Exhibit 99.3

 

 

Management’s Discussion & Analysis for the year ended May 31, 2020 July 28, 2020

Management’s

Discussion & Analysis

This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Aphria Inc. and its subsidiaries (collectively, the “Company”, “Aphria”, “we”, “us” or “our”), is for the fiscal year ended May 31, 2020. It is supplemental to and should be read in conjunction with the Company’s audited consolidated financial statements and the accompanying notes for the fiscal year ended May 31, 2020. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”).

This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102 - Continuous Disclosure Obligations (“NI 51-102”) of the Canadian Securities Administrators. Under the United States (“U.S.”)/Canada Multijurisdictional Disclosure System, we are permitted to prepare the MD&A in accordance with Canadian disclosure requirements, which may differ from U.S. disclosure requirements. Additional information regarding Aphria is available on our website at www.aphriainc.com or through the System for Electronic Document Analysis and Retrieval (SEDAR) website at www.sedar.com.

In this MD&A, reference is made to gram equivalents, “all-in” cost of sales of dried cannabis per gram, cash costs to produce dried cannabis per gram, cannabis gross profit, cannabis gross margin, distribution gross profit, distribution gross margin, adjusted EBITDA, adjusted EBITDA from cannabis operations, adjusted EBITDA from distribution operations, adjusted EBITDA from businesses under development, capital and intangible asset expenditures, – wholly owned subsidiaries, capital and intangible asset expenditures – majority-owned subsidiaries and strategic investments which are not measures of financial performance under IFRS. The Company calculates each as follows:

 

•

Gram equivalents include both grams of dried cannabis as well as grams of cannabis oil as derived using an ‘equivalency factor’ of 1 gram per 5.75 mL of cannabis oil. Management believes this measure provides useful information as a benchmark of the Company against its competitors.

•

“All-in” cost of sales of dried cannabis per gram is equal to production costs less cost of accessories and cannabis oil conversion costs divided by gram equivalents of cannabis sold in the quarter. This measure provides the cost per gram of dry cannabis and gram equivalent of oil sold before the post harvesting processing costs to create oil or other ancillary products.

•

Cash costs to produce dried cannabis per gram is equal to “all-in” cost of sales of dried cannabis less amortization, packaging costs and distribution costs divided by gram equivalents of cannabis sold in the quarter. Management believes this measure provides useful information as it removes non-cash amortization and packaging costs and provides a benchmark of the Company against its competitors.

•

Cannabis gross profit is equal to gross profit less distribution revenue, insurance recovery, cost of goods purchased, the non-cash increase (plus the non-cash decrease) in the fair value adjustments on sale of inventory and on growth of biological assets, if any. Management believes this measure provides useful information as it removes non-similar revenue, costs and fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.

•

Cannabis gross margin is cannabis gross profit divided by net revenue from cannabis products. Management believes this measure provides useful information as it represents the gross profit based on the Company’s cost to produce inventory sold and removes fair value metrics tied to increasing stock levels (decreasing stock levels) required by IFRS.

•

Distribution gross profit is equal to gross profit less revenue from cannabis products, insurance recovery, excise taxes, production costs, cost of cannabis purchased, the non-cash increase (plus the non-cash decrease) in the fair value adjustments on sale of inventory and on growth of biological assets, if any. Management believes this measure provides useful information as it removes non-similar revenue and costs.

•

Distribution gross margin is distribution gross profit divided by distribution revenue. Management believes this measure provides useful information as it represents the gross profit based on the Company’s costs to purchase

 

 

 

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inventory for resale in its distribution business.

•

Adjusted EBITDA is net income (loss), plus (minus) income taxes (recovery), plus (minus) finance (income) expense, net, plus (minus) non-operating (income) loss, net, plus amortization, plus share-based compensation, plus (minus) non-cash fair value adjustments on sale of inventory and on growth of biological assets, plus impairment, plus transaction costs, and certain one-time non-operating expenses, as determined by management. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations.

•

Adjusted EBITDA from cannabis operations is calculated based on the same approach outlined above for Adjusted EBITDA, based on the operations of the following entities in the Company’s consolidated financial statements: Aphria Inc., Broken Coast Cannabis Ltd. (“Broken Coast”) and 1974568 Ontario Ltd. (“Aphria Diamond”). Management believes this measure provides useful information as it is a commonly used measure in the capital markets and it is a close proxy for repeatable cash generated from the Company’s operations in the cannabis regulated industry.

•

Adjusted EBITDA from distribution operations is calculated based on the same approach outlined above for Adjusted EBITDA, based on the operations of the following entities in the Company’s consolidated financial statements; CC Pharma GmbH, ABP, S.A. (“ABP”) and FL Group S.r.l. (“FL Group”). Management believes this measure provides useful information as it is a commonly used measure in the capital markets and it is a close proxy for repeatable cash generated from the Company’s distribution operations.

•

Adjusted EBITDA from businesses under development is adjusted EBITDA minus adjusted EBITDA from cannabis operations and adjusted EBITDA from distribution operations. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by the Company’s businesses under development.

•

Capital and intangible asset expenditures – wholly-owned subsidiaries are all cash out flows used in investing activities relating to investment in capital assets and investment in intangible assets, net of shares issued for wholly owned subsidiaries. Management believes this measure provides useful information as it helps provide an indication of the use of capital by the Company outside of its operating activities.

•

Capital and intangible asset expenditures – majority-owned subsidiaries are all cash out flows used in investing activities relating to investment in capital assets and investment in intangible assets, net of shares issued for majority-owned subsidiaries. Management believes this measure provides useful information as it helps provide an indication of the use of capital by the Company outside of its operating activities.

•

Strategic investments are the total cash out flows used in investing activities relating to investment in long-term investments and equity investees as well as both notes and convertible notes advanced. Management believes this measure provides useful information as it helps provide an indication of the use of capital by the Company outside of its operating activities.

These measures do not have any standardized meaning prescribed under IFRS and are not necessarily comparable to similarly titled measures used by other companies.

All amounts in this MD&A are expressed in thousands of Canadian dollars, except share and per share amounts, unless otherwise indicated.

This MD&A contains forward-looking information within the meaning of Canadian securities laws. Refer to “Cautionary Note Regarding Forward-Looking Statements” for cautionary statements regarding forward-looking statements.

This MD&A is prepared as of July 28, 2020.

 

 

 

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Company Overview

 

Aphria Inc. is a leading global cannabis company, with operations in Canada, Germany, Italy, Malta, Colombia, and Argentina.

Headquartered in Leamington, Ontario, the Company is licensed to cultivate, process and sell medical and adult-use cannabis, cannabis-derived extracts and derivative cannabis products in Canada under the provisions of the Cannabis Act. The Company is also in the process of investing in and building out its cultivation, processing and distribution capabilities internationally.

Aphria Inc. exists under the laws of the Business Corporations Act (Ontario) and its common shares are listed under the symbol “APHA” on the Toronto Stock Exchange (“TSX”) in Canada and the Nasdaq Global Select Market (“Nasdaq”) in the U.S. effective June 8, 2020.

Canadian Cannabis Operations¹

The Company’s domestic Canadian cannabis operations are comprised of its Aphria One greenhouse facility held through Aphria Inc., and facilities held through its wholly-owned British Columbia-based subsidiary Broken Coast, and its 51% majority-owned Leamington-based subsidiary, Aphria Diamond.

Aphria One is the Company’s original greenhouse facility, which is located in Leamington, Ontario. Aphria One is licensed to cultivate, process and sell medical and adult-use cannabis, cannabis-derived extracts and derivative cannabis products under the provisions of the Cannabis Act. Its current licence expires on March 20, 2023. Aphria One maintains a European Union Good Manufacturing Practices (“EU-GMP”) certification as an active substance manufacturer (Part II - Medical Products) issued by the Malta Medicines Authority for the supply of bulk cannabis product for medicinal use to worldwide EU-GMP-certified facilities, where permissible.

Broken Coast, a wholly-owned subsidiary of the Company acquired in February 2018, is licensed to cultivate, process, and sell medical and adult-use cannabis, cannabis-derived extracts and derivative cannabis products under the provisions of the Cannabis Act. Broken Coast’s purpose-built, indoor cannabis production facility on Vancouver Island provides Aphria with ‘B.C. Bud’ and is one of the leading premium cannabis brands in Canada. Broken Coast’s current licence expires March 13, 2023.

Aphria Diamond is a 51% majority-owned subsidiary of the Company, incorporated in November 2017. This entity is the Company’s venture with Double Diamond Farms (“Double Diamond”) and is licensed to cultivate cannabis under the provisions of the Cannabis Act. Aphria Diamond’s current licence expires November 1, 2020.

International Operations

Outside of Canada, we have identified certain geographies that present opportunities to bring our expertise developed in the Canadian medical and adult-use markets and generate profitable growth.

We currently have international operations in Germany, Italy, Malta, Colombia and Argentina as well as a strategic relationship in Denmark. In establishing our international footprint, we sought to create operational hubs in those continents where we identified the biggest opportunities for growth and designed our operations to ensure consistent, high quality supply of cannabis products as well as a distribution network.

In Europe, we established our primary hub in Germany. With our acquisition of CC Pharma GmbH (“CC Pharma”), we have access to an established distribution network throughout Europe. Currently the majority of distribution activities for CC

 

1

References to Canadian cannabis operations include the results of: (i) Canadian subsidiaries which hold investments and have no other operations; and (ii) companies which also actively produce and sell cannabis under the Cannabis Act (Aphria One, Aphria Diamond and Broken Coast). References to “Licences” includes the above-noted licences issued to Aphria One, Aphria Diamond and Broken Coast under the Cannabis Act.

