal Information] Fax: [Redacted: Personal Information]
|
|
3. |
Concentra Bank Regina, Saskatchewan S4P 3G8 Attention: [Redacted: Personal Information] Fax: [Redacted: Personal Information]
|
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|
4. |
Farm Credit Canada 1800 Hamilton Street Regina, SK S4P 4K7 Attention: [Redacted: Personal Information] Fax: [Redacted: Personal Information]
|
EXHIBIT B - DRAW REQUEST
To: Bank of Montreal, as Administrative Agent (the "Agent")
This Draw Request is delivered pursuant to the amended and restated credit agreement made among Organigram Holdings Inc. as borrower (the "Borrower"), Bank of Montreal and certain other lenders as lenders, and Bank of Montreal as administrative agent for the lenders from time to time thereunder, dated as of November 27, 2020 (as amended, restated, supplemented, replaced or otherwise modified from time to time, the "Credit Agreement"). Terms used herein as defined terms shall have the respective meanings ascribed in the Credit Agreement, unless otherwise defined in herein.
1. The Borrower hereby requests an Advance as follows:
|
(a) |
Facility: |
|
|
(b) |
Date of Advance: |
|
|
(c) |
Amount of Advance: |
|
|
(d) |
Availment Option: |
|
|
(e) |
If Availment Option is a Bankers' Acceptance or BA Equivalent Loan, indicated period requested: |
|
|
(f) |
If Letter of Credit requested, attach schedule setting out requested terms: |
2. The Borrower hereby certifies that as at the date hereof:
(a) the representations and warranties in the Credit Agreement are true and correct in all material respects as if made on the date hereof, except for any such representations and warranties which are expressly stated therein to have been made only as at the date of the Credit Agreement; and
(a) no Default or Event of Default has occurred and is continuing, nor shall the making of the Advance pursuant to this Draw Request result in the occurrence of a Default or an Event of Default.
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Dated this ____________ day of _______________ , _____________.
|
ORGANIGRAM HOLDINGS INC. By:_____________________________________ Name: Title: By:_____________________________________ Name: Title: |
|
EXHIBIT C - ROLLOVER NOTICE
To: Bank of Montreal, as Administrative Agent (the "Agent")
This Rollover Notice is delivered pursuant to the amended and restated credit agreement made among Organigram Holdings Inc. as borrower (the "Borrower"), Bank of Montreal and certain other lenders as lenders, and Bank of Montreal as administrative agent for the lenders from time to time thereunder, dated as of November 27, 2020 (as amended, restated, supplemented, replaced or otherwise modified from time to time, the "Credit Agreement"). Terms used herein as defined terms shall have the respective meanings ascribed in the Credit Agreement, unless otherwise defined herein.
1. The Borrower hereby requests a Rollover as follows:
|
(a) |
Facility: |
|
|
(b) |
Availment Option to be rolled over: |
|
|
(c) |
amount of maturing Advance: |
|
|
(d) |
date of maturing Advance: |
|
|
(e) |
period requested: |
2. The Borrower hereby certifies that as at the date hereof:
(a) the representations and warranties in the Credit Agreement are true and correct in all material respects as if made on the date hereof, except for any such representations and warranties which are expressly stated therein to have been made only as at the date of the Credit Agreement; and
(b) no Default or Event of Default has occurred and is continuing, nor shall the making of the Rollover pursuant to this Rollover Notice result in the occurrence of a Default or Event of Default.
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Dated this ____________ day of _______________ , _____________.
|
ORGANIGRAM HOLDINGS INC. By:_____________________________________ Name: Title: By:_____________________________________ Name: Title: |
|
EXHIBIT D - SUBSTITUTION NOTICE
To: Bank of Montreal, as Administrative Agent (the "Agent")
This Substitution Notice is delivered pursuant to the amended and restated credit agreement made among Organigram Holdings Inc. as borrower (the "Borrower"), Bank of Montreal and certain other lenders as lenders, and Bank of Montreal as administrative agent for the lenders from time to time thereunder, dated as of November 27, 2020 (as amended, restated, supplemented, replaced or otherwise modified from time to time, the "Credit Agreement"). Terms used herein as defined terms shall have the respective meanings ascribed in the Credit Agreement, unless otherwise defined herein.
1. The Borrower hereby requests a Substitution as follows:
|
(a) |
Facility: |
|
|
(b) |
Availment Option to be converted: |
|
|
(c) |
amount of maturing Advance: |
|
|
(d) |
date of maturing Advance: |
|
|
(e) |
Availment Option requested: |
|
|
(f) |
period requested: |
2. The Borrower hereby certifies that as at the date hereof:
(a) the representations and warranties in the Credit Agreement are true and correct in all material respects as if made on the date hereof, except for any such representations and warranties which are expressly stated therein to have been made only as at the date of the Credit Agreement; and
(b) no Default or Event of Default has occurred and is continuing, nor shall the making of the Substitution pursuant to this Substitution Notice result in the occurrence of a Default or Event of Default.
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Dated this ____________ day of _______________ , _____________.
|
ORGANIGRAM HOLDINGS INC. By:_____________________________________ Name: Title: By:_____________________________________ Name: Title: |
|
EXHIBIT E - REPAYMENT NOTICE
To: Bank of Montreal, as Administrative Agent (the "Agent")
This Repayment Notice is delivered pursuant to the amended and restated credit agreement made among Organigram Holdings Inc. as borrower (the "Borrower"), Bank of Montreal and certain other lenders as lenders, and Bank of Montreal as administrative agent for the lenders from time to time thereunder, dated as of November 27, 2020 (as amended, restated, supplemented, replaced or otherwise modified from time to time, the "Credit Agreement"). Terms used herein as defined terms shall have the respective meanings ascribed in the Credit Agreement, unless otherwise defined herein.
The Borrower hereby advises that a Repayment will be made as follows:
1. Availment Option of Advance to be repaid:
2. date of Repayment:
3. amount of Repayment:
Dated this ____________ day of _______________ , _____________.
|
ORGANIGRAM HOLDINGS INC. By:_____________________________________ Name: Title: By:_____________________________________ Name: Title: |
|
EXHIBIT F - COMPLIANCE CERTIFICATE
To: Bank of Montreal, as Administrative Agent (the "Agent")
This Compliance Certificate is delivered pursuant to the amended and restated credit agreement made among Organigram Holdings Inc. as borrower (the "Borrower"), Bank of Montreal and certain other lenders as lenders, and Bank of Montreal as administrative agent for the lenders from time to time thereunder, dated as of November 27, 2020 (as amended, restated, supplemented, replaced or otherwise modified from time to time, the "Credit Agreement"). Terms used herein as defined terms shall have the respective meanings ascribed in the Credit Agreement, unless otherwise defined herein.
