EXHIBIT 99.2
SNDL Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
For the three months ended March 31, 2023
Management’s Discussion and Analysis
This Management’s Discussion and Analysis (“MD&A”) of the financial condition and performance of SNDL Inc. (“SNDL” or the “Company”) for the three months ended March 31, 2023 is dated May 12, 2023. This MD&A should be read in conjunction with the Company’s condensed consolidated interim financial statements and the notes thereto for the three months ended March 31, 2023 (the “Interim Financial Statements”) and the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 (the “Audited Financial Statements”) and the risks identified in the Company's Annual Report on Form 20-F for the year ended December 31, 2022 (the “Annual Report”) and elsewhere in this MD&A. This MD&A has been prepared in accordance with National Instrument 51-102 - Continuous Disclosure Obligations and is presented in thousands of Canadian dollars, except where otherwise indicated. All share amounts in this MD&A have been adjusted retrospectively to reflect the Share Consolidation (as defined herein) unless otherwise noted. See “Liquidity and Capital Resources—Equity”.
MD&A – Table of Contents
COMPANY OVERVIEW
SNDL Inc., formerly Sundial Growers Inc., operates under four reportable segments:
•Liquor retail sales of wines, beers and spirits,
•Cannabis retail sales of cannabis products and accessories through corporate-owned and franchised cannabis retail operations,
•Cannabis operations as a licensed producer that grows cannabis using indoor facilities and manufactures cannabis products, providing proprietary cannabis processing services; and
•Investments targeting the cannabis industry.
The principal activities of the Company are the retailing of wines, beers and spirits under the Wine and Beyond, Liquor Depot and Ace Liquor retail banners; the operation and support of corporate-owned and franchise retail cannabis stores in certain Canadian jurisdictions where the private sale of recreational cannabis is permitted, under the Value Buds, Sweet Tree, Spiritleaf, Superette and Firesale retail banners; the manufacturing of cannabis products providing proprietary cannabis processing services, the production, distribution and sale of cannabis domestically and for export pursuant to the Cannabis Act (Canada) (the “Cannabis Act”) through a cannabis brand portfolio that includes Top Leaf, Contraband, Citizen Stash, Sundial Cannabis, Vacay, Spiritleaf Selects, Palmetto, Value Buds, Versus, Bonjak, Namaste, Re-up and Grasslands; and, the deployment of capital to direct and indirect investments and partnerships throughout the cannabis industry.
The Company produces and markets cannabis products for the Canadian adult-use market and recently expanded to include export for the international medicinal market. SNDL’s purpose-built indoor modular grow rooms create consistent, highly controlled cultivation environments and are the foundation of the Company’s production of high-quality, strain-specific cannabis products. SNDL’s operations cultivate cannabis using approximately 448,000 square feet of total space in Olds and approximately 380,000 square feet of total space in Atholville. SNDL’s extraction and manufacturing operations include 81,800 square feet of total space in British Columbia and 32,000 square feet of total space in Ontario. The Company has a distribution network that covers 98% of the national adult-use cannabis industry.
SNDL and its subsidiaries operate solely in Canada with the exception of Green Roads, Inc. (“Green Roads”), a subsidiary acquired in the Valens Transaction (defined below) who sold CBD products in the United States and is classified as held for sale and discontinued operations. Through its joint venture, SunStream Bancorp Inc. (“SunStream”), the Company provides growth capital that pursues indirect investment and financial services opportunities in the cannabis sector, as well as other investment opportunities. The Company also makes strategic portfolio investments in debt and equity securities.
The Company also owns approximately 63% of Nova Cannabis Inc. (“Nova”), whose principal activities are related to the retail sale of cannabis.
SNDL was incorporated under the Business Corporations Act (Alberta) on August 19, 2006. The Company’s common shares are listed under the symbol “SNDL” on the NASDAQ Capital Market (“Nasdaq”).
On July 25, 2022, the Company’s shareholders approved a special resolution amending the articles of SNDL to change the name of the Company from “Sundial Growers Inc.” to “SNDL Inc.” and the change became effective on the same day. In light of the evolution of SNDL’s business over the past two years, the new name more appropriately reflects the operating model and strategy across liquor and cannabis retail, cannabis cultivation and production and investments. The rebrand underscores SNDL’s differentiated vertical integration model and reorients to its position as Canada’s largest private sector regulated cannabis and liquor product platform.
SNDL is headquartered in Calgary, Alberta, with operations in Olds, Alberta, Kelowna, British Columbia, Bolton, Ontario and Atholville, New Brunswick, and corporate-owned and franchised retail liquor and cannabis stores in five provinces across Canada.
SNDL’s overall strategy is to build sustainable, long-term shareholder value by improving liquidity and cost of capital while optimizing the capacity and capabilities of its production facilities in the creation of a consumer-centric brand and product portfolio. SNDL’s retail operations will continue to build a Canadian retail liquor brand and a network of retail cannabis stores across Canadian jurisdictions where the private distribution of cannabis is legal. SNDL’s investment operations seek to deploy capital through direct and indirect investments and partnerships throughout the cannabis industry.
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RECENT DEVELOPMENTS
Strategic partnership with nova
On May 5, 2023, Nova’s shareholders approved the previously announced agreement with SNDL to implement a strategic partnership to create a well-capitalized cannabis retail platform in Canada under a vertical integration model as amended on April 3, 2023. Completion of the Nova reorganization remains subject to certain other customary closing conditions, including the receipt of certain regulatory approvals required under applicable provincial cannabis legislation. Subject to the satisfaction or waiver of all closing conditions, the Nova reorganization is expected to be completed on or before June 30, 2023.
LIGHTBOX Acquisition
On March 28, 2023, the Company announced that it had entered into an agreement (the “Lightbox Agreement”) with Lightbox Enterprises Ltd. (“Lightbox”) to acquire four cannabis retail stores operating under the Dutch Love Cannabis banner (“Dutch Love”). Under the Lightbox Agreement, SNDL will acquire from Lightbox the rights to four Dutch Love stores and the rights to use certain Dutch Love related intellectual property for total consideration of $7.8 million. The consideration is comprised of i) $1.5 million cash; ii) the cancellation of the $3.0 million debt owed by Lightbox to SNDL; and iii) $3.3 million payable in common shares of SNDL.
The transaction is expected to be completed in the context of Lightbox's proceedings under the CCAA from the Supreme Court of British Columbia (the “BC Court”). On December 2, 2022, the BC Court granted an order that approved a sale and investment solicitation process (“SISP”) in respect of the assets, undertakings and properties of Lightbox, and the Lightbox Agreement is the result of the SISP process.
The transaction is anticipated to close by the end of June 2023.
Valens Acquisition
On August 22, 2022, the Company and The Valens Company Inc. (“Valens”) announced that they had entered into an arrangement agreement (the “Valens Arrangement Agreement”) pursuant to which the Company would acquire, subject to Valens’ shareholder approval and customary closing conditions, all of the issued and outstanding common shares of Valens, other than those owned by SNDL and its subsidiaries, by way of a statutory plan of arrangement (the “Valens Transaction”). Concurrently with the execution of the Valens Arrangement Agreement, the Company assumed Valens’ non-revolving term loan facility from its then-existing lender, and amended and restated the related credit agreement to provide for a $60.0 million non-revolving term loan facility with a maturity date of December 15, 2023 and an interest rate of 10% per annum (the “Valens Facility”). As Valens is now a wholly-owned subsidiary of the Company, the Valens Facility became inter-company debt following the closing of the Valens Transaction. The Valens Transaction closed on January 17, 2023.