 

 

 

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Pharma within Europe relate to the distribution of non-cannabis medical products with plans to incorporate medical cannabis products into the product assortment. We are also in the process of constructing cultivation and production operations in Germany. Our wholly-owned subsidiary, Aphria Rx GmbH (“Aphria Rx”), participated in the tender process conducted by the German Federal Institute for Drugs and Medical Devices (“BfArM”) to award licences for in-country cultivation and was one of three companies selected by BfArM to receive a licence for the cultivation of medical cannabis in Germany. Aphria Rx was granted a total of five lots, the most available lots within the tender process, and we are the only German tender winner with the permission to grow all three strains of medical cannabis approved by the BfArM. We expect that our German cultivation facility will be completed in November 2020.

In September 2018, we acquired licences in Latin America and the Caribbean. We identified Colombia as our hub for South America for business operations and the provision of cannabis and cannabis derivative products for the region.

Strategy and Outlook

Aphria, a leading global cannabis consumer packaged goods company, is setting the standard for brand development, product innovation and industrial scale cultivation and automation for the production of cannabis grown in environmentally responsible conditions. The Company was one of the first licensed producers in Canada and the first Canadian licensed producer to fully exploit greenhouse cultivation and industrial-scale production to deliver sustainable operating profit margins in the emerging cannabis industry. Through its international operations, the Company also seeks to create long-term shareholder value by identifying partnership and investment opportunities where the Company can apply the expertise and knowledge gained in the Canadian cannabis industry to other geographies which have legalized the use of cannabis nationally.

Within Canada, Aphria is focused on gaining market share in the Canadian cannabis industry by executing on its strategic priorities on entering new product categories that have the most consumer demand, while leveraging its expertise to develop brands that are truly differentiated from its competitors and optimizing its production to continue to be the high-quality, low-cost producer it is today. Internationally, the Company intends to continue to maximize the utilization of its existing assets and investments in connection with the development and execution of its growth plans. By building on this foundation, Aphria strives to take a leadership position in the industry.

Products

Medical Brands

The Company currently produces, markets and distributes its medical cannabis products under the Aphria and Broken Coast brands.

 

		Since 2014, the Aphria brand has been a leading, trusted choice for Canadian patients seeking high quality pharmaceutical-grade medical cannabis. Today, the Aphria brand continues to be a leading brand in Canada and, we will continue to leverage its market leadership as we develop our medical cannabis markets internationally under the Aphria brand.   Medical cannabis products under the Broken Coast brand are grown in small batches in single-strain rooms, with a commitment to product quality in order to exceed patient expectations.

Aphria is committed to providing Canadian patients, including its veterans, with high-quality medical cannabis. We have curated strains selected by veterans for veterans, in order to suit their specific needs and preferences. The Company’s Veteran Support Program has been developed to support veterans above and beyond current reimbursement offerings across Canada, allowing for medical cannabis coverage on softgels, oral sprays, 510 cartridge vaporizers, sublingual oil, and

 

 

 

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dried flowers. The Company expects to remain committed to, and continues to invest in, the Canadian and international medical markets.

Canadian Adult-Use Market Brands

The Company is investing capital and resources to establish a leading position in the adult-use market in Canada. These investments are focused on brand building with consumers, product innovation, distribution, trade marketing and cannabis education. Aphria’s strategy is to develop a brand focused portfolio that resonates with consumers in all category segments.

Aphria positioned, and continues to grow, its adult-use brand portfolio to specifically meet the different consumer segments of the adult-use cannabis market. The Company leveraged its selection of strains to offer each consumer segment a different experience through its product and terpene profiles, while also focusing on the value proposition for each of these segments as it relates to price, potency and product assortment. The suite of brands created by the Company for Canada’s adult-use market includes P’tite Pof, Good Supply, Solei, RIFF and Broken Coast. Each brand is unique to a specific consumer segment and is designed to meet the needs of these targeted segments, as described below:

 

ECONOMY BRANDS
		Everyday enjoyment     2
VALUE BRANDS
		Unmistakably Québécois   P’tite Pof is inspired by Québécois culture, casse-croûte signage and your local dépanneur.   Straightforward, functional, bold, charming and iconic. Our traditional blue and red with a modern twist.
CORE BRANDS
		Quality Bud. No B.S.   Embrace the goodness of classic cannabis culture.   Good Supply is an insider brand that speaks your language and reminds you of when you first fell in love with cannabis.   Find Your Moment   Solei Sungrown Cannabis (“Solei”) helps consumers discover a path to seeing the world through moments related to their activities.

 

 

² No peeking. Coming soon.

 

 

 

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		Approachable, simple, welcoming, brightening.
		PREMIUM BRANDS
		Elevate. Collaborate. Create.   RIFF is not your conventional cannabis brand. We are a brand by creatives for creatives.   An unconventional brand, fueled by creativity and collaboration.
		Cultivated with Character     3
		PREMIUM+ BRANDS
		West Coast, Naturally – The best bud in the world   Authentic and effortless build on small batch growing techniques / craft approach.   Broken Coast’s reputation for its high quality flower; aroma, bud composition, and heavy trichome appearance delivers an incredible experience.

Distribution

Canadian and International Medical Markets

In Canada, the medical distribution channel follows a direct to patient model which permits us to provide patients with cannabis directly through our medical portal.

Through the acquisition of CC Pharma, the Company obtained a leading importer and distributor of EU-pharmaceuticals for the German market. Based on regulations, pharmacies can only supply the branded product that has been named in a prescription to the patient by a physician. Substitution of the product is only possible if the particular brand of product is unavailable. As such, the Company intends to expand CC Pharma’s operations to meet the high demand for medicinal cannabis by distributing cannabis throughout the German pharmacies, leveraging its existing business and know-how to ensure that the Company’s products are sufficiently stocked in the pharmacies in Germany.    

 

 

 

³ No peeking. Coming soon.

 

 

 

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In Argentina, ABP, our wholly-owned subsidiary, distributes medical cannabis throughout Argentina under the Argentinian “Compassionate Use” national law. Under the Argentinian “Compassionate Use” national law, patients with refractory epilepsy, holding a medical prescription from a neurologist, can apply for special access to imported medical cannabis products.

Wholesale and Other Sales Channels

The focus on the right strain assortment, quality of flower, extraction capabilities and processing enables Aphria to drive wholesale channel opportunities for revenue growth. Aphria already completed several sales through its wholesale strategy, and will continue to do so by building partnerships in the industry.

Recent changes in the Canadian market resulted in more competitors moving towards an asset light model through the rationalization of cultivation facilities. As this transition occurs, the Company anticipates demand for its saleable flower to increase, providing new opportunities in the wholesale channel.

The Company will expand its capabilities outside of saleable flower, as its quality of extraction processes continue to grow into new categories pacing with the consumption of new cannabis derivative products (also known as Cannabis 2.0) categories. Aphria will be selective on its partners, with the intent to secure supply agreements to further optimize and drive efficiency within its supply chain and operations.

Canadian Adult-Use Market

The Company maintains supply agreements for adult-use cannabis with all the provinces and the Yukon Territory in Canada, representing access to 99.8% of Canadians.

The Company is party to an exclusive distribution agreement with Great North Distributors Inc. (“Great North Distributors”), a wholly-owned Canadian subsidiary of Southern Glazer’s Wine & Spirits, to provide the Company with the sales force and wholesale/retail channel expertise required to efficiently distribute the Company’s products through each of the provincial/territorial cannabis control agencies.

Production

The Company maintains ample production capacity to meet its current and near-term demand in Canada and abroad.

During the COVID-19 pandemic, the Company paused its previously announced extraction and processing expansions, including the on-going work completing the extraction center of excellence, up to and including its licensing. The Company maintains sufficient extraction capacity to meet its current and near-term demand in Canada and abroad.

New Products and Accessories

On October 17, 2019, the Canadian government legalized the production and sale of cannabis infused products (Cannabis 2.0).

At the launch of Cannabis 2.0, the Company’s primary focus was within the vape category as the Company anticipated, similar to the U.S. market, that these products would grow to represent a significant percentage of the Canadian cannabis market demand for derivatives. According to Headset Inc., an organization which tracks data including sales data across the cannabis category in the U.S., the vape market makes up 17% to 30% of U.S. sales (California, Nevada, Colorado, Washington) depending on the market. Additionally, vape products were and are aligned with the Company’s extraction capabilities and know-how. Once legislatively allowed, the Company successfully launched over 30 new vape SKUs into the Canadian market with positive reviews from control boards and consumers alike. The Company benefited from being first in the Canadian cannabis vape market, winning market share with consumers with its 510 and all in one branded vape products. The Company also supplies products under the PAX platform for consumers who own this proprietary vape system.

The Company believes edibles, concentrates and beverage products will collectively represent a growing proportion of the Cannabis 2.0 market and developed a strategy to meet this demand. As such, the Company is currently also equally focused on the development of other categories of Cannabis 2.0 products.

 

 

 

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International Operations

 

Currently the Company maintains international operations in Germany, Italy, Malta, Colombia and Argentina. While these markets are still at various stages of development, and the regulatory environment around them is either newly formed or still being formed, we believe the Company is uniquely positioned to bring the knowledge and expertise gained in Canada in order to generate profitable growth in these geographies.