The undersigned officer of the Borrower hereby certifies on behalf of the Borrower and without personal liability as follows:
1. This Compliance Certificate is provided in respect of the fiscal period of the Borrower comprised of the immediately preceding four Fiscal Quarters ended (the "Fiscal Period").
2. Delivered herewith are the [Interim Financial Statements / Year-end Financial Statements], accompanied by management's discussion and analysis together with a management-prepared reconciliation and all other information reasonably required by the Agent showing all adjustments required to reflect Adjusted GAAP.
3. Delivered herewith is a copy of the Borrower's auditor's letter to management. [note - delete if not Fiscal Year]
4. EBITDA for the Fiscal Quarter ended _____________ is_____________ [note - see Section 7.03(a) for minimum EBITDA requirements]
5. The ratio of Total Funded Debt to Tangible Net Worth is ______________________ determined as follows (note: may not exceed 0.50:1 at any time):
Total Funded Debt: ; divided by
EBITDA: ____________________________;
equals:
6. The Borrower hereby certifies that as at the date hereof:
(a) the representations and warranties in the Credit Agreement are true and correct in all material respects as if made on the date hereof, except for any such representations and warranties which are expressly stated therein to have been made only as at the date of the Credit Agreement; and
(b) no Default or Event of Default has occurred and is continuing.
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Dated this ____________ day of _______________ , _____________.
|
_____________________________________________ Title: |
|
See attachments.
EXHIBIT G - FORM OF BA EQUIVALENT NOTE
[insert date]
FOR VALUE RECEIVED, the undersigned hereby promises to pay to the order of [name of Non-BA Lender] at its office at [insert address from Credit Agreement], the sum of Dollars ($ ) in lawful money of Canada on [insert date of maturity].
Dated this ____________ day of _______________ , _____________.
|
ORGANIGRAM HOLDINGS INC. By:_____________________________________ Name: Title: By:_____________________________________ Name: Title: |
|
EXHIBIT H - CBA MODEL PROVISIONS
See attached.
SCHEDULE TO CREDIT AGREEMENT
The attached model credit agreement provisions, which have been revised under the direction of the Canadian Bankers' Association Secondary Loan Market Specialist Group from provisions prepared by The Loan Syndications and Trading Association, Inc., form part of this Agreement, except for the footnotes to the model credit agreement provisions and subject to the following variations:
MODEL CREDIT AGREEMENT PROVISIONS
1. Definitions
"Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Administrative Agent.
"Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.
"Agreement" means the credit agreement of which these Provisions form part.
"Applicable Law" means (a) any domestic or foreign statute, law (including common and civil law), treaty, code, ordinance, rule, regulation, restriction or by-law (zoning or otherwise); (b) any judgement, order, writ, injunction, decision, ruling, decree or award; (c) any regulatory policy, practice, guideline or directive; or (d) any franchise,, licence, qualification, authorization, consent, exemption, waiver, right, permit or other approval of any Governmental Authority, binding on or affecting the Person referred to in the context in which the term is used or binding on or affecting the property of such Person, in each case whether or not having the force of law.
"Applicable Percentage" means with respect to any Lender, the percentage of the total Commitments represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be the percentage of the total outstanding Loans and participations in respect of Letters of Credit represented by such Lender's outstanding Loans and participations in respect of Letters of Credit.
"Approved Fund" means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
"Assignment and Assumption" means an assignment and assumption entered into by a Lender and an Eligible Assignee and accepted by the Administrative Agent, in substantially the form of Exhibit A or any other form approved by the Administrative Agent.
"Change in Law" means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any Applicable Law, (b) any change in any Applicable Law or in the administration, interpretation or application thereof by any Governmental Authority or (c) the making or issuance of any Applicable Law by any Governmental Authority.
"Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have corresponding meanings.
"Default" means any event or condition that constitutes an Event of Default or that would constitute an Event of Default except for satisfaction of any condition subsequent required to make the event or condition an Event of Default, including giving of any notice, passage of time, or both.
"Eligible Assignee" means any Person (other than a natural person, any Obligor or any Affiliate of an Obligor), in respect of which any consent that is required by Section 10(b) has been obtained.
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"Excluded Taxes" means, with respect to the Administrative Agent, any Lender, the Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of an Obligor hereunder, (a) taxes imposed on or measured by its net income and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located (b) any branch profits taxes or any similar tax imposed by any jurisdiction in which the Lender is located and (c) in the case of a Foreign Lender (other than (i) an assignee pursuant to a request by the Borrower under Section 3.3(b), (ii) an assignee pursuant to an Assignment and Assumption made when an Event of Default has occurred and is continuing or (iii) any other assignee to the extent that the Borrower has expressly agreed that any withholding tax shall be an Indemnified Tax), any withholding tax that (A) is not imposed or assessed in respect of a Loan that was made on the premise that an exemption from such withholding tax would be available where the exemption is subsequently determined, or alleged by a taxing authority, not to be available and (B) is required by Applicable Law to be withheld or paid in respect of any amount payable hereunder or under any Loan Document to such Foreign Lender at the time such Foreign Lender becomes a party hereto (or designates a new lending office) or is attributable to such Foreign Lender's failure or inability (other than as a result of a Change in Law) to comply with Section 3.2(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from an Obligor with respect to such withholding tax pursuant to Section 3.2(a). For greater certainty, for purposes of item (c) above, a withholding tax includes any Tax that a Foreign Lender is required to pay pursuant to Part XIII of the Income Tax Act (Canada) or any successor provision thereto.
"Foreign Lender" means any Lender that is not organized under the laws of the jurisdiction in which the Borrower is resident for tax purposes and that is not otherwise considered or deemed in respect of any amount payable to it hereunder or under any Loan Document to be resident for income tax or withholding tax purposes in the jurisdiction in which the Borrower is resident for tax purposes by application of the laws of that jurisdiction. For purposes of this definition Canada and each Province and Territory thereof shall be deemed to constitute a single jurisdiction and the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.
"Fund" means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.