The Valens Transaction consideration was comprised of (i) the assumption of Valens’ $60 million non-revolving term loan facility from its then-existing lender, as described above, and (ii) an aggregate 27.6 million SNDL common shares valued at $84.0 million based on the fair value of each common share of the Company on the closing date (0.3334 of a SNDL common share for each Valens common share).
Valens is a manufacturer of cannabis products providing proprietary cannabis processing services, in addition to product development, manufacturing, and commercialization of cannabis consumer packaged goods. Valens products are formulated for the medical, health and wellness, and recreational consumer segments. Valens distributes medicinal cannabis products to Australia through its subsidiary Valens Australia Pty Ltd. (“Valens Australia”). Additionally, Valens manufactured, distributed, and sold a wide range of CBD products in the United States through its subsidiary Green Roads, prior to the Valens Transaction. Green Roads filed for bankruptcy on March 6, 2023. Subject to the bid procedures, a successful bid of USD$3.1 million was accepted and the sale was approved at a court hearing on May 10, 2023.
Superette Acquisition
On February 7, 2023, the Company announced that, in the context of the Superette Group’s (as defined below) proceedings under the Companies’ Creditors Arrangement Act (Canada) (“CCAA”), it has successfully closed the Superette Transaction (as defined below) contemplated by the agreement of purchase and sale dated August 29, 2022 (as amended
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and restated on December 12, 2022) (the “APS”) and the approval and vesting order issued by the Ontario Superior Court of Justice (Commercial List) on December 20, 2022.
The Superette Group sells cannabis and non-cannabis branded merchandise and has furthered its market exposure and brand awareness through private-label cannabis offerings. Pursuant to the APS, certain of the Superette entities, including Superette Inc. and Superette Ontario Inc. (“Superette Ontario”) (collectively, the “Superette Group”), have sold their right, title and interest in (i) five Superette retail locations within Toronto and Ottawa; (ii) the intellectual property rights related to the Superette brand (the “Superette IP”); and (iii) the shares of Superette Ontario (collectively, the “Superette Transaction”).
OTHER DEVELOPMENTS
Cost-saving measures and rightsizing cannabis operations at alberta facility
On February 13, 2023, the Company announced changes to its operations through a rightsizing of cannabis cultivation in Olds, Alberta, and Atholville, New Brunswick in an effort to focus the facility on premium products and brands. On April 27, the Company announced the next step in rightsizing the Olds operation. A total of 172 positions were eliminated in these two reductions in workforce and are expected to deliver approximately $9 million in savings across labour and operational costs for the remainder of 2023. The Valens Transaction has accelerated the need to optimize and rationalize SNDL's manufacturing and operational footprint to better address market saturation and oversupply.
Through its integration and rationalization efforts, the Company is assessing all assets and will continue to make decisions based on sustainable profitability.
Initiation of share repurchase program
On November 16, 2022, the Company announced that the Board approved a renewal of the share repurchase program upon its expiry on November 19, 2022. The renewed share repurchase program authorizes the Company to repurchase up to $100 million of its outstanding common shares through open market purchases at prevailing market prices. SNDL may purchase a maximum of 11.8 million common shares under the share repurchase program, representing approximately 5% of the issued and outstanding common shares as at the date of announcement, and will expire on November 30, 2023. The renewed share repurchase program does not require the Company to purchase any minimum number of common shares and repurchases may be suspended or terminated at any time at the Company's discretion. The actual number of common shares which may be purchased pursuant to the renewed share repurchase program and the timing of any purchases will be determined by SNDL’s management and the Board. All common shares purchased pursuant to the renewed share repurchase program will be returned to treasury for cancellation.
Refer to “Liquidity and Capital Resources – Equity” below and “Item 16E – Purchases of Equity Securities by the Issuer and Affiliated Purchasers” in the Annual Report to which this MD&A is attached as an exhibit for further details regarding common shares purchased and cancelled during 2022 and 2023.
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OPERATIONAL AND FINANCIAL HIGHLIGHTS
The following table summarizes selected operational and financial information of the Company for the periods noted.
| | | | | | | | | | | | |
| | | | | | | | |
($000s, except as indicated) | Q1 2023 | | Q1 2022 | | Change | | % Change | |
Financial | | | | | | | | |
Gross revenue | | 212,899 | | | 20,127 | | | 192,772 | | | 958 | % |
Net revenue | | 202,452 | | | 17,597 | | | 184,855 | | | 1050 | % |
Cost of sales | | 158,149 | | | 14,326 | | | 143,823 | | | 1004 | % |
Gross margin (1) | | 32,541 | | | 3,419 | | | 29,122 | | | 852 | % |
Gross margin % | | 16 | % | | 19 | % | | | | -3 | % |
Gross margin before fair value adjustments (1)(2) | | 35,126 | | | 1,290 | | | 33,836 | | | 2623 | % |
Gross margin before fair value adjustments % (2) | | 17 | % | | 7 | % | | | | 10 | % |
Interest and fee revenue | | 4,211 | | | 3,861 | | | 350 | | | 9 | % |
Investment loss | | (5,169 | ) | | (17,710 | ) | | 12,541 | | | 71 | % |
Loss from operations | | (32,020 | ) | | (23,170 | ) | | (8,850 | ) | | -38 | % |
Net loss from continuing operations attributable to owners of the Company | | (34,203 | ) | | (37,904 | ) | | 3,701 | | | 10 | % |
Per share, basic and diluted | | (0.13 | ) | | (0.18 | ) | | 0.05 | | | 28 | % |
Net loss from discontinued operations attributable to owners of the Company | | (1,365 | ) | | — | | | (1,365 | ) | | 100 | % |
Per share, basic and diluted | | (0.01 | ) | | — | | | (0.01 | ) | | 100 | % |
Net loss attributable to owners of the Company | | (35,568 | ) | | (37,904 | ) | | 2,336 | | | 6 | % |
Per share, basic and diluted | | (0.14 | ) | | (0.18 | ) | | 0.04 | | | 22 | % |
Adjusted EBITDA from continuing operations (2) | | 7,415 | | | (675 | ) | | 8,090 | | | 1199 | % |
| | | | | | | | |
Statement of Financial Position | | | | | | | | |
Cash and cash equivalents | | 213,253 | | | 422,824 | | | (209,571 | ) | | -50 | % |
Inventory | | 153,542 | | | 140,950 | | | 12,592 | | | 9 | % |
Property, plant and equipment | | 200,228 | | | 319,747 | | | (119,519 | ) | | -37 | % |
Total assets | | 1,617,746 | | | 1,996,272 | | | (378,526 | ) | | -19 | % |
(1)Includes inventory obsolescence and impairment expense of $9.2 million for the three months ended March 31, 2023, and expense of $2.0 million for the three months ended March 31, 2022.
(2)Adjusted EBITDA from continuing operations, gross margin before fair value adjustments and gross margin before fair value adjustments percentage are specified financial measures that do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. Refer to the “Specified Financial Measures” section of this MD&A for further information.