Export Facility from Canada

Leveraging our industrial scale cultivation and automation for the production of cannabis grown in environmentally responsible conditions in Canada and our ability to cultivate high-quality, low cost cannabis on a consistent basis, we expect to supply much of our international demand with cannabis and cannabis derivative products from Canada. In Germany, we have been preparing for the importation of EU-GMP certified cannabis from our Canadian facilities, Avanti and Aphria One to CC Pharma in order to leverage CC Pharma’s extensive distribution network. For Argentina, we have been supplying medical cannabis from Avanti to Argentina under the Argentinian “Compassionate Use” national law as well as for the medical cannabis product being supplied to the Hospital de Pediatria Garrahan for a pediatric refractory epilepsy clinical study.

Avanti currently holds four Canadian licences: (i) Cannabis Processing Licence; (ii) Cannabis Analytical Testing Licence; (iii) Drug Establishment Licence; and (iv) Medical Device Establishment Licence. In addition, Avanti received its EU-GMP certification in respect of medicinal products for human use and investigational medicinal products for human use (Part 1 – Medical Products) in January 2020. Avanti provides testing services to our Canadian cannabis operations and, its Part II EU-GMP certification allows Avanti to process, package, label and test cannabis oil as well as package, label and test dried cannabis for medicinal use in permitted jurisdictions throughout the European Union and in any jurisdiction, worldwide, that recognizes the EU-GMP standards. In addition, Aphria One’s EU-GMP certification allows the Company to be a supplier of bulk dried flower for medicinal use worldwide to other Part I EU-GMP-certified facilities licensed to further process or package bulk dried flower into finished cannabis product for sale in permitted jurisdictions.

European Union

Germany

The German market is considered to be one of the most highly sought-after developed medical cannabis markets in the world. Our wholly-owned subsidiary, Aphria Rx, participated in the tender process for in-country cultivation licences and was one of three companies selected by the BfArM to receive a licence for the cultivation of medical cannabis in Germany. We were granted a total of five lots, which was the most available lots within the tender process and Aphria Rx is the only winner of the German tender with the permission to grow all three strains of medical cannabis approved by the BfArM. Each lot is currently expected to provide a minimum annual capacity of 200 kgs. Germany currently allows for the sale of medical cannabis and cannabis extracts to pharmacies. These cannabis products are also covered by insurance companies. This coverage provides the opportunity for a greater number of medical cannabis patients with access to the full use and benefits of these products.

The Company’s approach in Germany is a three-pronged approach covering demand, supply and distribution.

Demand

We developed educational virtual and online programs and other means for outreach to healthcare professionals, which provide the Company with access to doctors to educate on the uses of medical cannabinoids. The Company also plans to build and operate pain treatment centers, including telemedicine, throughout Germany, which will further provide access to patients. The Company partnered with a leading company in digital applications and medical software to build a modern, patient-centric clinic for telemedicine.

 

 

 

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Supply

The Company intends to supply cannabis products into the German market through imports from Canada and local production. The Company also entered into a strategic partnership with a prominent European flower producer in Denmark to obtain access to EU-GMP-certified organic medical cannabis for both the German market as well as throughout Europe. In addition, pursuant to the licence granted by BfArM, the Company is in the process of constructing its cultivation facility from which we expect to deliver the first harvest to BfArM by the beginning of calendar year 2021. In addition, we completed the construction of a storage facility located at CC Pharma. The cultivation and storage facilities are being constructed in line with EU-GMP requirements.

Distribution

Through the acquisition of CC Pharma, the Company obtained a leading importer and distributor of EU-pharmaceuticals for the German market and Europe. CC Pharma operates a production, repackaging and labelling facility. Based on regulations, pharmacies can only supply the branded product that has been named in a prescription to the patient by a physician. Substitution of the product is only possible if the particular brand of product is unavailable. As such, the Company intends to expand CC Pharma’s operations to meet the high demand for medicinal cannabis by distributing cannabis throughout the German pharmacies, leveraging its existing business and know-how to ensure that the Company’s products are sufficiently stocked in the pharmacies in Germany.

Malta

Through its subsidiary, ASG, the Company received the first import permit for medical cannabis issued by the Government of Malta’s Ministry of Health. ASG also received its Part II EU-GMP certification in respect of production of cannabis for medicinal and research purposes, allowing it to ship finished dried flower and finished oil for medicinal and research use in permitted jurisdictions throughout the European Union. The Company intends on using ASG to import cannabis resin and dried flower for processing, packaging and distribution of EU-GMP compliant cannabis products.

Italy

The Company’s wholly owned subsidiary, FL Group, is authorized to import cannabis products into Italy and to distribute pharmaceutical products, including cannabis-based and cannabinoids products in Italy to pharmacies.

South America

Colombia

The Company maintains a 90% ownership interest in Colcanna S.A.S. (“Colcanna”). This ownership provides the Company with the ability to further develop the global Aphria brand through the distribution of Aphria branded products to patients across South America. The Company intends to secure an export licence to distribute cannabis products within the LATAM region. Furthermore, the Company signed an exclusive three-year agreement with the Colombian Medical Federation (“FMC”), a national guild that oversees the ethical exercise of the medical profession in Colombia. Under this agreement, Aphria and the FMC jointly developed an academic curriculum and cohosted several conferences and events on the appropriate medicinal use of cannabis. The FMC is affiliated with nearly 2,000 doctors and maintains a database of more than 70,000 medical professionals that rely on the organization for research and educational resources, including through a virtual platform that offers certified courses on a range of subjects.

Argentina

In Argentina, ABP, the Company’s wholly-owned subsidiary, is a distributor of traditional pharmaceutical medicines and medical cannabis products for the Argentinian market. On June 6, 2019, the Ministry of Health in Argentina approved a resolution authorizing public and private health insurance companies to import and stock medical cannabis inventory for sale to patients suffering from refractory epilepsy. This represents a significant improvement for these patients since before the resolution products could only be imported on a named patient basis. The legislative change reduces the delay experienced by patients when ordering and receiving their prescribed medical cannabis since it is now readily available and can be dispensed on demand. The Company believes that this recent resolution represents an evolution of the medical cannabis regulatory framework in Argentina towards sustainable commercialization.

 

 

 

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Commencing in January 2020, ABP began shipping, distributing and delivering its first consolidated units (in bulk) of medical cannabis into Argentina under the “Compassionate Use” national law for patients with refractory epilepsy, holding a medical prescription from a neurologist. In compliance with the national drug law, patients are required to pick up controlled substances products at an authorized pharmacy. ABP is fully authorized and licensed by the national regulatory agency (ANMAT) to distribute and deliver controlled substances via authorized pharmaceutical channels.

Importantly, the Company continues to work with Hospital de Pediatria Garrahan, a leading pediatric hospital in Buenos Aires, which recently published favourable preliminary results in refractory epileptic patients following treatment with Aphria products.

Pan-Asia

Australia

Aphria maintains relationships in Australia with two companies conducting medical cannabis clinical trials.

Medlab Pty Ltd. is currently in a clinical trial related to oncology pain using Aphria blended cannabis strains for oil, subsequently converted in Australia into a nanocell mucosol spray. Aphria and Medlab Pty Ltd. share the rights in the intellectual property associated with the active pharmaceutical ingredient on this trial.

CannPal Pty Ltd. is currently in a clinical trial related to animal pain in cats and dogs, wherein the test product is fabricated using Aphria strains.

Aphria also maintains a supply relationship with Althea Company Pty, a licensed producer in Australia.

United States

Aphria does not maintain any direct or indirect investments in the U.S., where despite being legal in individual states in varying degrees, cannabis remains federally illegal. The Company is focused on participating in federally permissible activities in the U.S., and is therefore currently reviewing the landscape and looking to prepare for legalization of cannabis through the purchase of profit generating companies in other industries and converting their existing operations to include cannabis when it is federally legal to do so. The Company intends to be well poised to capitalize on the U.S. market should it become federally legal to do so through this strategy. The Company believes investing in more established industries will generate faster returns through positive EBITDA and provide cash flow to further invest in existing businesses, while putting the Company in the best possible position to generate significant long-term returns if and when the U.S. legalizes cannabis federally and removes the current barriers in the industry.

 

 

 

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Aphria’s Purpose

 

Mission

To be the premier global cannabis company through an unrelenting commitment to our people, the planet, product quality and innovation.

Vision

To be the best performing cannabis company globally, providing investors with access to the most accretive cannabis opportunities around the world.

Our Values

In an emerging and constantly evolving industry, our values unite us, informing and inspiring the way we work with our employees, patients, consumers and one another. Our commitment to our people, the planet, product quality and innovation helps us create stronger, healthier communities everywhere we do business. Our corporate social responsibility (“CSR”) goes beyond our borders. We are committed to exporting our industry leading knowledge and practices to our global subsidiaries. For the communities we call home, we are vigilant of the impact we have and strive to be a positive contributor to their well-being.

We put people first

We are committed to meeting the needs of our patients and consumers whether they are looking for more natural options for their medical needs, exploring their options in wellness, or seeking alternatives to their lifestyle. We are driven by a desire to help others live their best life.

This includes continuous product development on different methods of administering the product through oil, softgels, vapes and eventually edibles, oral strip and other derivatives, as well as being proactive in aiding patients who have difficulties obtaining the required medical care.