"Governmental Authority" means the government of Canada or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government, including any supra-national bodies such as the European Union or the European Central Bank and including a Minister of the Crown, Superintendent of Financial Institutions or other comparable authority or agency.
"Indemnified Taxes" means Taxes other than Excluded Taxes.
"Issuing Bank" means the Person named elsewhere in this Agreement as the issuer of Letters of Credit on the basis that it is "fronting" for other Lenders and not on the basis that it is the attorney of other Lenders to sign Letters of Credit on their behalf, or any successor issuer of Letters of Credit. For greater certainty, where the context requires, references to "Lenders" in these Provisions include the Issuing Bank.
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"Loan" means any extension of credit by a Lender under this Agreement, including by way of bankers' acceptance or LIBO Rate Loan, except for any Letter of Credit or participation in a Letter of Credit.
"Obligors" means, collectively, the Borrower and each of the guarantors of the Borrower's obligations that are identified elsewhere in this Agreement.
"Other Taxes" means all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or under any other Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.
"Participant" has the meaning assigned to such term in Section 10(d).
"Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.
"Provisions" means these model credit agreement provisions.
"Related Parties" means, with respect to any Person, such Person's Affiliates and the directors, officers, employees, agents and advisors of such Person and of such Person's Affiliates.
"Taxes" means all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
2. Terms Generally
(1) The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein (including this Agreement) shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented, restated or otherwise modified (subject to any restrictions on such amendments, supplements, restatements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and permitted assigns, (c) the words "herein", "hereof' and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) unless otherwise expressly stated, all references in these Provisions to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, these Provisions, but all such references elsewhere in this Agreement shall be construed to refer to this Agreement apart from these Provisions, (e) any reference to any law or regulation herein shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time and (f) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.
(2) If there is any conflict or inconsistency between these Provisions and the other terms of this Agreement, the other terms of this Agreement shall govern to the extent necessary to resolve the conflict or inconsistency.
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3. Yield Protection
3.1 Increased Costs.
(a) Increased Costs Generally. If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender;
(ii) subject any Lender to any Tax of any kind whatsoever with respect to this Agreement, any Letter of Credit, any participation in a Letter of Credit or any Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof, except for Indemnified Taxes or Other Taxes covered by Section 3.2 and the imposition, or any change in the rate, of any Excluded Tax payable by such Lender; or
(iii) impose on any Lender or any applicable interbank market any other condition, cost or expense affecting this Agreement or Loans made by such Lender or any Letter of Credit or participation therein;
and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Loan (or of maintaining its obligation to make any such Loan), or to increase the cost to such Lender or the Issuing Bank of participating in, issuing or maintaining any Letter of Credit (or of maintaining its obligation to participate in or to issue any Letter of Credit), or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or any other amount), then upon request of such Lender the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered.
(b) Capital Requirements. If any Lender determines that any Change in Law affecting such Lender or any lending office of such Lender or such Lender's holding company, if any, regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement, the Commitments of such Lender or the Loans made by, or the Letters of Credit issued or participated in by such Lender, to a level below that which such Lender or its holding company could have achieved but for such Change in Law (taking into consideration such Lender's policies and the policies of its holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or its holding company for any such reduction suffered.
(c) Certificates for Reimbursement. A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section, including reasonable detail of the basis of calculation of the amount or amounts, and delivered to the Borrower shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.
(d) Delay in Requests. Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's right to demand such compensation, except that the Borrower shall not be required to compensate a Lender pursuant to this Section for any increased costs incurred or reductions suffered more than nine months prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender's intention to claim compensation therefore, unless the Change in Law giving rise to such increased costs or reductions is retroactive, in which case the nine-month period referred to above shall be extended to include the period of retroactive effect thereof.
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3.2 Taxes.
(a) Payments Subject to Taxes. If any Obligor, the Administrative Agent, or any Lender is required by Applicable Law to deduct or pay any Indemnified Taxes (including any Other Taxes) in respect of any payment by or on account of any obligation of an Obligor hereunder or under any other Loan Document, then (i) the sum payable shall be increased by that Obligor when payable as necessary so that after making or allowing for all required deductions and payments (including deductions and payments applicable to additional sums payable under this Section) the Administrative Agent or Lender, as the case may be, receives an amount equal to the sum it would have received had no such deductions or payments been required, (ii) the Obligor shall make any such deductions required to be made by it under Applicable Law and (iii) the Obligor shall timely pay the full amount required to be deducted to the relevant Governmental Authority in accordance with Applicable Law.
(b) Payment of Other Taxes by the Borrower. Without limiting the provisions of paragraph (a) above, the Borrower shall timely pay any Other Taxes to the relevant Governmental Authority in accordance with Applicable Law.
(c) Indemnification by the Borrower. The Borrower shall indemnify the Administrative Agent and each Lender, within 10 days after demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent or such Lender and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.
(d) Evidence of Payments. As soon as practicable after any payment of Indemnified Taxes or Other Taxes by an Obligor to a Governmental Authority, the Obligor shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.
(e) Status of Lenders. Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is resident for tax purposes, or any treaty to which such jurisdiction is a party, with respect to payments hereunder or under any other Loan Document shall, at the request of the Borrower, deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by Applicable Law or reasonably requested by the Borrower or the Administrative Agent, such properly completed and executed documentation prescribed by Applicable Law as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, (a) any Lender, if requested by the Borrower or the Administrative Agent, shall deliver such other documentation prescribed by Applicable Law or reasonably requested by the Borrower or the Administrative Agent as will enable the Borrower or the Administrative Agent to determine whether or not such Lender is subject to withholding or information reporting requirements, and (b) any Lender that ceases to be, or to be deemed to be, resident in Canada for purposes of Part XIII of the Income Tax Act (Canada) or any successor provision thereto shall within five days thereof notify the Borrower and the Administrative Agent in writing.
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(f) Treatment of Certain Refunds and Tax Reductions. If the Administrative Agent or a Lender determines, in its sole discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which an Obligor has paid additional amounts pursuant to this Section or that, because of the payment of such Taxes or Other Taxes, it has benefited from a reduction in Excluded Taxes otherwise payable by it, it shall pay to the Borrower or Obligor, as applicable, an amount equal to such refund or reduction (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower or Obligor under this Section with respect to the Taxes or Other Taxes giving rise to such refund or reduction), net of all out-of-pocket expenses of the Administrative Agent or such Lender, as the case may be, and without interest (other than any net after-Tax interest paid by the relevant Governmental Authority with respect to such refund). The Borrower or Obligor as applicable, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to the Borrower or Obligor (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender if the Administrative Agent or such Lender is required to repay such refund or reduction to such Governmental Authority. This paragraph shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes that it deems confidential) to the Borrower or any other Person, to arrange its affairs in any particular manner or to claim any available refund or reduction.