CONSOLIDATED RESULTS
General and administrative
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Salaries and wages | | | 28,863 | | | | 6,346 | |
Consulting fees | | | 747 | | | | 412 | |
Office and general | | | 12,826 | | | | 1,698 | |
Professional fees | | | 3,155 | | | | 2,087 | |
Merchant processing fees | | | 1,271 | | | | — | |
Director fees | | | 131 | | | | 88 | |
Other | | | 1,580 | | | | 51 | |
| | | 48,573 | | | | 10,682 | |
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General and administrative expenses for the three months ended March 31, 2023 were $48.6 million compared to $10.7 million for the three months ended March 31, 2022. The increase of $37.9 million was mainly due to increases in salaries and wages, office and general expenses, professional fees and merchant processing fees as a result of the Alcanna Inc. (“Alcanna”), Valens and Zenabis Ltd. (“Zenabis”) acquisitions.
Share-based compensation
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Equity-settled expense | | | | | | |
Simple warrants | | | (337 | ) | | | 547 | |
Stock options | | | (5 | ) | | | 29 | |
Restricted share units | | | 2,624 | | | | 2,389 | |
Cash-settled expense | | | | | | |
Deferred share units | | | (73 | ) | | | 1,239 | |
| | | 2,209 | | | | 4,204 | |
Share-based compensation expense includes the expense related to the Company’s issuance of simple and performance warrants, stock options, restricted share units (“RSUs”) and deferred share units (“DSUs”) to employees, directors, and others at the discretion of the Board. Share-based compensation also includes the expense related to Nova’s issuance of RSUs and DSUs.
Share-based compensation expense for the three months ended March 31, 2023 was $2.2 million compared to $4.2 million for the three months ended March 31, 2022. The decrease of $2.0 million was due to a decrease in DSU expense and simple warrant expense, partially offset by an increase in RSU expense. The decrease in DSU expense was caused by a decrease in fair value of the DSUs resulting from a decrease in the Company’s share price. The decrease in simple warrant expense was caused by the vesting of awards issued in prior years in addition to the recovery of unvested forfeitures. The increase in RSU expense was due to the issuance of new RSUs during the period, partially offset by the vesting of RSUs granted in prior periods.
Transaction costs
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Transaction costs | | | 2,040 | | | | 6,481 | |
Transaction costs for the three months ended March 31, 2023, were $2.0 million compared to $6.5 million for the three months ended March 31, 2022. Transaction costs in the current period relate to relate to various acquisitions, including Valens and Superette. Transaction costs in the comparative period include costs associated with the Alcanna acquisition.
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Finance costs
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Cash finance expense | | | | | | |
Other finance costs | | | 28 | | | | 24 | |
| | | 28 | | | | 24 | |
Non-cash finance expense | | | | | | |
Change in fair value of investments at fair value through profit or loss | | | 3,368 | | | | — | |
Accretion on lease liabilities | | | 1,946 | | | | 340 | |
Financial guarantee liability (recovery) expense | | | (139 | ) | | | (142 | ) |
Other | | | 190 | | | | — | |
| | | 5,365 | | | | 198 | |
Interest income | | | (220 | ) | | | (283 | ) |
| | | 5,173 | | | | (61 | ) |
Finance costs include accretion expense related to lease obligations, finance income related to net investment in subleases, change in fair value of investments at Fair Value Through Profit or Loss (“FVTPL”) and certain other expenses.
Finance costs for the three months ended March 31, 2023 were $5.2 million compared to a recovery of $0.1 million for the three months ended March 31, 2022. The increase of $5.3 million was due to the change in fair value of investments at FVTPL and an increase in accretion on lease liabilities. The decrease in the fair value of investments at FVTPL was mainly due to an adjustment to the Superette promissory note (refer to note 14 in the Interim Financial Statements). The Company's lease liabilities have increased significantly due to the Alcanna acquisition as the Company acquired leases of retail space for corporate-owned stores.
Change in estimate of fair value of derivative warrants
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Change in estimate of fair value of derivative warrants | | | (4,802 | ) | | | 8,300 | |
Change in estimate of fair value of derivative warrants for the three months ended March 31, 2023 was a recovery of $4.8 million compared to an expense of $8.3 million for the three months ended March 31, 2022. The recovery in the current period relates to a decrease in the fair value, mainly due to a decrease in the Company’s share price from US$2.09 on December 31, 2022, to US$1.60 on March 31, 2023. The expense in the prior period relates to an increase in the fair value, mainly due to an increase in the Company’s share price from US$5.78 on December 31, 2021, to US$7.00 on March 31, 2022.
Net INCOME (loss) from continuing operations
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Net loss from continuing operations | | | (34,778 | ) | | | (38,040 | ) |
Net loss from continuing operations for the three months ended March 31, 2023 was $34.8 million compared to $38.0 million for the three months ended March 31, 2022. The decrease in net loss from continuing operations of $3.2 million was largely due to an increase in gross margin ($29.2 million), lower investment losses ($12.5 million), increased share of profit of equity-accounted investees ($5.4 million), lower transaction costs ($4.4 million) and change in fair value of derivative warrants ($13.1 million), partially offset by higher general and administrative expenses ($37.9 million), depreciation and amortization ($15.7 million) and finance costs ($5.2 million).
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Adjusted EBITDA from continuing operations
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Adjusted EBITDA from continuing operations (1) | | | 7,415 | | | | (675 | ) |
(1)Adjusted EBITDA from continuing operations is a specified financial measure that does not have standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. Refer to the “Specified Financial Measures” section of this MD&A for further information.
Adjusted EBITDA from continuing operations was $7.4 million for the three months ended March 31, 2023 compared to a loss of $0.7 million for the three months ended March 31, 2022. The increase was due to the following:
•Increase in gross margin including from the acquisition of Alcanna and Nova; and
•Increase in share of profit of equity-accounted investees related to fair value accounting adjustments to the Company’s SunStream joint venture investments.
The increase was partially offset by an:
•Increase in general and administrative expenses due to the acquisition of Alcanna, Valens and Zenabis.
OPERATING SEGMENTS
The Company’s reportable segments are organized by business line and are comprised of four reportable segments: liquor retail, cannabis retail, cannabis operations, and investments.
Liquor retail includes the sale of wines, beers and spirits through wholly owned liquor stores. Cannabis retail includes the private sale of recreational cannabis through wholly owned and franchise retail cannabis stores. Cannabis operations include the cultivation, distribution and sale of cannabis for the adult-use and medical markets domestically and for export, and providing proprietary cannabis processing services, in addition to product development, manufacturing, and commercialization of cannabis consumer packaged goods. Investments include the deployment of capital to investment opportunities. Certain overhead expenses not directly attributable to any operating segment are reported as “Corporate”.
| | | | | | | | | | | | | | | | | | | | | | | | |
($000s) | | Liquor
Retail | | | Cannabis
Retail (1) | | | Cannabis
Operations (2) | | | Investments (3) | Corporate | | | Total | |
As at March 31, 2023 | | | | | | | | | | | | | | | | | | |
Total assets | | | 327,072 | | | | 202,921 | | | | 333,439 | | | | 734,934 | | | | 19,380 | | | | 1,617,746 | |
Three months ended March 31, 2023 | |
Net revenue | | | 115,911 | | | | 67,408 | | | | 19,133 | | | | — | | | | — | | | | 202,452 | |
Gross margin | | | 26,267 | | | | 15,819 | | | | (9,545 | ) | | | — | | | | — | | | | 32,541 | |
Interest and fee revenue | | | — | | | | — | | | | — | | | | 4,211 | | | | — | | | | 4,211 | |
Investment (loss) income | | | — | | | | — | | | | (283 | ) | | | (4,886 | ) | | | — | | | | (5,169 | ) |
Share of profit of equity-accounted investees | | | — | | | | — | | | | — | | | | 9,516 | | | | — | | | | 9,516 | |
Depreciation and amortization | | | 10,346 | | | | 3,690 | | | | 1,146 | | | | — | | | | 1,286 | | | | 16,468 | |
Earnings (loss) from operations | | | (1,936 | ) | | | (53 | ) | | | (18,687 | ) | | | 8,737 | | | | (20,081 | ) | | | (32,020 | ) |
Income (loss) before income tax | | | (2,963 | ) | | | (744 | ) | | | (19,120 | ) | | | 5,370 | | | | (17,321 | ) | | | (34,778 | ) |
(1)Cannabis retail includes the operations of Superette from February 8, 2023 to March 31, 2023.