At Aphria, we understand some patients may have barriers that can impact their financial wellbeing. To help, we offer compassionate pricing for eligible patients that require financial assistance. Patients with an annual gross income of less than $30 are eligible to participate in Aphria’s compassionate pricing program.

The Company continues to provide access to treatment, on a compassionate basis, for a four-year-old epileptic girl in the United Kingdom; a treatment that has decreased her daily seizures from around thirty per day to just three or four.

We lead by example

We are passionate about pushing our industry forward. Our commitment to innovation means we are always on the lookout for new opportunities, that we attract those who share our outlook, and that we never stop focusing and imagining what’s coming next.

This includes the continuous push for innovations in expansionary projects, product development and market research. In the current year, the Company has made strides to be in the forefront of providing an innovative suite of Cannabis 2.0 products and continues to partner with various organizations to further develop product offerings including edibles, beverages, topicals, oral thin strips, and other cannabis-infused products. The Company offers the only CBN oil on the market, Solei CBN Renew oil, which won ‘Innovation of the Year’ at the 6th Annual Canadian Cannabis Awards.

In addition to the innovative strides, the Company has consistently delivered the quality of products consumers are looking for, resulting in all five of the Company’s medical and recreational brands taking home top honours at the 2019 Canadian Cannabis Awards in product categories.

 

 

 

		Management’s Discussion & Analysis  |  12

We respect the earth

As a conscientious company, we are committed to ensuring that our actions and those of our employees have a positive impact on the environment around us, no matter where we operate. Recently the Company launched Plant Positivity, Aphria’s social impact platform. With a vision of social impact for communities and individuals, through Plant Positivity, Aphria is providing people with better access to plants and leading education on the role plants can play in improving everyday well-being. As part of the platform, Aphria partnered with Evergreen, a national not-for-profit dedicated to making cities flourish to create the Plant Positivity Gardens: six gardens that add more than 50 varieties of native plant species to the existing 8,000-square-metres of gardens across Evergreen Brick Works. This partnership has created new spaces for people to reflect, socialize and learn more about the natural world. Further, the themed gardens contribute to a thriving community and educational space where people can experience sustainable practices that make cities flourish.

The Company is proud to employ – and continuously improve - sustainable growing and business practices to provide efficiencies, cost reduction benefits and lessen our impact on the environment. This includes:

 

•

Reducing the plastic and cardboard used in secondary packaging across all products targeting saving in excess of 35% net packaging weight.

•

Utilizing computerized systems to monitor and reduce water usage, and collection and cleaning of run-off water so that it can be safely reused.

•

Co-generating electricity, hot water, CO2 and cold water which is more efficient and reduces impact on local communities.

•

Capturing and cleaning the CO2 from the exhaust and adding it into the greenhouse to promote plant growth and reduce our carbon footprint.

We take responsibility to heart

We believe it is our responsibility to protect the safety of our employees, patients, consumers and society. Our partnerships and programs reflect our ongoing commitment to the safety of our communities through education, responsible use and meaningful corporate citizenship.

The Company places a great deal of energy and effort towards ensuring the safety of children and families in communities we serve. Our Charter Agreement with Drug Free Kids Canada and participation in the Global Cannabis Partnership, reflect our ongoing commitment to the safety of our communities through education, responsible use, and meaningful responsible corporate citizenship in our industry. Recently, the Company launched ‘Aphria Educates’ a program aimed to educate Canadians on responsible and safe use of all cannabis products legally available now and in the future. The first initiative was a two-city educational panel in conjunction with Drugs Free Kids Canada, a Canadian non-profit organization providing parents with evidence-based information about youth and substance use while promoting frequent, balanced parent-youth discussions about drugs. In addition to partnerships mentioned above, the Company has also partnerships with various organizations in countries like Colombia in order to jointly develop academic curriculums on the medicinal use of cannabis.

The Company recently launched the ‘Aphria Academy’, an e-learning site for budtender education designed to educate budtenders and retail staff across Canada about recreational brands and products.

These core values serve as a compass impacting the Company’s strategic decisions and its outlook. The activities and outlooks covered within each of the operations below as well as the activities within the Investor Highlights are intended to align to these core values.

 

 

 

		Management’s Discussion & Analysis  |  13

⬛ Investor Highlights

 

 

 

		YE - 2020				Q4 - 2020				Q3 - 2020
Distribution revenue			$  369,214				$  99,137				$  88,308
Net cannabis revenue			$  173,125				$  53,066				$  55,566
Kilogram equivalents sold			39,602.4				12,556.5				14,014.1
Kilograms produced, net			107,776.1				52,242.6				31,086.1
Production costs			$  64,972				$  18,917				$  16,707
Cost of goods purchased			$  322,688				$  87,190				$  76,911
Cash cost to produce dried cannabis / gram4			$  1.04				$  0.88				$  0.93
“All-in” cost of sales of dried cannabis / gram4			$  1.90				$  1.69				$  1.69
Gross profit before fair value adjustments4			$  133,759				$  40,026				$  35,691
Adjusted distribution margin4			12.6%				12.1%				12.9%
Adjusted cannabis margin4			50.1%				52.9%				42.7%
Adjusted EBITDA from cannabis operations4			$  20,106				$  9,360				$  6,031
Adjusted EBITDA from businesses under development4			$  (13,385)				$  (2,745)				$  (2,859)
Adjusted EBITDA from distribution operations4			$  10,511				$  1,943				$  2,564
Cash and cash equivalents & marketable securities			$  497,222				$  497,222				$  515,102
Working capital			$  732,908				$  732,908				$  746,572
Capital and intangible asset expenditures - wholly-owned subsidiaries4			$  76,915				$  25,569				$  23,839
Capital and intangible asset expenditures - majority-owned subsidiaries4			$  55,508				$  2,458				$  14,507
Strategic investments4			$  35,327				$  --				$  605

Fourth quarter three-month period

•

Recorded fifth consecutive quarter with positive adjusted EBITDA and positive adjusted EBITDA from cannabis operations;

•

Received EU-GMP certification for subsidiary ASG in respect of production of cannabis for medicinal and research purposes within the Malta location;

•

Liquidated $39,000 promissory note for proceeds of approximately $26,000;

•

Settlement of claim associated with Aleafia supply agreement;

•

Completed accretive transaction to repurchase Its convertible senior notes, further strengthening the Company’s balance sheet, reducing debt by approximately $91,000;

•

Transferred its stock exchange listing from the New York Stock Exchange (“NYSE”) to the Nasdaq on June 8, 2020; and

•

Impairment of specific assets within Jamaica, Lesotho, Colombia and Argentina due to COVID-19.

⬛ Recent Events

 

 

Coronavirus (“COVID-19”) Pandemic, Its Impact

Aphria continues to closely monitor and respond, where possible, to the ongoing COVID-19 situation. As the global situation continues to change rapidly, ensuring the well-being of our employees remains one of our top priorities. The Company also remains committed to providing best in class care and service to our valued patients and customers – facilities continue to remain open and operational with heightened measures in place to protect the health and safety of employees, vendors, partners and their families. The Company is committed to enhancing these measures and implementing other necessary practices as the situation warrants.

 

 

⁴ Non-IFRS measure

 

 

 

		Management’s Discussion & Analysis  |  14

Leamington, Ontario and Brampton, Ontario

Our Leamington facilities, Aphria One and Aphria Diamond, and Brampton facility, Avanti, remain open as they are currently considered essential businesses by the Ontario government.

Duncan, British Colombia

Our Duncan facility in British Colombia (“BC”), Broken Coast, remains open and is currently considered an essential business by the BC government.

Supply chain in Canada

Our supply chain team continues to work closely with our supply chain partners on a day-to-day basis to prevent and minimize any sort of disruption. As of the date of this MD&A, there do not appear to be any indications of challenges or delays in our supply chain; however, the Company has undertaken pre-emptive measures to ensure alternate supply sources in different continents.

The Company incurred additional expenses in Canada as it relates to COVID-19 initiatives of approximately $1,000 for the quarter.

Densborn, Germany

Our Densborn facility, CC Pharma, remains open and is considered an essential service by the German government.

Supply chain in Germany

Our supply chain team continues to work closely with our supply chain partners on a day-to-day basis to prevent and minimize any sort of disruption. As of the date of this MD&A, a number of suppliers in foreign countries are impacted by COVID-19. In all cases, we secured alternate supply, however at higher costs resulting in lower profits.

The Company incurred additional expenses in Germany as it relates to COVID-19 initiatives of approximately $1,000 for the quarter.

Cannabis market in Jamaica

Our herb houses, which are reliant on an active tourism market in Jamaica, have been closed due to the impact of COVID-19. We ceased funding these operations and are allowing our partner to pursue alternative funding operations including the possibility of identifying new partners possibly resulting in the Company’s ownership being diluted. There is no clear timeline on when the travel restrictions will be lifted, and the tourism industry can return pre-COVID-19 levels into Jamaica. As a result of these factors, an impairment charge of approximately $19,200 was recorded on our Jamaican subsidiary.

Construction in Colombia

The COVID-19 pandemic brought about uncertainties concerning whether construction would be permissible as an essential service in Colombia or whether we could safely construct during this period and how long such restrictions would continue due to the duration of pandemic as well as any potential additional closures in the future. Given these uncertainties, we decided to temporarily delay the construction of the cultivation facility in Colombia. Accordingly, we re-evaluated the growth plan of the Colombian market in the new environment, with regulatory shut-downs and pending product registrations, and this slowed our expected development of the South American market. As a result of these factors, an impairment charge of approximately $40,000 was recorded on our Colombian and Argentinian subsidiaries.