3.3 Mitigation Obligations: Replacement of Lenders.
(a) Designation of a Different Lending Office. If any Lender requests compensation under Section 3.1, or requires the Borrower to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.2 , then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 3.1 or 3.2 , as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.
(b) Replacement of Lenders. If any Lender requests compensation under Section 3.1, if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.2, if any Lender's obligations are suspended pursuant to Section 3.4 or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon 10 days' notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 10), all of its interests, rights and obligations under this Agreement and the related Loan Documents to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that:
(i) the Borrower pays the Administrative Agent the assignment fee specified in Section 10(b)(vi);
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(ii) the assigning Lender receives payment of an amount equal to the outstanding principal of its Loans and participations in disbursements under Letters of Credit, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any breakage costs and amounts required to be paid under this Agreement as a result of prepayment to a Lender) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts);
(iii) in the case of any such assignment resulting from a claim for compensation under Section 3.1 or payments required to be made pursuant to Section 3.2, such assignment will result in a reduction in such compensation or payments thereafter; and
(iv) such assignment does not conflict with Applicable Law.
A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.
3.4 Illegality.
If any Lender determines that any Applicable Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make or maintain any Loan (or to maintain its obligation to make any Loan), or to participate in, issue or maintain any Letter of Credit (or to maintain its obligation to participate in or to issue any Letter of Credit), or to determine or charge interest rates based upon any particular rate, then, on notice thereof by such Lender to the Borrower through the Administrative Agent, any obligation of such Lender with respect to the activity that is unlawful shall be suspended until such Lender notifies the Administrative Agent and the Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, the Borrower shall, upon demand from such Lender (with a copy to the Administrative Agent), prepay or, if conversion would avoid the activity that is unlawful, convert any Loans, or take any necessary steps with respect to any Letter of Credit in order to avoid the activity that is unlawful. Upon any such prepayment or conversion, the Borrower shall also pay accrued interest on the amount so prepaid or converted. Each Lender agrees to designate a different Lending Office if such designation will avoid the need for such notice and will not, in the good faith judgment of such Lender, otherwise be materially disadvantageous to such Lender.
3.5 Inability to Determine Rates Etc.
If the Required Lenders determine that for any reason a market for bankers' acceptances does not exist at any time or the Lenders cannot for other reasons, after reasonable efforts, readily sell bankers' acceptances or perform their other obligations under this Agreement with respect to bankers' acceptances, the Administrative Agent will promptly so notify the Borrower and each Lender. Thereafter, the Borrower's right to request the acceptance of bankers' acceptances shall be and remain suspended until the Required Lenders determine and the Agent notifies the Borrower and each Lender that the condition causing such determination no longer exists. If the Required Lenders determine that for any reason adequate and reasonable means do not exist for determining the LIBO Rate for any requested Interest Period with respect to a proposed LIBO Rate Loan, or that the LIBO Rate for any requested Interest Period with respect to a proposed LIBO Rate Loan does not adequately and fairly reflect the cost to such Lenders of funding such Loan, the Administrative Agent will promptly so notify the Borrower and each Lender. Thereafter, the obligation of the Lenders to make or maintain LIBO Rate Loans shall be suspended until the Administrative Agent (upon the instruction of the Required Lenders) revokes such notice. Upon receipt of such notice, the Borrower may revoke any pending request for a borrowing, conversion or continuation of LIBO Rate Loans or, failing that, will be deemed to have converted such request into a request for a borrowing of Base Rate Loans in the amount specified therein.
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4. Right of Setoff.
If an Event of Default has occurred and is continuing, each of the Lenders and each of their respective Affiliates is hereby authorized at any time and from time to time to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender or any such Affiliate to or for the credit or the account of any Obligor against any and all of the obligations of the Borrower now or hereafter existing under this Agreement or any other Loan Document to such Lender, irrespective of whether or not such Lender has made any demand under this Agreement or any other Loan Document and although such obligations of the Obligor may be contingent or unmatured or are owed to a branch or office of such Lender different from the branch or office holding such deposit or obligated on such indebtedness. The rights of each the Lenders and their respective Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff, consolidation of accounts and bankers' lien) that the Lenders or their respective Affiliates may have. Each Lender agrees to promptly notify the Borrower and the Administrative Agent after any such setoff and application, but the failure to give such notice shall not affect the validity of such setoff and application. If any Affiliate of a Lender exercises any rights under this Section 4, it shall share the benefit received in accordance with Section 5 as if the benefit had been received by the Lender of which it is an Affiliate.
5. Sharing of Payments by Lenders.
If any Lender, by exercising any right of setoff or counterclaim or otherwise, obtains any payment or other reduction that might result in such Lender receiving payment or other reduction of a proportion of the aggregate amount of its Loans and accrued interest thereon or other obligations hereunder greater than its pro rata share thereof as provided herein, then the Lender receiving such payment or other reduction shall (a) notify the Administrative Agent of such fact, and (b) purchase (for cash at face value) participations in the Loans and such other obligations of the other Lenders, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the Lenders rateably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and other amounts owing them, provided that
(i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest,
(ii) the provisions of this Section shall not be construed to apply to (x) any payment made by any Obligor pursuant to and in accordance with the express terms of this Agreement or (y) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in disbursements under Letters of Credit to any assignee or participant, other than to any Obligor or any Affiliate of an Obligor (as to which the provisions of this Section shall apply); and
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(iii) the provisions of this Section shall not be construed to apply to (w) any payment made while no Event of Default has occurred and is continuing in respect of obligations of the Borrower to such Lender that do not arise under or in connection with the Loan Documents, (x) any payment made in respect of an obligation that is secured by a Permitted Lien or that is otherwise entitled to priority over the Borrower's obligations under or in connection with the Loan Documents, (y) any reduction arising from an amount owing to an Obligor upon the termination of derivatives entered into between the Obligor and such Lender, or (z) any payment to which such Lender is entitled as a result of any form of credit protection obtained by such Lender.