(2)Cannabis operations include the operations of Valens for the period January 18, 2023 to March 31, 2023.
(3)Total assets include cash and cash equivalents.
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| | | | | | | | | | | | | | | | | | | | | | | | |
($000s) | | Liquor
Retail (1) | | | Cannabis
Retail (1) | | | Cannabis
Operations | | | Investments (2) | Corporate | | | Total | |
As at December 31, 2022 | | | | | | | | | | | | | | | | | | |
Total assets | | | 351,338 | | | | 200,393 | | | | 163,130 | | | | 825,151 | | | | 19,338 | | | | 1,559,350 | |
Three months ended March 31, 2022 | |
Net revenue | | | 1,310 | | | | 7,512 | | | | 8,775 | | | | — | | | | — | | | | 17,597 | |
Gross margin | | | 284 | | | | 3,293 | | | | (158 | ) | | | — | | | | — | | | | 3,419 | |
Interest and fee revenue | | | — | | | | — | | | | — | | | | 3,861 | | | | — | | | | 3,861 | |
Investment loss | | | — | | | | — | | | | — | | | | (17,710 | ) | | | — | | | | (17,710 | ) |
Share of profit of equity-accounted investees | | | — | | | | — | | | | — | | | | 4,091 | | | | — | | | | 4,091 | |
Depreciation and amortization | | | — | | | | 595 | | | | 9 | | | | — | | | | 135 | | | | 739 | |
Earnings (loss) from operations | | | (73 | ) | | | 131 | | | | (9,190 | ) | | | (9,758 | ) | | | (4,280 | ) | | | (23,170 | ) |
Income (loss) before income tax | | | (73 | ) | | | (280 | ) | | | (2,964 | ) | | | (9,695 | ) | | | (25,028 | ) | | | (38,040 | ) |
(1)Liquor retail includes one day of operations of Alcanna retail stores and cannabis retail includes one day of operations of Nova retail stores.
(2)Total assets include cash and cash equivalents.
LIQUOR RETAIL SEGMENT RESULTS
Earnings (loss) from operations
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 (1) | |
Net revenue | | | 115,911 | | | | 1,310 | |
Cost of sales | | | 89,644 | | | | 1,026 | |
Gross margin | | | 26,267 | | | | 284 | |
Gross margin % | | | 22.7 | % | | | 21.7 | % |
| | | | | | |
General and administrative | | | 17,046 | | | | 357 | |
Sales and marketing | | | 811 | | | | — | |
Depreciation and amortization | | | 10,346 | | | | — | |
Earnings (loss) from operations | | | (1,936 | ) | | | (73 | ) |
(1)Liquor retail results include one day of operations of Alcanna retail stores.
Gross margin for the three months ended March 31, 2023 was $26.3 million (22.7%). Gross margin for the one day of operations on March 31, 2022 was $0.3 million (21.7%). Cost of sales for liquor retail operations is comprised of the cost of wine, beer and spirits.
At March 31, 2023, the Ace Liquor store count was 137, the Liquor Depot store count was 20 and the Wine and Beyond store count was 12. At May 12, 2023, the Ace Liquor store count was 138, the Liquor Depot store count was 20 and the Wine and Beyond store count was 12.
CANNABIS RETAIL SEGMENT RESULTS
GROSS revenue
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 (1) | | | 2022 (2) | |
Retail | | | 64,100 | | | | 5,439 | |
Franchise | | | 1,767 | | | | 2,050 | |
Other | | | 1,541 | | | | 23 | |
Gross revenue | | | 67,408 | | | | 7,512 | |
(1)Cannabis retail results include the operations of Superette from February 8, 2023 to March 31, 2023.
(2)Cannabis retail results include one day of operations of Nova retail stores.
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Gross revenue for the three months ended March 31, 2023 was $67.4 million compared to $7.5 million for the three months ended March 31, 2022. The increase of $59.9 million is mainly attributable to the Alcanna and Nova acquisition. Retail revenue is comprised of retail cannabis sales to private customers from corporate-owned stores. Franchise revenue is comprised of royalty revenue, advertising revenue and franchise fees. Other revenue consists of millwork, supply and accessories revenue and proprietary licensing.
Earnings (loss) from operations
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 (1) | | | 2022 (2) | |
Net revenue | | | 67,408 | | | | 7,512 | |
Cost of sales | | | 51,589 | | | | 4,219 | |
Gross margin | | | 15,819 | | | | 3,293 | |
Gross margin % | | | 23.5 | % | | | 43.8 | % |
| | | | | | |
General and administrative | | | 11,967 | | | | 2,332 | |
Sales and marketing | | | 226 | | | | 235 | |
Depreciation and amortization | | | 3,690 | | | | 595 | |
Share-based compensation | | | (11 | ) | | | — | |
Earnings (loss) from operations | | | (53 | ) | | | 131 | |
(1)Cannabis retail results include the operations of Superette from February 8, 2023 to March 31, 2023.
(2)Cannabis retail results include one day of operations of Nova retail stores.
Gross margin for the three months ended March 31, 2023 was $15.8 million (23.5%) compared to $3.3 million (43.8%) for the three months ended March 31, 2022. Cost of sales for cannabis retail operations is comprised of the cost of pre-packaged cannabis and related accessories. Gross margin percentage in the prior period is higher due to the proportion of franchise revenue compared to gross revenue. Franchise revenue does not have a corresponding cost of sales.
At March 31, 2023, the Spiritleaf store count was 99 (22 corporate stores and 77 franchise stores), the Superette store count was 5 corporate stores and the Value Buds store count was 91 corporate stores. At May 12, 2023, the Spiritleaf store count is 99 (22 corporate stores and 77 franchise stores), the Superette store count is 5 corporate stores, the Firesale store count is 2 corporate stores and the Value Buds store count is 91 corporate stores.
CANNABIS OPERATIONS SEGMENT RESULTS
Revenue
| | | | | | | | |
| | Three months ended
March 31 | |
($000s, except as indicated) | | 2023 (1) | | | 2022 | |
Provincial boards | | | 26,129 | | | | 9,732 | |
Medical | | | 21 | | | | 3 | |
Wholesale | | | 3,149 | | | | 1,570 | |
Analytical testing | | | 281 | | | | — | |
Gross revenue | | | 29,580 | | | | 11,305 | |
Excise taxes | | | (10,447 | ) | | | (2,530 | ) |
Net revenue | | | 19,133 | | | | 8,775 | |
(1)Cannabis operations revenue includes the operations of Valens for the period January 18, 2023 to March 31, 2023.
The Company’s revenue comprises bulk and packaged sales under the Cannabis Act pursuant to its supply agreements with Canadian provincial boards, other LPs and international exports, proprietary extraction services, white label product formulation and manufacturing, the sale of bulk winterized oil and distillate, toll processing and co-packaging services and analytical testing.