 

 

 

		Management’s Discussion & Analysis  |  15

Access to Lesotho

Our facility, built and pending final approvals for EU-GMP certification, was scheduled to begin ramping up production. As a result of the pandemic, the country of Lesotho closed its borders and our partners and senior management team have not been able to access the facility as they reside outside of Lesotho. As a result of these COVID-19 factors, an impairment charge of approximately $4,800 was recorded on our Lesotho operations.

Liquidity

At the present time, Aphria believes it has sufficient levels of cash to respond to the current pandemic through its anticipated duration. As at May 31, 2020, Aphria has working capital of $732,908 including cash balances of over $497,200 and access to very minor line of credit facilities of just over $11,700.

While there are certain principal payments due in the next 12 months, our earliest debt maturity is over a year from May 31, 2020, in July 2021.

Loan covenants (based on current market conditions only)

Aphria maintains a debt service charge covenant on certain loans secured by its Aphria One facilities that is measured at year-end only. The Company was in breach of its debt service ratio loan covenant for the year, as of year-end. The Company obtained a letter from the relevant financial institution confirming that the loan will not be called within the next twelve month period. The Company does not anticipate being in breach of any of its financial covenants in the next fiscal year. Aphria maintains a corporate guarantee and a minimum liquidity covenant on certain loans secured by Aphria Diamond that are measured quarterly. The Company does not anticipate approaching the minimum liquidity covenant at any time during the next 12 months. Aphria Diamond’s loan with its lender is not subject to any income related covenants until after May 31, 2020. The Company anticipates meeting these covenants on all testing dates during the next 12 months. Thereafter, it is subject to a debt service charge covenant, based solely on Aphria Diamond’s results. CC Pharma maintains certain covenants on its loans, secured by the Densborn facilities and inventory. The Company anticipates meeting those covenants on all testing dates during the next 12 months.

Protection of our employees

We took and continue to take, important steps to protect our employees during this period, including:

•

Staggered work schedules, banning all non-essential contractors and closing our facility to guests, all to reduce flow of traffic into and out of our facilities;

•

Staggered employee breaks, redesigned work stations and processes to minimize employee interaction and ensure appropriate social distancing;

•

Installed thermal scanners at all facility employee entrances to monitor employee temperatures;

•

Enhanced sanitation of work areas, both in terms of breadth and depth of cleanings; and

•

Implemented mandatory 14-day quarantines for all workers returning from out of country visits.

In addition, during this period, we took the following actions to reinforce our commitment to our front-line hourly employees:

•

Accelerated a planned wage increase at our Aphria One facility from June 1, 2020 to April 1, 2020, generating a 3% to 5% increase in pay for all manufacturing employees; and

•

Implemented a Company paid lunch program for all employees at our Canadian facilities during this period.

Giving back to our communities

We are providing multiple programs to seniors and front-line healthcare workers in the local Leamington community to support them during this period, including having:

•

Made a major donation to Erie Shores Community Hospital to allow them to acquire additional equipment and resources for their staff;

 

 

 

		Management’s Discussion & Analysis  |  16

•

Made a donation of excess personal protective equipment to Erie Shores Community Hospital;

•

Piloted ‘The Wellness Lounge’, a virtual mental health forum to promote mental health awareness, community and connections among Veterans and First Responders in conjunction with Wounded Warriors Canada;

•

Continued the Aphria Supports program, where employee volunteers operate a dedicated local phone number for seniors and front-line healthcare workers to purchase and deliver groceries and other necessities during this difficult time; and,

•

Continued a 10% discount on medical products to compensate for the current economic climate.

Impairment

For all of the factors previously listed surrounding the effects of the pandemic on the Company’s operations, accumulative impairment charge of approximately $64,000 was recorded. It is possible that additional long-term performance does not develop in line with financial projections if further delays in regulatory services, international construction and restrictions on travel continue to prevail with duration and impact greater than currently anticipated. In addition, it is still too early to assess the full impact COVID-19 will have on the economies in the countries in which we do business.

Aleafia Settlement

Subsequent to year-end, we entered into a settlement agreement with Aleafia Health Inc. (“Aleafia”) with respect to the settlement of the arbitration relating to the Supply Agreement between the parties. As part of the settlement, Aleafia received total consideration of approximately $29,000 comprised of $15,500 cash and $10,000 worth of common shares of the Company with the balance consisting of the waiver of accounts receivable owed by Aleafia to Aphria. The Company recorded a loss of $4,345 on settlement, based on the consideration paid of $25,500, forgiveness of $3,101 of accounts receivable, offset by deferred revenue of $22,756, and accounts payable and accrued liabilities of $1,500. The full amount has been provided for in the year and recorded in accounts payable and accrued liabilities.

An Inconvenient Truth – Over or Undersupply in the Cannabis Market

As demand for medical and adult-use cannabis continued to increase throughout 2019 and the first half of 2020, licensed producers in Canada continued to expand their production and outdoor facilities. Many cannabis analysts believe that this has led or will lead to over-supply in the Canadian cannabis market. However, Aphria believes that it is too simplistic to conclude that the Canadian cannabis market, as a whole, is in fact over-supplied. The Company believes that opportunities exist where cannabis is being undersupplied in certain channels and consumer needs are not yet met and that, using data analytics and understanding consumer preferences, the Company can continue to strategically gain more market share in these categories.

For example, the Company found that the vapes category has a high trial rate for cannabis consumers but that there is a lack of differentiation amongst most competitive offerings. The Company focused on identifying untapped opportunities in this category through extensive consumer segmentation and brand development. Aphria’s R&D team invested resources on the development of proper proportions of THC:CBD ratios, and the right blends of botanical or full spectrum terpene profiles in an attempt to directly satisfy certain consumer pallets. The Company believes that this strategy has successfully driven positive consumer feedback and repeat purchases.

Aphria applied the same strategic approach and careful selection of strains to each of its dry flower offerings for its P’tite Pof, Good Supply, Solei, RIFF and Broken Coast brands. A key insight learned through Aphria’s consumer research was that consumers are still establishing their metrics on how they define value for dry flower when it relates to: potency; terpene profile; and, visual product attributes. For this reason, Aphria focused its selection of dry flower offerings by brand based on its consumer research and insights in an effort to ensure its products are over-delivering on the known preferences that rank the highest to consumers. Aphria believes that this enabled its brand portfolio to continue to drive more consumption within the existing Canadian retail footprint, increase package formats and look to complimentary line extensions, all in an effort to continue to increase market share in the dry flower category.

All of which leads us to our belief that despite significant over-supply in the indoor and outdoor extraction grade markets, pockets of undersupply remain plentiful within the saleable flower market, positioning Aphria for market leadership, regardless of over-supply in certain channels or slow retail roll-out.

 

 

 

		Management’s Discussion & Analysis  |  17

Product Innovation

The Company’s strategic focus on its product innovation pipeline is leading to an aggressive roll-out of new products, new formats and product line extensions over the next year. This innovation is led by development efforts including:

•

Industrial-scaIe extraction technologies using different methods including CO2, butane and ethanol;

•

Effective isolation of terpenes, cannabinoids (moving beyond cannabidiol (“CBD”) and tetrahydrocannabinol (“THC”)) and other cannabis compounds; and

•

Nano-emulsification technology providing flavourless and colourless input material into derivative products such as edibles and beverages.

The Company’s current innovation pipeline includes:

•

Innovations including:

○

Liquid enhancers;

○

CBD vapes;

○

Wax;

○

Kief;

○

Hash;

○

Topical creams & lotions;

○

Vape pens powered by line extensions on all vape pens genetics;

○

Edibles including gummies and chocolates;

○

Distillate syringes;

○

Butane based shatter and resin;

○

Diamonds; and,

○

New strains.

•

Line extensions including:

○

Vape pens;

○

Pre-roll multi-packs, including 7x0.5g and 3x0.33g;

○

Dried flower in 15 g and 28 g packaging;

○

New oral sprays; and,

○

Balm & lubes.

The most immediate of the innovations include:

•

Liquid enhancers using our propriety nano-technology. Enhancers offer consumers a conveniently dosed flavourless additive that transforms any beverage into a cannabis beverage; and

•

Concentrates across multiple different formats, catering to the experienced cannabis user seeking unique and intense experience. This segment continues to grow and its appeal to its specific brand consumer segments is resonating strong from customer and consumer feedback.

The Company continues to evolve its flower, pre-roll, vape and oil product lines to meet the needs of consumers across the country, based on extensive consumer research. We strive to deliver the products consumers crave, in the format they want and in the flavours they desire.

Brand Dominance

The Company continues to believe that its award-winning adult-use brands, developed for consumers across broad demographics and targeted segments, remain unmatched in the industry. With a focus on brand building, innovation, loyalty and conversion, Aphria’s differentiated portfolio of brands and products continues to drive growth, both in sales and market share across categories. As a result, Aphria continues to drive category leadership in market share rankings and we have successfully grown our revenue from adult-use cannabis products by more than $36,700 or 184% from our first quarter to the fourth quarter.