The Obligors consent to the foregoing and agree, to the extent they may effectively do so under Applicable Law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against each Obligor rights of setoff and counterclaim and similar rights of Lenders with respect to such participation as fully as if such Lender were a direct creditor of each Obligor in the amount of such participation.
6. Administrative Agent's Clawback
(a) Funding by Lenders Presumption by Administrative Agent. Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any advance of funds that such Lender will not make available to the Administrative Agent such Lender's share of such advance, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with the provisions of this Agreement concerning funding by Lenders and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable advance available to the Administrative Agent, then the applicable Lender shall pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at a rate determined by the Administrative Agent in accordance with prevailing banking industry practice on interbank compensation. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such advance. If the Lender does not do so forthwith, the Borrower shall pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon at the interest rate applicable to the advance in question. Any payment by the Borrower shall be without prejudice to any claim the Borrower may have against a Lender that has failed to make such payment to the Administrative Agent.
(b) Payments by Borrower; Presumptions by Administrative Agent. Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of any Lender hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute the amount due to the Lenders. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at a rate determined by the Administrative Agent in accordance with prevailing banking industry practice on interbank compensation.
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7. Agency.
7.1 Appointment and Authority. Each of the Lenders and the Issuing Bank hereby irrevocably appoints the Person identified elsewhere in this Agreement as the Administrative Agent to act on its behalf as the Administrative Agent hereunder and under the other Loan Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. The provisions of this Article are solely for the benefit of the Administrative Agent, the Lenders and the Issuing Bank, and no Obligor shall have rights as a third party beneficiary of any of such provisions.
7.2 Rights as a Lender. The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with any Obligor or any Affiliate thereof as if such Person were not the Administrative Agent and without any duty to account to the Lenders.
7.3 Exculpatory Provisions.
(1) The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents. Without limiting the generality of the foregoing, the Administrative Agent:
(a) shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;
(b) shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for in the Loan Documents), but the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Loan Document or Applicable Law: and
(c) shall not, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is communicated to or obtained by the person serving as the Administrative Agent or any of its Affiliates in any capacity.
(2) The Administrative Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as is necessary, or as the Administrative Agent believes in good faith is necessary, under the provisions of the Loan Documents) or (H) in the absence of its own gross negligence or wilful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until notice describing the Default is given to the Administrative Agent by the Borrower or a Lender.
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(3) Except as otherwise expressly specified in this Agreement, the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition specified in this Agreement, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.
7.4 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of a Loan, or the issuance of a Letter of Credit, that by its terms must be fulfilled to the satisfaction of a Lender or the Issuing Bank, the Administrative Agent may presume that such condition is satisfactory to such Lender or the Issuing Bank unless the Administrative Agent shall have received notice to the contrary from such Lender or the Issuing Bank prior to the making of such Loan or the issuance of such Letter of Credit. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.
7.5 Indemnification of Administrative Agent. Each Lender agrees to indemnify the Administrative Agent and hold it harmless (to the extent not reimbursed by the Borrower), rateably according to its Applicable Percentage (and not jointly or jointly and severally) from and against any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel, which may be incurred by or asserted against the Administrative Agent in any way relating to or arising out of the Loan Documents or the transactions therein contemplated. However, no Lender shall be liable for any portion of such losses, claims, damages, liabilities and related expenses resulting from the Administrative Agent's gross negligence or wilful misconduct.
7.6 Delegation of Duties. The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by the Administrative Agent from among the Lenders (including the Person serving as Administrative Agent) and their respective Affiliates. The Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The provisions of this Article and other provisions of this Agreement for the benefit of the Administrative Agent shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.
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7.7 Replacement of Administrative Agent.
(1) The Administrative Agent may at any time give notice of its resignation to the Lenders, the Issuing Bank and the Borrower. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor, which shall be a Lender having a Commitment to a revolving credit if one or more is established in this Agreement and having an office in Toronto. Ontario or Montréal, Québec, or an Affiliate of any such Lender with an office in Toronto or Montréal. The Administrative Agent may also be removed at any time by the Required Lenders upon 30 days' notice to the Administrative Agent and the Borrower as long as the Required Lenders, in consultation with the Borrower, appoint and obtain the acceptance of a successor within such 30 days, which shall be a Lender having a Commitment to a revolving credit if one or more is established in this Agreement and having an office in Toronto or Montréal, or an Affiliate of any such Lender with an office in Toronto or Montréal.
(2) If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may on behalf of the Lenders, appoint a successor Administrative Agent meeting the qualifications specified in Section 7.7(1) provided that if the Administrative Agent shall notify the Borrower and the Lenders that no qualifying Person has accepted such appointment, then such resignation shall nonetheless become effective in accordance with such notice and (1) the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents (except that in the case of any collateral security held by the Administrative Agent on behalf of the Lenders under any of the Loan Documents the retiring Administrative Agent shall continue to hold such collateral security until such time as a successor Administrative Agent is appointed) and (2) all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender directly, until such time as the Required Lenders appoint a successor Administrative Agent as provided for above in the preceding paragraph.
(3) Upon a successor's appointment as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the former Administrative Agent, and the former Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents (if not already discharged therefrom as provided in the preceding paragraph). The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the termination of the service of the former Administrative Agent, the provisions of this Section 7 and of Section 9 shall continue in effect for the benefit of such former Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the former Administrative Agent was acting as Administrative Agent.
7.8 Non-Reliance on Administrative Agent and Other Lenders. Each Lender and the Issuing Bank acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender and the Issuing Bank also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.
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7.9 Collective Action of the Lenders. Each of the Lenders hereby acknowledges that to the extent permitted by Applicable Law, any collateral security and the remedies provided under the Loan Documents to the Lenders are for the benefit of the Lenders collectively and acting together and not severally and further acknowledges that its rights hereunder and under any collateral security are to be exercised not severally, but by the Administrative Agent upon the decision of the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for in the Loan Documents). Accordingly, notwithstanding any of the provisions contained herein or in any collateral security, each of the Lenders hereby covenants and agrees that it shall not be entitled to take any action hereunder or thereunder including, without limitation, any declaration of default hereunder or thereunder but that any such action shall be taken only by the Administrative Agent with the prior written agreement of the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for in the Loan Documents). Each of the Lenders hereby further covenants and agrees that upon any such written agreement being given, it shall co-operate fully with the Administrative Agent to the extent requested by the Administrative Agent. Notwithstanding the foregoing, in the absence of instructions from the Lenders and where in the sole opinion of the Administrative Agent, acting reasonably and in good faith, the exigencies of the situation warrant such action, the Administrative Agent may without notice to or consent of the Lenders take such action on behalf of the Lenders as it deems appropriate or desirable in the interest of the Lenders.