Gross revenue for the three months ended March 31, 2023 was $29.6 million compared to $11.3 million for the three months ended March 31, 2022. The increase of $18.3 million was mainly due to the additional revenue as a result of the
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Valens and Zenabis acquisitions. Provincial board revenue increased by $16.4 million and wholesale revenue increased by $1.5 million.
Excise taxes are the federal excise duties and additional provincial or territorial duties payable on adult-use cannabis products at the time such product is shipped from the production facility in its final packaging. Federal duties on adult-use cannabis products are calculated as the greater of (i) $0.25 per gram of flowering material, (ii) $0.75 per gram of non-flowering material or $0.25 per viable seed or seedling and (iii) 2.5% of the dutiable amount as calculated in accordance with the Excise Act, 2001. The rates of provincial or territorial duties vary by jurisdiction.
Excise taxes for the three months ended March 31, 2023 were $10.4 million compared to $2.5 million for the three months ended March 31, 2022. The increase of $7.9 million was due to the increased revenue from the Valens and Zenabis acquisitions. The excise tax rate as a percentage of revenue has increased due to the application of excise tax on a volume basis that has experienced price declines.
Cost of sales
| | | | | | | | |
| | Three months ended
March 31 | |
($000s, except as indicated) | | 2023 | | | 2022 | |
Cost of sales | | | 16,916 | | | | 9,081 | |
Cost of sales includes four main categories: procurement, cultivation, manufacturing and shipment and fulfillment costs.
Cost of sales for the three months ended March 31, 2023 were $16.9 million compared to $9.1 million for the three months ended March 31, 2022. The increase of $7.8 million was due to the increase in sales associated with the Valens and Zenabis acquisitions.
Gross margin
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Net revenue | | | 19,133 | | | | 8,775 | |
Cost of sales | | | 16,916 | | | | 9,081 | |
Inventory impairment and obsolescence | | | 9,177 | | | | 1,981 | |
Gross margin before fair value adjustments (1) | | | (6,960 | ) | | | (2,287 | ) |
Change in fair value of biological assets | | | (3,535 | ) | | | 3,690 | |
Change in fair value realized through inventory | | | 950 | | | | (1,561 | ) |
Gross margin | | | (9,545 | ) | | | (158 | ) |
(1)Gross margin before fair value adjustments is a specified financial measure that does not have standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. Refer to the “Specified Financial Measures” section of this MD&A for further information.
Gross margin before fair value adjustments
Gross margin before fair value adjustments is defined as net revenue less cost of sales and inventory obsolescence and impairment before adjusting for the non-cash changes in the fair value adjustments on the sale of inventory and the growth of biological assets.
Gross margin before fair value adjustments for the three months ended March 31, 2023 was negative $7.0 million compared to negative $2.3 million for the three months ended March 31, 2022. The decrease of $4.7 million was due to higher cost of sales and a higher inventory obsolescence provision, partially offset by higher net revenue.
The total inventory obsolescence and impairment recognized during the three months ended March 31, 2023 was $9.2 million. The reorganization of the Cannabis Operations segment subsequent to the Valens transaction has resulted in a larger than typical provision for inventory obsolescence and impairment provision.
The total inventory obsolescence and impairment recognized during the three months ended March 31, 2022 was $2.7 million, with $2.0 million relating to cost of sales and negative $0.7 million relating to the change in fair value realized through inventory.
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Change in fair value of biological assets
Biological assets consist of cannabis plants in various stages of vegetation, including clones, which have not yet been harvested. Net unrealized changes in fair value of biological assets less cost to sell during the period are included in the results of operations for the related period. Biological assets are presented at their fair values less costs to sell up to the point of harvest. The fair values are determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusted for the amount for the expected selling price less costs to sell per gram.
Change in fair value realized through inventory
Change in fair value realized through inventory comprises fair value adjustments associated with the cost of inventory when such inventory is sold. Inventories are carried at the lower of cost and net realizable value. When sold, the cost of inventory is recorded as cost of sales, while fair value adjustments are recorded as change in fair value realized through inventory.
INVESTMENTS SEGMENT RESULTS
Interest and fee revenue
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Interest and fee revenue | | | | | | |
Interest revenue from investments at amortized cost | | | 1,006 | | | | 995 | |
Interest and fee revenue from investments at FVTPL | | | 624 | | | | 2,116 | |
Interest revenue from cash | | | 2,581 | | | | 750 | |
| | | 4,211 | | | | 3,861 | |
Interest and fee revenue for the three months ended March 31, 2023, was $4.2 million compared to $3.9 million for the three months ended March 31, 2022. The increase of $0.3 million was due to an increase in interest revenue from cash partially offset by a decrease in interest and fee revenue from investments at FVTPL. Interest revenue from cash increased due to increases in the base interest rates. Interest and fee revenue from investments at FVTPL decreased mainly due to the settlement of the Zenabis senior loan in connection with the Zenabis acquisition.
Investment revenue
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Investment revenue | | | | | | |
Realized (losses) gains | | | (43,804 | ) | | | 124 | |
Unrealized gains (losses) | | | 38,635 | | | | (17,834 | ) |
| | | (5,169 | ) | | | (17,710 | ) |
Investment revenue for the three months ended March 31, 2023, was negative $5.2 million compared to negative $17.7 million for the three months ended March 31, 2022. The current period was impacted by the realized loss on marketable securities and reversal of the unrealized loss on marketable securities previously recorded, both due to the settlement of Valens shares, previously acquired in 2021 and 2022, in connection with the Valens Transaction. The prior period was impacted by decreases in share prices of the Company’s investments in Indiva Limited, Village Farms International Inc., and Valens.
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Share of profit of equity-accounted investees
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Net profit (loss) | | | 9,516 | | | | 4,091 | |
Share of profit of equity-accounted investees is comprised of the Company’s share of the net profit generated from its investments in SunStream. The current investment portfolio of SunStream is comprised of secured debt and hybrid debt and derivative instruments with United States based cannabis businesses.
Share of profit of equity-accounted investees for the three months ended March 31, 2023 was $9.5 million compared to $4.1 million for the three months ended March 31, 2022. The increase of $5.4 million was due to accounting fair value adjustments to the investments.
SELECTED QUARTERLY INFORMATION
The following table summarizes selected consolidated operating and financial information of the Company for the preceding eight quarters.
| | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 | |
($000s, except as indicated) | Q1 | | Q4 | | Q3 | | Q2 | | Q1 | | Q4 (1) | | Q3 (1) | | Q2 | |
Gross revenue | | 212,899 | | | 246,866 | | | 235,144 | | | 227,557 | | | 20,127 | | | 25,630 | | | 17,162 | | | 12,739 | |
Gross investment (loss) income | | (958 | ) | | (879 | ) | | (1,201 | ) | | (32,496 | ) | | (13,849 | ) | | (38,108 | ) | | (14,699 | ) | | 5,706 | |
Gross margin | | 32,541 | | | 43,568 | | | 50,309 | | | 43,079 | | | 3,419 | | | (2,499 | ) | | 1,782 | | | (2,821 | ) |
Net (loss) income from continuing operations attributable to owners of the Company | | (35,568 | ) | | (125,801 | ) | | (98,108 | ) | | (73,301 | ) | | (37,904 | ) | | (56,989 | ) | | 16,708 | | | (52,287 | ) |
Per share, basic and diluted | | (0.14 | ) | | (0.53 | ) | | (0.41 | ) | | (0.31 | ) | | (0.18 | ) | | (0.28 | ) | | 0.08 | | | (0.28 | ) |
Adjusted EBITDA from continuing
operations (2) | | 7,415 | | | (7,549 | ) | | 18,320 | | | (25,927 | ) | | (675 | ) | | 18,425 | | | 10,539 | | | (205 | ) |
(1)Adjustments to provisional amounts have been made in the comparative period (Q3 2021 and Q4 2021) due the consummation of the Inner Spirit acquisition, refer to note 5(b) in the Company’s Audited Financial Statements.