 

 

 

		Management’s Discussion & Analysis  |  18

In Q4, the Company’s largest contributor of sales continues to be flower, which represented 58% of total sales. Aphria’s vape portfolio continued its rapid ascension and is now the number two contributor to sales, representing approximately 14% of gross sales. Pre-rolls continue to perform strongly and represent 12% of Aphria gross sales. Oils products have grown in sales from $2,800 to $4,500 but continue to decline as an overall percentage of our product portfolio, as vapes increasingly take on a larger portion of our product offering. As part of oils, our capsules continue to hold about 0.5% of the overall portfolio.

In Canada, the provinces of Ontario, Alberta, Quebec, and British Columbia are primary markets based on total cannabis sales. Aphria brand sales and market share have grown significantly each quarter in these primary markets, most recently increasing 27% from the prior quarter.

Overall Portfolio Performance

Ontario⁵

The Company has doubled market share over the last nine months. In the fourth quarter, the Company grew from 13% market share to 16.1% market share and continues to maintain the leading licensed producer position in market share in total sales in Ontario, widening the gap from competitors. For the month of May 2020, Aphria ranked first in brick and mortar retail channel with 17.5% total market share. This was achieved through strong sales from the Company’s flower maintaining its number two position with 15.5% and pre-rolls, oral sprays and vapes maintaining number one positions with 22.6%, 55.1% and 23.5% share of market, respectively. For e-commerce sales, the Company achieved 14.6% share across all product categories, securing the number one licensed producer position overall in Ontario, combining both brick and mortar and e-commerce sales.

Alberta⁶

Aphria currently ranks as the number one licensed producer across all product categories by dollar amount. For the month of May, the Company ranked first amongst its peers holding a 12% share of the Alberta cannabis retail market.

British Columbia⁷

The Company continues to grow market share in BC increasing share by 2.7% in Q4.

Quebec

Information on the Company’s competitive positioning amongst its peers from Quebec is not currently available.

The Company continued to gain market share in primary markets throughout the month of June, maintaining its number one position in Ontario and Alberta.

Brand and Category Performance

RIFF, Good Supply, Solei and Broken Coast continue to outperform across Canada. In the flower category, Broken Coast remains a top 10 selling brand, despite only being available on a limited basis, and RIFF, Good Supply and Solei have made significant moves in category rank, quarter over quarter. Good Supply experienced a 21.3% increase in flower sales in Q4, with Royal Highness in 3.5 gram packaging, gaining a top three spot at the Ontario Cannabis Store (“OCS”)⁵. In the pre-roll category, all three Aphria brands increased market position. In Ontario, our brands hold two of the top three positions by sales and the Company has a total of seven SKUs in the top 25 for the province. The Company’s Pre-roll brands Solei, RIFF and Good Supply continue to excel, led by Good Supply at 39% of category share, up from 11% of category share last quarter⁸. In Ontario, Aphria brands continue to gain momentum in the vape category as they climb the top selling vape charts. The Company holds the top selling vape SKU in Q4 at the OCS with Good Supply Pineapple Express 510 Cartridge⁵ and is extremely excited with its recent introduction of the Good Supply Purple Monkey 510 Cartridge. Aphria’s industry leading Solei oils continue to be the number one selling oil brand in primary markets, led by Solei Free⁸. In Ontario, Aphria brands rank #1 in vapes, and pre-rolls, and #2 in flower and oils⁵.

 

⁵ Information obtained from the OCS

⁶ Information obtained from the Alberta Gaming, Liquor and Cannabis Commission

⁷ Information obtained from Buddi

⁸ Information obtained from Headset Insights

 

 

 

		Management’s Discussion & Analysis  |  19

All the success enjoyed by the Company’s brands positions Aphria very well for future category growth, particularly given the increases in retail rollouts across its primary markets. As of the end of May 2020, estimated store count in Ontario was 82 retail stores authorized, up from 24 stores just six months ago, and reaching 100 authorizations in recent weeks. Further, the Ontario government has committed to approving approximately five new stores per week moving forward⁹. In Alberta, there are nearly 500 retail stores authorized and growing, Quebec has 42 retail stores and BC now has over 200 retail stores. Canada ended May with approximately 900 stores nationally, compared to an estimated 730 stores at the end of January. According to BNN Bloomberg, there are now over 1,000 licensed cannabis stores in Canada, as new stores in B.C. and Ontario push the store count into quadruple digits.

While several provinces, including Ontario, are significantly behind the market leader Alberta in store counts per capita, the recent activity associated with new retail rollouts is very encouraging for Aphria as one of the industry sales leaders, particularly for its continued growth prospects.

The Company continues to execute its strategic plan to position Aphria as a leader in category innovation with exciting new product categories and line extensions launching in the very near future.

Our award-winning brands are winning accolades, securing positive feedback from consumers, scoring higher on repeat purchase intent versus key competitors¹⁰, experiencing high organic consumer interest, and are consistently appearing as the most searched brand on OCS, appearing more than those of other licensed producers¹¹.

⬛ Fair Value Measurements

 

Impact of fair value metrics on biological assets and inventory

In accordance with IFRS, the Company is required to record its biological assets at fair value. During the main growth phase, the cost of each plant is accumulated on a weekly basis. This occurs from the date of clipping from a mother plant up to the end of the tenth week of growth for Aphria One and Aphria Diamond and ninth week of growth for Broken Coast. For the remainder of the growing period, the cost of each plant continues to be accumulated on a weekly basis but also includes an allocation of the fair value of the plant. At the time of harvest, the Company increases the carrying value of the harvested product to its full fair value less costs to sell.

 

⁹ Information obtained from Mjbizdaily

¹⁰ Information obtained from Lift Co. March 31, 2020.

¹¹ Information obtained from OCS

 

 

 

		Management’s Discussion & Analysis  |  20

As at May 31, 2020, the Company’s harvested cannabis and cannabis oil, as detailed in Note 5, and biological assets, as detailed in Note 6 of its financial statements, are as follows:

 

		May 31, 2020				February 29, 2020
Harvested cannabis - at cost			$  72,641				$  30,265
Harvested cannabis - fair value increment			70,310				39,504
Purchased cannabis - at cost			8,764				13,907
Harvested cannabis trim - at cost			3,855				9,391
Harvested cannabis trim - fair value increment			168				6,524
Cannabis oil - at cost			30,946				29,056
Cannabis oil - fair value increment			6,053				25,049
Purchased CBD distillate - at cost			5,503				7,493
Softgel capsules - at cost			430				222
Softgel capsules - fair value increment			150				188
Cannabis vapes - at cost			5,686				756
Cannabis vapes - fair value increment			1,865				624
Biological assets - at cost			18,941				25,165
Biological assets - fair value increment			9,400				8,693
Cannabis products - at fair value			$  234,712				$  196,837

The Company modified the size and length of time we grow the plants to optimize the use of the automation. As a result, the Company was able to modify its standard costs and fair value accounting of biological assets accordingly.

Aphria One and Aphria Diamond’s biological assets are carried at cost plus fair value increments of $0.40, $0.80, $1.19 and $1.59 per gram for weeks 11, 12, 13 and 14, respectively. Broken Coast’s biological assets are carried at cost plus fair value increments of $0.70, $1.40, $2.10 and $2.81 per gram for weeks 10, 11, 12 and 13 respectively. Harvested cannabis and harvested cannabis trim are carried at fair values of $3.00 per gram and $0.25 per gram, respectively (February 29, 2020 - $3.50 and $2.00) for greenhouse produced cannabis. Harvested cannabis and harvested cannabis trim are carried at fair values of $4.00 per gram, $0.25 per gram, respectively (February 29, 2020 - $4.00 and $3.25) for indoor produced cannabis. Cannabis oil, softgel capsules, and cannabis vape oils include the relative fair value based on the amount of harvested cannabis or harvested cannabis trim used in the production of each product.

The individual components of fair values are as follows:

 

		May 31,     2020				February 29,     2020
Harvested cannabis - at cost - per gram			$  1.54				$  1.54
Harvested cannabis - fair value increment - per gram			$  1.49				$  2.01
Purchased cannabis - at cost - per gram			$  3.04				$  3.26
Harvested cannabis trim - at cost - per gram			$  0.24				$  1.24
Harvested cannabis trim - fair value increment - per gram			$  0.01				$  0.86
Cannabis oil - at cost - per mL			$  0.29				$  0.29
Cannabis oil - fair value increment - per mL			$  0.06				$  0.25
Purchased CBD distillate - at cost - per mL			$  0.30				$  0.37
Softgel capsules - at cost - per mL			$  0.26				$  0.29
Softgel capsules - fair value increment - per mL			$  0.09				$  0.24
Cannabis vapes - at cost - per mL			$  0.26				$  0.29
Cannabis vapes - fair value increment - per mL			$  0.09				$  0.24

 

 

 

		Management’s Discussion & Analysis  |  21

⬛ Cost per Gram

 

Calculation of “all-in” costs of sales of dried cannabis per gram

The Company calculates “all-in” cost of sales of dried cannabis per gram as follows:

 

“All - in” cost of sales of dried cannabis per gram		Year ended				Three months ended
		May 31, 2020				May 31, 2020				February 29, 2020
Production costs			$  64,972				$  18,917				$  16,707
Less:
Cost of accessories			$  (2)				$  --				$  --
Cannabis oil conversion costs			$  (1,860)				$  (561)				$  (570)
Adjusted “All-in” cost of sales of dried cannabis			$  63,110				$  18,356				$  16,137
Gram equivalents sold during the quarter12			33,236,338				10,833,578				9,571,886
“All-in” cost of sales of dried cannabis per gram			$  1.90				$  1.69				$  1.69

Calculation of cash costs to produce dried cannabis per gram

The Company calculates cash costs to produce dried cannabis per gram as follows:

 

Cash costs to produce dried cannabis per gram		Year ended				Three months ended
		May 31, 2020				May 31, 2020				February 29, 2020
Adjusted “All-in” cost of sales of dried cannabis			$  63,110				$  18,356				$  16,137
Less:
Amortization			$  (9,544)				$  (1,956)				$  (3,439)
Packaging costs			$  (10,299)				$  (3,033)				$  (1,809)
Distribution costs			$  (8,721)				$  (3,821)				$  (2,034)
Cash costs to produce dried cannabis			$  34,546				$  9,546				$  8,855
Gram equivalents sold during the quarter12			33,236,338				10,833,578				9,571,886
Cash costs to produce per gram			$  1.04				$  0.88				$  0.93

The decrease in the cash cost to produce dried cannabis per gram was largely driven by the continued production from the Company’s Aphria Diamond expansion. The Company expects that the cost should continue to decrease as better yields can be expected due to seasonality and a steady increase in the optimization of growing conditions in the newly approved greenhouses.