7.10 No Other Duties. etc. Anything herein to the contrary notwithstanding none of the Bookrunners Arrangers or holders of similar titles, if any, specified in this Agreement shall have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents, except in its capacity, as applicable, as the Administrative Agent or a Lender hereunder.
8. Notices: Effectiveness; Electronic Communication
(a) Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as-provided in paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier to the addresses or telecopier numbers specified elsewhere in this Agreement or, if to a Lender, to it at its address or telecopier number specified in the Register or, if to an Obligor other than the Borrower, in care of the Borrower.
Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given on a business day between 9:00 a.m. and 5:00 p.m. local time where the recipient is located, shall be deemed to have been given at 9:00 a.m. on the next business day for the recipient). Notices delivered through electronic communications to the extent provided in paragraph (b) below, shall be effective as provided in said paragraph (b).
(b) Electronic Communications. Notices and other communications to the Lenders and the Issuing Bank hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent provided that the foregoing shall not apply to notices to any Lender of Loans to be made or Letters of Credit to be issued if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it provided that approval of such procedures may be limited to particular notices or communications.
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Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.
(c) Change of Address. Etc. Any party hereto may change its address or telecopier number for notices and other communications hereunder by notice to the other parties hereto.
9. Expenses; Indemnity: Damage Waiver
(a) Costs and Expenses. The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the preparation, negotiation, execution, delivery and administration of this Agreement and the other Loan Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (ii) all reasonable out-of-pocket expenses incurred by the Administrative Agent, any Lender or the Issuing Bank, including the reasonable fees, charges and disbursements of counsel, in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents, including its rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit.
(b) Indemnification by the Borrower. The Borrower shall indemnify the Administrative Agent (and any sub-agent thereof), each Lender and the Issuing Bank, and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by any Indemnitee or asserted against any Indemnitee by any third party or by any Obligor arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance or non-performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation or non-consummation of the transactions contemplated hereby or thereby, (ii) any Loan or Letter of Credit or the use or proposed use of the proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (ii) any actual or alleged presence or Release of Hazardous Materials on or from any property owned or operated by any Obligor, or any Environmental Liability related in any way to any Obligor, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by an Obligor and regardless of whether any Indemnitee is a party thereto, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (x) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee or (y) result from a claim brought by the Borrower or any other Obligor against an Indemnitee for breach in bad faith of such Indemnitee's obligations hereunder or under any other Loan Document, if the Obligor has obtained a final and nonappealable judgment in its favour on such claim as determined by a court of competent jurisdiction, nor shall it be available in respect of matters specifically addressed in Sections 3.1, 3.2 and 9(a).
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(c) Reimbursement by Lenders. To the extent that the Borrower for any reason fails to indefeasibly pay any amount required under paragraph (a) or (b) of this Section to be paid by it to the Administrative Agent (or any sub-agent thereof), the Issuing Bank or any Related Party of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent), the Issuing Bank or such Related Party, as the case may be, such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent) or the Issuing Bank in its capacity as such, or against any Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent) or Issuing Bank in connection with such capacity. The obligations of the Lenders under this paragraph (c) are subject to the other provisions of this Agreement concerning several liability of the Lenders.
(d) Waiver of Consequential Damages. Etc. To the fullest extent permitted by Applicable Law, the Obligors shall not assert, and hereby waive, any claim against any Indemnitee, on any theory of liability, for indirect, consequential, punitive, aggravated or exemplary damages (as opposed to direct damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby (or any breach thereof), the transactions contemplated hereby or thereby, any Loan or Letter of Credit or the use of the proceeds thereof. No Indemnitee shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby.
(e) Payments. All amounts due under this Section shall be payable promptly after demand therefor. A certificate of the Administrative Agent or a Lender setting forth the amount or amounts owing to the Administrative Agent, Lender or a sub-agent or Related Party, as the case may be, as specified in this Section, including reasonable detail of the basis of calculation of the amount or amounts, and delivered to the Borrower shall be conclusive absent manifest error.
10. Successors and Assigns
(a) Successors and Assigns Generally. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that no Obligor may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of paragraph (b) of this Section, (ii) by way of participation in accordance with the provisions of paragraph (d) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of paragraph (f) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in paragraph (d) of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
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(b) Assignments by Lenders. Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that:
(i) except if an Event of Default has occurred and is continuing or in the case of an assignment of the entire remaining amount of the assigning Lenders Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, the aggregate amount of the Commitment being assigned (which for this purpose includes Loans outstanding thereunder) or, if the applicable Commitment is not then in effect, the principal outstanding balance of the Loan of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if "Trade Date" is specified in the Assignment and Assumption, as of the Trade Date) shall not be less than $5,000,000, in the case of any assignment in respect of a revolving facility, or $1,000,000, in the case of any assignment in respect of a term facility, unless each of the Administrative Agent and, so long as no Default has occurred and is continuing, the Borrower otherwise consent to a lower amount (each such consent not to be unreasonably withheld or delayed);
(ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement with respect to the Loan or the Commitment assigned, except that this clause (ii) shall not prohibit any Lender from assigning all or a portion of its rights and obligations among separate credits on a non-pro rata basis;
(iii) any assignment of a Commitment relating to a credit under which Letters of Credit may be issued must be approved by any Issuing Bank (such approval not to be unreasonably withheld or delayed) unless the Person that is the proposed assignee is itself already a Lender with a Commitment under that credit;
(iv) any assignment must be approved by the Administrative Agent (such approval not to be unreasonably withheld or delayed) unless:
(x) in the case of an assignment of a Commitment relating to a revolving credit, the proposed assignee is itself already a Lender with the same type of Commitment,
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(y) no Event of Default has occurred and is continuing, and the assignment is of a Commitment relating to a non-revolving credit that is fully advanced, or
(z) the proposed assignee is a bank whose senior, unsecured, non-credit enhanced, long term debt is rated at least A3, A- or A low by at least two of Moody's Investor Services Inc., Standard & Poor's, a division of The McGraw-Hill Companies, Inc. and Dominion Bond Rating Service Limited, respectively;
(v) any assignment must be approved by the Borrower (such approval not to be unreasonably withheld or delayed) unless the proposed assignee is itself already a Lender with the same type of Commitment or a Default has occurred and is continuing; and
(vi) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee in an amount specified elsewhere in this Agreement and the Eligible Assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.