(2)Adjusted EBITDA from continuing operations is a specified financial measure that does not have standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. Refer to the “Specified Financial Measures” section of this MD&A for further information.
During the eight most recent quarters the following items have had a significant impact on the Company’s financial results and results of operations:
•Implementing several streamlining and efficiency initiatives which included workforce optimizations;
•Issuance of common shares under at-the-market equity programs;
•Entering into and acquiring several cannabis-related investments;
•Investing and disposing of marketable securities;
•Decreasing ownership in Pathway RX Inc.;
•The addition of investment strategies to the Company’s operations;
•Price discounts and provisions for product returns;
•Impairment of property, plant and equipment;
•Provisions for inventory obsolescence and impairment;
•Investments in SunStream;
•Acquisitions of Inner Spirit Holdings Ltd. (“Inner Spirit”), Alcanna (inclusive of its subsidiary, Nova), Zenabis, Valens and Superette; and
•Impairment of goodwill and intangible assets from the Inner Spirit and Alcanna acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
| | | | | | | | |
($000s) | | March 31, 2023 | | | December 31, 2022 | |
Cash and cash equivalents | | | 213,253 | | | | 279,586 | |
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Capital resources are financing resources available to the Company and are defined as the Company’s debt and equity. The Company manages its capital resources with the objective of maximizing shareholder value and sustaining future development of the business. The Company manages its capital structure and adjusts it, based on the funds available to the Company, in order to support the Company’s activities. The Company may adjust capital spending, issue new equity or issue new debt, subject to the availability of such debt or equity financing on commercial terms.
The Company’s primary need for liquidity is to fund investment opportunities, capital expenditures, working capital requirements and for general corporate purposes. The Company’s lease liabilities have increased significantly due to both the Inner Spirit and Alcanna acquisitions as corporate stores occupy leased retail space. Refer to “Contractual Commitments and Contingencies – Commitments” for an estimate of the contractual maturities of the Company’s lease liabilities. The Company’s primary source of liquidity historically has been from funds received from the proceeds of common share issuances and debt financing. The Company’s ability to fund operations and investments and make planned capital expenditures depends on future operating performance and cash flows, as well as the availability of future financing–all of which is subject to prevailing economic conditions and financial, business and other factors.
Management believes its current capital resources will be sufficient to satisfy cash requirements associated with funding the Company’s operating expenses and future development activities for at least the next twelve months. However, no assurance can be given that this will be the case or that future sources of capital will not be necessary.
Debt
As at March 31, 2023, the Company has no outstanding bank debt or other debt.
Equity
On July 25, 2022, the Company’s shareholders approved a special resolution for the consolidation of all of the issued and outstanding common shares (the “Share Consolidation”).
Immediately following the shareholder approval, the Board determined to effect the Share Consolidation on the basis of one post-consolidation common share for every ten pre-consolidation common shares. The Share Consolidation took effect on July 25, 2022, and the common shares began trading on Nasdaq on a post-consolidation basis beginning on July 26, 2022.
All references to common shares, warrants, simple warrants, performance warrants, stock options, RSUs and DSUs (excluding the Nova RSUs and DSUs), including exercise prices where applicable, have been fully retrospectively adjusted to reflect the Share Consolidation.
As at March 31, 2023, the Company had the following share capital instruments outstanding:
| | | | | | | | |
(000s) | | March 31, 2023 | | | December 31, 2022 | |
Common shares | | | 260,144 | | | | 206,041 | |
Common share purchase warrants (1) | | | 309 | | | | 357 | |
Simple warrants (2) | | | 150 | | | | 259 | |
Performance warrants (3) | | | 117 | | | | 139 | |
Stock options (4) | | | 39 | | | | 45 | |
Restricted share units | | | 9,106 | | | | 754 | |
(1)0.3 million warrants were exercisable as at March 31, 2023.
(2)0.1 million simple warrants were exercisable as at March 31, 2023.
(3)0.1 million performance warrants were exercisable as at March 31, 2023.
(4)32.9 thousand stock options were exercisable as at March 31, 2023.
Common shares were issued during the three months ended March 31, 2023 in connection with the following transactions:
•The Company purchased and cancelled 0.5 million common shares at a weighted average price of $2.78 (US$2.04) per common share for a total cost of $1.5 million;
•The Company issued 27.6 million common shares valued at $84.0 million as consideration for the Valens acquisition; and
•The Company received and cancelled 2.2 million of its own common shares in connection with the Valens acquisition.
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Subsequent to March 31, 2023:
•The Company issued 0.1 million common shares in connection with the vesting of RSUs under the long term incentive plan.
As at May 12, 2023, a total of 260.3 million common shares were outstanding.
Cash Flow Summary
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Cash provided by (used in): | | | | | | |
Operating activities | | | (48,797 | ) | | | (26,020 | ) |
Investing activities | | | (6,466 | ) | | | (103,972 | ) |
Financing activities | | | (11,070 | ) | | | (5,435 | ) |
Change in cash and cash equivalents | | | (66,333 | ) | | | (135,427 | ) |
Cash Flow – Operating Activities
Net cash used in operating activities was $48.8 million for the three months ended March 31, 2023 compared to $26.0 million used in operating activities for the three months ended March 31, 2022. The increase of $22.8 million was due to the change in non-cash working capital, partially offset by a decrease in net loss adjusted for non-cash items. The change in non-cash working capital is comprised of changes in inventory, accounts receivable, prepaid expenses and deposits and accounts payable. The main drivers were the seasonal accumulation of liquor inventory for the Liquor Retail segment as December drawdowns were replenished in the first quarter, and the payment of Valens accounts payable which had increased due to cash flow deficiencies and the impending acquisition by SNDL, including severance costs and over $6 million in excise tax in arrears.
Cash Flow – Investing Activities
Net cash used in investing activities was $6.5 million for the three months ended March 31, 2023 compared to $104.0 million used in investing activities for the three months ended March 31, 2022. The decrease of $97.5 million was primarily due to additions to equity-accounted investees, additions to investments and acquisitions in the comparative period.
Cash Flow – Financing Activities
Net cash used in financing activities was $11.1 million for the three months ended March 31, 2023 compared to $5.4 million used in financing activities for the three months ended March 31, 2022. The increase of $5.7 million was largely due to increased payments on lease liabilities and change in restricted cash in the prior period.
Liquidity risks associated with financial instruments
Credit risk
Credit risk is the risk of financial loss if the counterparty to a financial transaction fails to meet its obligations. The maximum amount of the Company’s credit risk exposure is the carrying amounts of cash and cash equivalents, accounts receivable, and investments. The Company attempts to mitigate such exposure to its cash and cash equivalents by investing only in financial institutions with investment grade credit ratings or secured investments. The Company manages risk over its accounts receivable by issuing credit only to credit worthy counterparties. The Company limits its exposure to credit risk over its investments by ensuring the agreements governing the investments are secured in the event of counterparty default. The Company considers financial instruments to have low credit risk when its credit risk rating is equivalent to investment grade. The Company assumes that the credit risk on a financial asset has increased significantly if it is outstanding past the contractual payment terms. The Company considers a financial asset to be in default when the debtor is unlikely to pay its credit obligations to the Company.