 

 

¹² Gram equivalents sold excludes 6,366,108 grams of product purchased and resold for the year ended May 31, 2020. Gram equivalents sold for the quarter excludes 1,722,970 and 4,442,214 grams of product purchased and resold for the three months ended May 31, 2020 and February 29, 2020 respectively.

 

 

 

		Management’s Discussion & Analysis  |  22

⬛ Results of Operations

 

Net revenue

During the three months ended May 31, 2020, the Company recognized revenues of $152,203 versus $128,568 in the same period of the prior year and $144,424 in the third quarter of fiscal 2020, representing an increase of 18.4% from the prior year and 5.4% from the prior quarter. Included in net revenue for the three months ended May 31, 2020 is $65,461 of revenue from cannabis products, $(12,395) of excise taxes, and $99,137 of distribution revenue.

Net revenue for the year ended as of May 31, 2020 was $543,339 versus $237,110 in the same period of the prior year, representing a 129.2% increase.

Distribution revenue

Included in distribution revenue is $97,097 and $362,111 of revenue from CC Pharma, and $2,040 and $7,103 of revenue from other distribution companies for the three and twelve months ended May 31, 2020.

Revenue from cannabis products

 

Cannabis revenue		Year ended				Three months ended
		May 31, 2020				May 31, 2020				February 29, 2020
Revenue from medical cannabis products			$  37,452				$  8,447				$  8,663
Revenue from adult-use cannabis products			150,414				56,687				44,724
Wholesale cannabis revenue			16,870				327				11,037
Cannabis revenue			$  204,736				$  65,461				$  64,424

During the quarter the Company sold 8,991.9 kgs of dried cannabis, 2,015.0 kg equivalents of cannabis oil products and 1,549.6 kgs of cannabis vape oils compared to 10,672.9 kgs of dried cannabis, 2,360.1 kg equivalents of cannabis oil products and 981.1 kgs of cannabis vape oils in the prior quarter.

 

Cannabis revenue		Year ended				Three months ended
		May 31, 2020				May 31, 2020				February 29, 2020
Revenue from dried flower			$  146,424				$  45,868				$  48,766
Revenue from oil			43,094				10,529				9,504
Revenue from cannabis vapes			15,218				9,064				6,154
Cannabis revenue			$  204,736				$  65,461				$  64,424

Gross revenue from medical cannabis products

Revenue from medical cannabis products for the three months ended May 31, 2020 was $8,447 versus $10,855 in the same period of the prior year and $8,663 in the third quarter of fiscal 2020, representing a decrease of 22.2% from the same period for the prior year and a 2.5% decrease from the prior quarter.

Revenue from medical cannabis products for the year ended May 31, 2020 was $37,452 versus $43,662 in the same period of the prior year, representing a decrease of 14.2% from the prior year.

The decrease in revenue from medical cannabis sold during the quarter from the prior quarter was related to:

 

•

Decrease in the medical cannabis sales by 78.7 kg equivalents to 1,273.3 kg equivalents sold in the current quarter, a

 

 

 

		Management’s Discussion & Analysis  |  23

decrease of 5.8% from the prior quarter. As a result of COVID-19 precautions, medical patients incurred issues renewing prescriptions, preventing them from placing orders during the quarter. Subsequent to quarter-end, Health Canada implemented interim measures automatically extending the expiry dates of existing prescriptions. As a result, we do not anticipate the same issue next quarter.

 

•

This factor was partially offset by an increase in the average gross retail selling price (excluding wholesale) to medical patients during the quarter from $6.41 to $6.63, a 3.4% increase from the prior quarter.

Gross revenue from adult-use cannabis products

Revenue from adult-use cannabis products for the three months ended May 31, 2020 was $56,687 versus $18,506 in the same period of the prior year and $44,724 in the third quarter of fiscal 2020, representing an increase of 206.3% from the same period for the prior year and a 26.7% increase from the prior quarter.

Revenue from adult-use cannabis products for the year ended May 31, 2020 was $150,414 versus $36,948 in the same period of the prior year, representing an increase of 307.1%.

The increase in revenue from adult-use cannabis products during the quarter from the prior quarter was related to:

 

•

Increase in the adult-use cannabis sales by 2,660.6 kg equivalents to 10,831.3 kg equivalents sold in the current quarter, a 32.6% increase from the prior quarter.

This factor was partially offset by:

 

•

Decrease in the average gross selling price to the adult-use market from $5.47 to $5.23, a 4.4% decrease from the prior quarter. The decrease is primarily related to:

o

Change in mix to reflect increased consumer demand for Good Supply branded product; and,

o

Price reductions in key markets to solidify market share.

Wholesale cannabis revenue

Revenue from wholesale cannabis products for the three months ended May 31, 2020 was $327 versus $4,171 in the same period of the prior year and $11,037 in the third quarter of fiscal 2020.

Revenue from wholesale cannabis produced for the year ended May 31, 2020 was $16,870 versus $5,738 In the prior year.

Gross profit and gross margin

The gross profit for the three months ended May 31, 2020 was $47,390, compared to $36,007 in the same quarter in the prior year and $59,575 in the previous quarter, a decrease of 20.5% from the prior quarter.

 

 

 

		Management’s Discussion & Analysis  |  24

		Year ended				Three months ended
		May 31, 2020				May 31, 2020				February 29, 2020
Cannabis revenue		$	204,736			$	65,461				$  64,424
Distribution revenue			369,214				99,137				88,308
Insurance recovery			1,000				--				550
Excise taxes			(31,611	)			(12,395	)			(8,858	)
Net revenue			543,339				152,203				144,424
Production costs			64,972				18,917				16,707
Cost of cannabis purchased			21,920				6,070				15,115
Cost of goods purchased			322,688				87,190				76,911
Gross profit before fair value adjustments			133,759				40,026				35,691
Fair value adjustment on sale of inventory			57,039				20,979				16,383
Fair value adjustment on growth of biological assets			(115,255	)			(28,343	)			(40,267	)
			(58,216	)			(7,364	)			(23,884	)
Gross profit		$	191,975			$	47,390				$  59,575
Gross margin			35.3	%			31.1	%			41.3	%

Cost of sales currently consist of five main categories: (i) production costs, (ii) cost of cannabis purchased, (iii) cost of goods purchased, (iv) fair value adjustment on sale of inventory and (v) fair value adjustment on growth of biological assets:

(i) Production costs include all direct and indirect costs of production, related to cannabis sold. This includes costs relating to growing, cultivation and harvesting, quality assurance and quality control, cannabis oil processing, as well as packaging, labelling and amortization of production equipment and greenhouse infrastructure utilized in the production of cannabis.

(ii) Cost of cannabis purchased consists of Canadian cannabis purchased from other licensed producers for packaging and branding under one of the Company’s brands and sold directly to consumers or through retail outlets.

(iii) Cost of goods purchased consists of items purchased for resale through the Company’s distribution businesses which are run through its subsidiaries ABP and CC Pharma.

(iv) Fair value adjustment on sale of inventory is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the effect of the non-cash fair value adjustment of inventory sold in the period.

(v) Fair value adjustment on growth of biological assets is part of the Company’s cost of sales due to IFRS standards relating to agriculture and biological assets (i.e. living plants or animals). This line item represents the effect of the non-cash fair value adjustment of biological assets (cannabis) produced in the period. In an effort to increase transparency, inventory of harvested cannabis (Note 5 – consolidated financial statements for the year ended May 31, 2020) consists of harvested cannabis and harvested cannabis trim to be $3.00 and $0.25 per gram respectively, for greenhouse produced cannabis and $4.00 and $0.25 per gram respectively, for indoor produced cannabis.

Management believes that the different components of net revenue and cost of sales included in the gross profit and gross margin can be confusing. Accordingly, management believes the use of cannabis gross profit, cannabis gross margin, distribution gross profit and distribution gross margin provides a better representation of performance of the Company’s different types of operations because it excludes non-cash fair value adjustments required by IFRS.

 

 

 

		Management’s Discussion & Analysis  |  25

Cannabis gross profit, cannabis gross margin, distribution gross profit and distribution gross margin are non-IFRS financial measures that do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies.