Subject to acceptance and recording thereof by the Administrative Agent pursuant to paragraph (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement and the other Loan Documents, including any collateral security, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 3 and 9, and shall continue to be liable for any breach of this Agreement by such Lender, with respect to facts and circumstances occurring prior to the effective date of such assignment. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (d) of this Section. Any payment by an assignee to an assigning Lender in connection with an assignment or transfer shall not be or be deemed to be a repayment by the Borrower or a new Loan to the Borrower.
(c) Register. The Administrative Agent shall maintain at one of its offices in Toronto, Ontario or Montréal, Quebec a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.
(d) Participations. Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural person, an Obligor or any Affiliate of an Obligor) (each, a "Participant") in all or a portion of such Lender's rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it) provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (Hi) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any payment by a Participant to a Lender in connection with a sale of a participation shall not be or be deemed to be a repayment by the Borrower or a new Loan to the Borrower.
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Subject to paragraph (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Section 3 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 4 as though it were a Lender, provided such Participant agrees to be subject to Section 5 as though it were a Lender.
(e) Limitations upon Participant Rights. A Participant shall not be entitled to receive any greater payment under Section 3.1 and 3.2 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 3.2 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 3.2(e) as though it were a Lender.
(f) Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, but no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
11. Governing Law: Jurisdiction: Etc.
(a) Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the Province specified elsewhere in this Agreement and the laws of Canada applicable in that Province.
(b) Submission to Jurisdiction. Each Obligor irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the courts of the Province specified elsewhere in this Agreement, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any other Loan Document, or for recognition or enforcement of any judgment, and each of the parties hereto irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or in any other Loan Document shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against any Obligor or its properties in the courts of any jurisdiction.
(c) Waiver of Venue. Each Obligor irrevocably and unconditionally waives, to the fullest extent permitted by Applicable Law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by Applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court,
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12. WAIVER OF JURY TRIAL
EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
13. Counterparts: Integration: Effectiveness: Electronic Execution
(a) Counterparts: Integration: Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Loan Documents and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in the conditions precedent Section(s) of this Agreement, this Agreement shall become effective when it has been executed by the Administrative Agent and when the Administrative Agent has received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by telecopy or by sending a scanned copy by electronic mail shall be effective as delivery of a manually executed counterpart of this Agreement.
(b) Electronic Execution of Assignments. The words "execution," "signed" 'signature" and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system as the case may be, to the extent and as provided for in any Applicable Law, including Parts 2 and 3 of the Personal Information Protection and Electronic Documents Act (Canada), the Electronic Commerce Act, 2000 (Ontario) and other similar federal or provincial laws based on the Uniform Electronic Commerce Act of the Uniform Law Conference of Canada or its Uniform Electronic Evidence Act, as the case may be.
14. Treatment of Certain Information: Confidentiality
(1) Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to it, its Affiliates and its and its Affiliates' respective partners, directors, officers, employees, agents, advisors and representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority), (c) to the extent required by Applicable Laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap, derivative, credit-linked note or similar transaction relating to the Borrower and its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent or any Lender on a non-confidential basis from a source other than an Obligor.
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(2) For purposes of this Section "Information" means all information received in connection with this Agreement from any Obligor relating to any Obligor or any of its Subsidiaries or any of their respective businesses, other than any such information that is available to the Administrative Agent or any Lender on a non-confidential basis prior to such receipt. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. In addition, the Administrative Agent may disclose to any agency or organization that assigns standard identification numbers to loan facilities such basic information describing the facilities provided hereunder as is necessary to assign unique identifiers (and, if requested, supply a copy of this Agreement), it being understood that the Person to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to make available to the public only such Information as such person normally makes available in the course of its business of assigning identification numbers.
(3) In addition, and notwithstanding anything herein to the contrary, the Administrative Agent may provide the information described on Exhibit B concerning the Borrower and the credit facilities established herein to Loan Pricing Corporation and/or other recognized trade publishers of information for general circulation in the loan market.
EXHIBIT A
ASSIGNMENT AND ASSUMPTION
This Assignment and Assumption (the "Assignment and Assumption") is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the "Assignor") and [Insert name of Assignee] (the "Assignee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the "Credit Agreement"), receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.
For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (i) all of the Assignor's rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the respective facilities identified below (including without limitation any letters of credit, guarantees, and swingline loans included in such facilities) and (ii) to the extent permitted to be assigned under Applicable Law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan-transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned pursuant to clauses (i) and (ii) above being referred to herein collectively as, the "Assigned Interest"). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.
1. Assignor:__________________________________________
2. Assignee:__________________________________________
[and is an Affiliate/Approved Fund of [Identify Lender]]
3. Borrower(s):_______________________________________
4. Administrative Agent: _______________________, as the administrative agent under the Credit Agreement
5. Credit Agreement: [The [amount] Credit Agreement dated as of___ among [name of Borrower(s)], the Lenders parties thereto, [name of Administrative Agent], as Administrative Agent, and the other agents parties thereto]
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6. Assigned Interest:
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Facility Assigned |
Aggregate Amount of Commitment/Loans for |
Amount of |
Percentage |
CUSIP Number |
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$ |
$ |
% |
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$ |
$ |
% |
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$ |
$ |
% |
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[7. Trade Date:_________________________________
Effective Date: , 20 [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]
The terms set forth in this Assignment and Assumption are hereby agreed to:
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ASSIGNOR |
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By: |
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Title: |
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ASSIGNEE |
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By: |
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Name: |
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Title: |
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[Consented to and] Accepted:
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[NAME OF ADMINISTRATIVE AGENT], |
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By: |
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Name: |
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Title: |
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[Consented to:] |
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[NAME OF RELEVANT PARTY] |
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Per: |
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Name: |
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Title: |
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ANNEX 1 to Assignment and Assumption
[_____________________]
STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION
1. Representations and Warranties.
1.1 Assignor. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.
1.2 Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it meets all requirements of an Eligible Assignee under the Credit Agreement (subject to receipt of such consents as may be required under the Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section thereof, as applicable, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (v) if it is a Foreign Lender, attached to the Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.