The Company applies the simplified approach under IFRS 9 and has calculated expected credit losses based on lifetime expected credit losses, taking into consideration historical credit loss experience and financial factors specific to the debtors and general economic conditions.
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The Company has evaluated the credit risk of its investments, taking into consideration historical credit loss experience, financial factors specific to the debtors and general economic conditions, and determined the expected credit loss to be $0.1 million for the three months ended March 31, 2023.
Liquidity risk
Liquidity risk is the risk that the Company cannot meet its financial obligations when due. The Company manages liquidity risk by monitoring operating and growth requirements. The Company prepares forecasts to ensure sufficient liquidity to fulfil obligations and operating plans. Management believes its current capital resources will be sufficient to satisfy cash requirements associated with funding the Company’s operating expenses and future development activities for at least the next 12 months. However, no assurance can be given that this will be the case or that future sources of capital will not be necessary.
Market risk
Market risk is the risk that changes in market prices will affect the Company’s income or value of its holdings of financial instruments. The Company is exposed to market risk in that changes in market prices will cause fluctuations in the fair value of its marketable securities. The fair value of marketable securities is based on quoted market prices as the Company’s marketable securities are shares of publicly traded entities.
CONTRACTUAL COMMITMENTS AND CONTINGENCIES
The information presented in the table below reflects management’s estimate of the contractual maturities of the Company’s obligations at March 31, 2023.
| | | | | | | | | | | | | | | |
($000s) | Less than
one year | | One to three
years | | Three to five
years | | Thereafter | | Total | |
Accounts payable and accrued liabilities | | 62,106 | | | — | | | — | | | — | | | 62,106 | |
Lease liabilities | | 41,126 | | | 68,944 | | | 68,955 | | | 27,841 | | | 206,866 | |
Financial guarantee liability | | — | | | 268 | | | — | | | — | | | 268 | |
Contractual obligation | | — | | | 2,566 | | | — | | | — | | | 2,566 | |
Total | | 103,232 | | | 71,778 | | | 68,955 | | | 27,841 | | | 271,806 | |
The Company has entered into certain supply agreements to provide dried cannabis and cannabis products to third parties. The contracts require the provision of various amounts of dried cannabis on or before certain dates. Should the Company not deliver the product in the agreed timeframe, financial penalties apply which may be paid either in product in-kind or cash. Under these agreements, the Company has accrued financial penalties payable as at March 31, 2023 of $2.5 million (December 31, 2022 - $2.5 million).
From time to time, the Company may become involved in legal proceedings arising in the ordinary course of its business. Such proceedings, certain of which are pending or have been threatened against the Company, could include commercial litigation related to breach of contract claims brought by customers, suppliers and contractors, as well as litigation related to termination of certain of its employees. The outcome of any litigation is inherently uncertain. Although the Company believes it has meritorious defenses against all currently pending and threatened proceedings and intend to vigorously defend all claims if they are brought, unfavorable rulings, judgments or settlement terms could have a material adverse impact on its business and results of operations.
15
SPECIFIED FINANCIAL MEASURES
Certain specified financial measures in this MD&A including adjusted EBITDA from continuing operations, gross margin before fair value adjustments and gross margin before fair value adjustments percentage are non-IFRS measures. These terms are not defined by IFRS and, therefore, may not be comparable to similar measures reported by other companies. These non-IFRS financial measures should not be considered in isolation or as an alternative for measures of performance prepared in accordance with IFRS.
Non-IFRS Financial Measures
Adjusted EBITDA from continuing operations
Adjusted EBITDA from continuing operations is a non-IFRS financial measure which the Company uses to evaluate its operating performance. Adjusted EBITDA from continuing operations provides information to investors, analysts, and others to aid in understanding and evaluating the Company’s operating results in a similar manner to its management team. Adjusted EBITDA from continuing operations is defined as net income (loss) from continuing operations before finance costs, change in estimate of fair value of derivative warrants, depreciation and amortization, income tax recovery and excluding change in fair value of biological assets, change in fair value realized through inventory, unrealized foreign exchange gains or losses, unrealized gains or losses on marketable securities, realized gains or losses on investments resulting from business combinations, share-based compensation expense, asset impairment, gain or loss on disposal of property, plant and equipment, cost of sales non-cash component, restructuring costs, transaction costs and certain one-time non-operating expenses, as determined by management.
The following table reconciles adjusted EBITDA from continuing operations to net income (loss) for the periods noted.
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Net (loss) income from continuing operations | | | (34,778 | ) | | | (38,040 | ) |
Adjustments: | | | | | | |
Finance costs | | | 5,173 | | | | (61 | ) |
Change in estimate of fair value of derivative warrants | | | (4,802 | ) | | | 8,300 | |
Depreciation and amortization | | | 16,468 | | | | 739 | |
Change in fair value of biological assets | | | 3,535 | | | | (3,690 | ) |
Change in fair value realized through inventory | | | (950 | ) | | | 1,561 | |
Unrealized foreign exchange (gain) loss | | | 48 | | | | 16 | |
Unrealized (gain) loss on marketable securities | | | (38,635 | ) | | | 17,834 | |
Realized loss on marketable securities resulting from business combinations | | | 43,699 | | | | — | |
Share-based compensation | | | 2,209 | | | | 4,204 | |
Asset impairment | | | 807 | | | | — | |
Loss (gain) on disposition of PP&E | | | 184 | | | | — | |
Cost of sales non-cash component (1) | | | 1,704 | | | | — | |
Inventory impairment (recovery) and obsolescence | | | 9,177 | | | | 1,981 | |
Restructuring costs | | | 1,536 | | | | — | |
Transaction costs | | | 2,040 | | | | 6,481 | |
Adjusted EBITDA from continuing operations | | | 7,415 | | | | (675 | ) |
(1)Cost of sales non-cash component is comprised of depreciation expense.
16
Gross margin before fair value adjustments
Gross margin before fair value adjustments is a non-IFRS financial measure which the Company uses to evaluate its operating performance in the Company’s Cannabis Operations segment. Gross margin before fair value adjustments provides information which management believes to be useful to investors, analysts and others in understanding and evaluating the Company’s operating results as it removes non-cash fair value metrics. Gross margin before fair value adjustments is defined as gross margin less the non-cash changes in the fair value adjustments on the sale of inventory and the growth of biological assets. Gross margin before fair value adjustments is comprised of net revenue less cost of sales and inventory obsolescence and impairment.
The following table reconciles gross margin before fair value adjustments to gross margin for the periods noted.
| | | | | | | | |
| | Three months ended
March 31 | |
($000s) | | 2023 | | | 2022 | |
Gross margin | | | (9,545 | ) | | | (158 | ) |
Change in fair value of biological assets | | | (3,535 | ) | | | 3,690 | |
Change in fair value realized through inventory | | | 950 | | | | (1,561 | ) |
Gross margin before fair value adjustments | | | (6,960 | ) | | | (2,287 | ) |
Non-IFRS Financial Ratios
Gross margin before fair value adjustments percentage
Gross margin before fair value adjustments percentage is a non-IFRS financial ratio which the Company uses to evaluate its operating performance in the Company’s cannabis operations segment. Gross margin before fair value adjustments percentage is defined as gross margin before fair value adjustments divided by net revenue.
RELATED PARTIES
The Company entered into the following related party transactions during the periods noted, in addition to those disclosed in note 15 of the Interim Financial Statements relating to the Company’s SunStream joint venture.