2. Payments. From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignee whether such amounts have accrued prior to, on or after the Effective Date. The Assignor and the Assignee shall make all appropriate adjustments in payments by the Administrative Agent for periods prior to the Effective Date or with respect to the making of this assignment directly between themselves.
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3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and permitted assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy or by sending a scanned copy by electronic mail shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law governing the Credit Agreement.
EXHIBIT B
LOAN MARKET DATA TEMPLATE
Recommended Data Fields - At Close
The items highlighted in bold are those that Loan Pricing Corporation (LPC) deem essential. The remaining items are those that LPC has seen become more prominent over time as transparency has increased in the U.S. Loan Market.
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Company Level Issuer Name Location SIC (Cdn) Identification Number(s) Revenue *Measurement of Risk S&P Sr. Debt S&P Issuer Moody's Sr. Debt Moody's Issuer Fitch Sr. Debt Fitch Issuer S&P Implied (internal assessment) DBRS Other Ratings *Industry Classification Moody's Industry S&P Industry Parent Financial Ratios |
Deal Specific Currency/Amount Date Purpose Sponsor Financial Covenants Target Company Assignment Language Law Firms MAC Clause Springing lien Cash Dominion Mandatory Prepays Restrct'd Payments (Neg Covs) Other Restrictions |
Facility Specific Currency/Amount Type Purpose Tenor Term Out Option Expiration Date Facility Signing Date Pricing Base Rate(s) / Spread(s) / BA / LIBOR Initial Pricing Level Pricing Grid (tied to, levels) Grid Effective Date Fees Participation Fee (tiered also) Commitment Fee Annual Fee Utilization Fee LC Fee(s) BA Fee Prepayment Fee Other Fees to Market Security Secured/Unsecured Collateral and Seniority of Claim Collateral Value Guarantors Lenders Names/Titles Lender Commitment ($) Committed/Uncommitted Distribution method Amortization Schedule Borrowing Base/Advance Rates New Money Amount Country of Syndication Facility Rating (Loss given default) S&P Bank Loan Moody's Bank Loan Fitch Bank Loan DBRS Other Ratings |
* These items would be considered useful to capture from an analytical perspective
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Updated Schedules
See Attached
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6.01(b) ‐ Companies Information
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Company |
Class |
Prior |
Governing |
Registered |
Approved |
Number and |
Shareholders |
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Names/Corporate |
Jurisdiction |
Office and |
Jurisdictions |
classes of |
and holdings |
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Predecessors |
and any |
Principal |
and |
issued and |
(number and |
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prior |
Place of |
locations |
outstanding |
class) |
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Business |
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shares |
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Organigram |
Borrower |
Inform Resources |
Canada |
35 English |
Each |
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n/a, public |
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Holdings |
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Corp.; |
(formerly |
Drive, |
Province of |
company |
|
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Inc. |
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British |
Moncton, |
Canada |
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0885160 B.C. Ltd.; |
Columbia) |
New |
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Brunswick, |
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Inform |
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E1E 3X3 |
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Exploration Corp.; |
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OrganiGram |
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|
Holdings Inc. |
|
|
|
|
|
|
Organigram |
Secured |
|
New |
35 English |
Each |
[Redacted] |
[Redacted] |
|
Inc. |
Subsidiary |
Brunswick |
Drive, |
Province of |
|
|
|
|
|
|
|
Moncton, |
Canada |
|
|
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|
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|
New |
|
|
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Brunswick, |
|
|
|
|
|
|
|
|
E1E 3X3 |
|
|
|
|
|
10870277 |
Secured |
N/A |
Canada |
35 English |
|
[Redacted] |
[Redacted] |
|
Canada Inc. |
Subsidiary |
|
|
Drive, |
|
|
|
|
|
|
|
|
Moncton, |
|
|
|
|
|
|
|
|
New |
|
|
|
|
|
|
|
|
Brunswick, |
|
|
|
|
|
|
|
|
E1E 3X3 |
|
|
|
|
10667480 |
Unsecured |
N/A |
Canada |
35 English |
|
[Redacted] |
[Redacted] |
|
Canada |
Subsidiary |
|
|
Drive, |
|
|
|
|
Corp. |
|
|
|
Moncton, |
|
|
|
|
|
|
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New |
|
|
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|
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|
Brunswick, |
|
|
|
|
|
|
|
|
E1E 3X3 |
|
|
|
|
10858501 |
Unsecured |
N/A |
Canada |
35 English |
|
[Redacted] |
[Redacted] |
|
Canada Inc. |
Subsidiary |
|
|
Drive, |
|
|
|
|
|
|
|
|
Moncton, |
|
|
|
|
|
|
|
|
New |
|
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|
Brunswick, |
|
|
|
|
|
|
|
|
E1E 3X3 |
|
|
|
|
10858668 |
Unsecured |
N/A |
Canada |
35 English |
|
[Redacted] |
[Redacted] |
|
Canada Inc. |
Subsidiary |
|
|
Drive, |
|
|
|
|
|
|
|
|
Moncton, |
|
|
|
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|
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New |
|
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|
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|
Brunswick, |
|
|
|
|
|
|
|
|
E1E 3X3 |
|
|
|
|
10870269 |
Unsecured |
N/A |
Canada |
35 English |
|
[Redacted] |
[Redacted] |
|
Canada Inc. |
Subsidiary |
|
|
Drive, |
|
|
|
|
|
|
|
|
Moncton, |
|
|
|
|
|
|
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|
New |
|
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|
Brunswick, |
|
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|
|
|
|
|
|
E1E 3X3 |
|
|
-29-
6.01(h) ‐ Material Permits
[Redacted]
-30-
6.01(i) ‐ Specific Permitted Liens
Nil.
-31-
6.01(j) ‐ Owned Properties
[Redacted]
-32-
6.01(k) ‐ Material leased Properties
[Redacted]
-33-
6.01(l) ‐ Intellectual Property
[Redacted]
-34-
6.01(n) ‐ Material Agreements
[Redacted]
-35-
6.01(o) ‐ Labour Agreements
The Companies have no contracts with labour unions or employee associations as at the Closing Date.
-36-
6.01(p) ‐ Environmental Matters
Nil.
-37-
6.01(q) ‐ Litigation
[Redacted]
-38-
6.01(r) ‐ Pension Plans
[Redacted]
-39-
7.02(iii) ‐ Investments existing on the Closing Date
[Redacted]