A member of key management personnel jointly controls a company that owns property leased to SNDL for one of its retail liquor stores. The lease term is from November 1, 2017 to October 31, 2027 and includes extension terms from November 1, 2027 to October 31, 2032 and November 1, 2032 to October 31, 2037. Monthly rent for the location includes base rent, common area costs and sign rent. The rent amounts are subject to increases in accordance with the executed lease agreement. For the three months ended March 31, 2023, the Company paid $41.7 thousand in total rent with respect to this lease.
OFF BALANCE SHEET ARRANGEMENTS
As at March 31, 2023, the Company did not have any off-balance sheet arrangements. The Company has certain operating or rental lease agreements, as disclosed in the “Contractual Commitments and Obligations” section of this MD&A, which are entered into in the normal course of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company makes assumptions in applying critical accounting estimates that are uncertain at the time the accounting estimate is made and may have a significant effect on the consolidated financial statements. Critical accounting estimates include the classification and recoverable amounts of CGUs, value of biological assets and inventory, estimating potential future returns on revenue, convertible instruments, value of investments, value of equity-accounted investees, value of leases, acquisitions and fair value of assets acquired and liabilities assumed in a business combination. Critical accounting estimates are based on variable inputs including but not limited to:
17
•Demand for cannabis for recreational and medical purposes;
•Expected cannabis sales volumes;
•Expected liquor sales volumes;
•Changes in market interest and discount rates;
•Future development and operating costs;
•Costs to convert harvested cannabis to finished goods;
•Expected yields from cannabis plants;
•Potential returns and pricing adjustments;
•Facts and circumstances supporting the likelihood and amount of contingent liabilities;
•Assumptions and methodologies for the valuation of derivative financial instruments;
•Discount rates used to value investments; and
•Market prices, volatility and discount rates used to determine fair value of equity-accounted investees.
Changes in critical accounting estimates can have a significant effect on net income as a result of their impact on revenue, costs of sales, provisions and impairments. Changes in critical accounting estimates can have a significant effect on the valuation of biological assets, inventory, property, plant and equipment, provisions and derivative financial instruments.
For a detailed discussion regarding the Company’s critical accounting policies and estimates, refer to the notes to the Audited Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS
The International Accounting Standards Board (IASB) and the IFRS Interpretations Committee regularly issue new and revised accounting pronouncements which have future effective dates and therefore are not reflected in the Company’s consolidated financial statements. Once adopted, these new and amended pronouncements may have an impact on the Company’s consolidated financial statements. The Company’s analysis of recent accounting pronouncements is included in the notes to the Audited Financial Statements.
RISK FACTORS
In addition to the risks described elsewhere in this document, for a detailed discussion regarding the Company’s risk factors, refer to the “Risk Factors” section of the Annual Report.
DISCLOSURE CONTROLS AND PROCEDURES
The Company has designed disclosure controls and procedures to provide reasonable assurance that: (i) material information relating to the Company is made known to the Company’s Chief Executive Officer and Chief Financial Officer by others, particularly during the period in which the annual and interim filings are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time period specified in securities legislation. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)). Based upon evaluation of the Company’s disclosure controls and procedures as of March 31, 2023, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of such date, as a result of the material weaknesses described in our MD&A for the year ended December 31, 2022.
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INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in NI 52-109 and Rule 13a-15(f) under the Exchange Act. Refer to our MD&A for the year ended December 31, 2022, for a discussion regarding internal control over financial reporting and the material weakness identified.
REMEDIATION
Management has implemented and continues to implement measures designed to ensure that control deficiencies are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include:
•continuing to strengthen procedures and controls related to the provision of and periodic review of user access to IT systems;
•continuing to strengthen the logging and monitoring of software updates and changes to systems supporting our financial reporting processes;
•enhancing the timeliness of executing user access reviews and the subsequent actions as required; and
•working with our advisors to continue to assist with process improvements and strengthening of controls over financial systems.
At May 12, 2023 the above remediation measures are in progress but will not be considered remediated until the updated controls operate for a sufficient period of time, and management has concluded through testing, that these controls are operating effectively.
The Company is pursuing remediation of the above material weakness during the 2023 fiscal year.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Except for the remediation activities described above, as of March 31, 2023, there have been no other changes in our internal control over financial reporting (as defined in NI 52-109 and Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
In accordance with guidance issued by the Canadian Securities Administrators and the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial reporting for the first fiscal year in which the acquisition occurred. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has limited the evaluation of our internal control over financial reporting to exclude controls, policies and procedures and internal control over financial reporting of the recently acquired operations of Valens (acquired January 17, 2023) and Superette (acquired on February 7, 2023).
ABBREVIATIONS
The following provides a summary of common abbreviations used in this document:
| |
Financial and Business Environment |
$ or C$ | Canadian dollars |
IFRS | International Financial Reporting Standards |
MD&A | Management’s Discussion and Analysis |
U.S. | United States |
US$ | United States dollars |
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FORWARD-LOOKING INFORMATION
This document may contain forward-looking information concerning the Company’s business, operations and financial performance and condition, as well as its plans, objectives and expectations for its business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim”, “anticipate”, “assume”, “believe”, “contemplate”, “continue”, “could”, “due”, “estimate”, “expect”, “goal”, “intend”, “may”, “objective”, “plan”, “predict”, “potential”, “positioned”, “seek”, “should”, “target”, “will”, “would”, and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable technology.
These forward-looking statements are based on current expectations, estimates, forecasts and projections about the Company’s business and the industry in which it operates and management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond its control. As a result, any or all of the forward-looking information in this document may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed or referred to under the heading “Risk Factors” herein. Although management believes that its underlying assessments and assumptions are reasonable based on currently available information, given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. All forward-looking statements in this MD&A are qualified by these cautionary statements. These statements are made as of the date of this MD&A and, except as required by applicable law, the Company assumes no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. Additionally, the Company undertakes no obligation to comment on analyses, expectations or statements made by third parties in respect of the Company, its financial or operating results or its securities.
This document contains estimates, projections and other information concerning the Company’s industry, business and the markets for its products. Information that is based on estimates, forecasts, projections, market research of similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, the Company obtained this industry, business, market and other data from its own internal estimates and research as well as from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.
In addition, assumptions and estimates of the Company’s and industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section “Risk Factors” herein. These and other factors could cause the Company’s future performance to differ materially from the Company’s assumptions and estimates.
Further information regarding the assumptions and risks inherent in the making of forward-looking statements can be found in the Annual Report, along with the Company’s other public disclosure documents. Copies of the Annual Report and other public disclosure documents are available under the Company’s profile on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com and on the EDGAR section of the U.S. Securities and Exchange Commission’s (the “SEC”) website at www.sec.gov.
Certain information in this MD&A is “financial outlook” within the meaning of applicable Canadian securities laws. The purpose of the financial outlook is to provide readers with disclosure of the Company’s reasonable expectations of its anticipated results. The financial outlook is provided as of the date of this MD&A. Readers are cautioned that the financial outlook may not be appropriate for other purposes.
ADDITIONAL INFORMATION
Additional information relating to the Company can be viewed under the Company’s profile on SEDAR at www.sedar.com, on the EDGAR section of the SEC’s website at www.sec.gov, or on the Company’s website at www.sndl.com. The information on or accessible through our website is not part of and is not incorporated by reference into this MD&A, and the inclusion of our website address in this MD&A is only for reference.
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