The following is the Company’s cannabis gross profit and cannabis gross margin as compared to IFRS for the three months ended May 31, 2020:

 

		Three months ended								Three months ended
		May 31, 2020 (IFRS)				Adjustments				May 31, 2020 (Adjusted)
Cannabis revenue			$  65,461				$  --				$  65,461
Distribution revenue			99,137				(99,137	)			--
Insurance recovery			--				--				--
Excise taxes			(12,395	)			--				(12,395	)
Net revenue			152,203				(99,137	)			53,066
Production costs			18,917				--				18,917
Cost of cannabis purchased			6,070				--				6,070
Cost of goods purchased			87,190				(87,190	)			--
Fair value adjustment on sale of inventory			20,979				(20,979	)			--
Fair value adjustment on biological assets			(28,343	)			28,343				--
			104,813				(79,826	)			24,987
Cannabis gross profit			$  47,390				$  (19,311	)			$  28,079
Cannabis gross margin			31.1	%							52.9	%

The Company’s adjusted cannabis gross profit increased by $4,335 and adjusted cannabis gross margin increased by 10.2% from the prior quarter. This increase was related to the following:

•

Increase in the higher margin adult-use sales to wholesale transaction ratio in the current quarter; and

 

•

Higher usage of the lower costing Aphria produced cannabis versus purchased cannabis.

As at the end of the prior quarter, the Company had $13,907 (4,267.1 kgs) of purchased cannabis on hand, of which the Company sold $6,070 (1,723.0 kgs) of the purchased cannabis in Q4. As of the MD&A date, the Company has sold all but approximately $4,400 of previously purchased cannabis and anticipates selling the remainder in the next month.

 

 

 

		Management’s Discussion & Analysis  |  26

The following is the Company’s distribution gross profit and distribution gross margin as compared to IFRS for the three months ended May 31, 2020:

 

		Three months ended								Three months ended
		May 31, 2020 (IFRS)				Adjustments				May 31, 2020 (Adjusted)
Cannabis revenue			$  65,461				$  (65,461)				$  --
Distribution revenue			99,137				--				99,137
Insurance recovery			--				--				--
Excise taxes			(12,395	)			12,395				--
Net revenue			152,203				(53,066	)			99,137
Production costs			18,917				(18,917	)			--
Cost of cannabis purchased			6,070				(6,070	)			--
Cost of goods purchased			87,190				--				87,190
Fair value adjustment on sale of inventory			20,979				(20,979	)			--
Fair value adjustment on biological assets			(28,343	)			28,343				--
			104,813				(17,623	)			87,190
Distribution gross profit			$  47,390				$  (35,443	)			$    11,947
Distribution gross margin			31.1	%							12.1	%

The Company’s adjusted distribution gross profit and adjusted distribution gross margin increased by $550 and decreased by 0.8% respectively from the prior quarter. The gross margin decreased as a result of certain international suppliers closing operations due to COVID-19. The Company was able to secure new suppliers to fill the demand, however the items were purchased at a slightly higher cost.

The gross profit for the year ended May 31, 2020 was $191,975, compared to $75,421 in the same period of the prior year. This increase is mainly driven by fiscal 2020 being the Company’s first full year after CC Pharma’s acquisition.

The following is the Company’s cannabis gross profit and cannabis gross margin as compared to IFRS for the year ended May 31, 2020:

 

		Year ended								Year ended
		May 31, 2020       (IFRS)				Adjustments				May 31, 2020       (Adjusted)
Cannabis revenue			$  204,736				$  --				$  204,736
Distribution revenue			369,214				(369,214	)			--
Insurance recovery			1,000				--				1,000
Excise taxes			(31,611	)			--				(31,611	)
Net revenue			543,339				(369,214	)			174,125
Production costs			64,972				--				64,972
Cost of cannabis purchased			21,920				--				21,920
Cost of goods purchased			322,688				(322,688	)			--
Fair value adjustment on sale of inventory			57,039				(57,039	)			--
Fair value adjustment on biological assets			(115,255	)			115,255				--
			351,364				(264,472	)			86,892
Cannabis gross profit			$  191,975				$  (104,742	)			$  87,233
Cannabis gross margin			35.3	%							50.1	%

 

 

 

		Management’s Discussion & Analysis  |  27

The following is the Company’s distribution gross profit and distribution gross margin as compared to IFRS for the year ended May 31, 2020:

 

		Year ended								Year ended
		May 31, 2020       (IFRS)				Adjustments				May 31, 2020       (Adjusted)
Cannabis revenue			$  204,736				$  (204,736)				$  --
Distribution revenue			369,214				--				369,214
Insurance recovery			1,000				(1,000	)			--
Excise taxes			(31,611	)			31,611				--
Net revenue			543,339				(174,125	)			369,214
Production costs			64,972				(64,972	)			--
Cost of cannabis purchased			21,920				(21,920	)			--
Cost of goods purchased			322,688				--				322,688
Fair value adjustment on sale of inventory			57,039				(57,039	)			--
Fair value adjustment on biological assets			(115,255	)			115,255				--
			351,364				(28,676	)			322,688
Distribution gross profit			$  191,975				$  (145,449	)			$  46,526
Distribution gross margin			35.3	%							12.6	%

Operating expenses

 

		For the three months ended May 31,								For the year ended May 31,
		2020				2019				2020				2019
General and administrative			$  27,676				$  26,191				$  99,977				$  69,752
Share-based compensation			4,855				3,084				22,500				26,080
Amortization			5,491				4,528				21,747				14,084
Selling			8,311				2,949				21,042				4,961
Marketing and promotion			3,853				2,625				20,464				23,010
Research and development			576				294				2,568				1,391
Impairment			63,971				--				63,971				58,039
Transaction costs			1,859				20,329				5,763				23,259
			$  116,592				$  60,000				$  258,032				$  220,576

Operating expenses are comprised of general and administrative, share-based compensation, amortization, selling, marketing and promotion, research and development, impairment, and transaction costs. These costs increased by $56,592 to $116,592 from $60,000 in the same quarter in the prior year. This was primarily due to $63,971 of impairment charges recorded in the current quarter whereas none was recorded in the same quarter of the prior year.

 

 

 

		Management’s Discussion & Analysis  |  28

General and administrative costs

 

		For the three months ended May 31,								For the year ended May 31,
		2020				2019				2020				2019
Executive compensation			$  2,482				$  2,156				$  9,084				$  5,821
Consulting fees			3,273				2,700				12,429				6,517
Office and general			4,769				5,026				16,556				16,511
Professional fees			1,898				6,086				6,592				11,790
Salaries and wages			10,938				6,375				37,873				19,627
Insurance			3,960				2,136				12,561				5,356
Travel and accommodation			50				1,358				3,751				3,116
Rent			306				354				1,131				1,014
			$  27,676				$  26,191				$  99,977				$  69,752

The increase in general and administrative costs from the prior quarter was largely related to:

 

•

An increase in headcounts at all levels of the organization as the Company increases its operational footprint with Aphria Diamond;

partially offset by:

 

•

A decrease in professional and consulting fees, as a result of corporate initiatives;

 

•

A decrease in travel and accommodation as a result of COVID-19; and

 

•

A reclassification of approximately $1,000 and $4,000 of salaries and wages related to sales and marketing employees from marketing and promotion to general and administrative (salaries and wages) for the three months and the year ended May 31, 2020 respectively.

Share-based compensation

The Company recognized share-based compensation expense of $4,855 for the three months ended May 31, 2020 compared to $3,084 for the same period in the prior year. Share-based compensation is valued using the Black-Scholes valuation model and represents a non-cash expense. The increase in share-based compensation is a result of an increase in the number of restricted share units (“RSUs”) vesting in the period offset by a decrease in the number of options issued in the period. The Company issued 38,526 deferred share units (“DSUs”), 334,708 RSUs and nil stock options in the current quarter compared to 29,392 DSUs, 197,600 RSUs and 80,000 stock options in the same period of the prior year. In addition, as the Company’s share-based compensation evolved from stock options only to a hybrid of stock options and share units, the Company’s share-based compensation becomes more closely tied to stock performance in the quarter. If the stock decreases, share-based compensation, net of the impact of new and vested awards, should also decrease. As the stock price increases, share-based compensation, net of the impact of new and vested awards, should also increase.

For the year ended May 31, 2020, the Company incurred share-based compensation of $22,500 as opposed to $26,080 for the prior year. The decrease in share-based compensation is a result of a decrease in the number of options and RSUs vesting in the period. The Company issued 165,100 DSUs, 2,601,979 RSUs and 1,894,128 stock options in the current year ended May 31, 2020 compared to 96,833 DSUs, 197,600 RSUs and 3,005,000 stock options in the prior year. Of the stock options granted in the year ended May 31, 2020, 483,333 vested.

Amortization

The Company incurred non-production related amortization charges of $5,491 for the three months ended May 31, 2020 compared to $4,528 for the same period in the prior year. The increase in amortization charges are a result of the full year of charges related with finite-life capital assets and intangibles acquired as part of the Company’s acquisitions, as well as the assets that have been transferred into use from the capital expenditures incurred in the current and prior fiscal year.

The Company incurred amortization charges of $21,747 for the year ended May 31, 2020 compared to $14,084 for the same period in the previous year. The increase for the year is consistent with the increase for the three-month period.

 

 

 

		Management’s Discussion & Analysis  |  29

Selling costs

For the three months ended May 31, 2020, the Company incurred selling costs of $8,311, versus $2,949 in the same quarter last year. The current period costs are 15.7% of net revenue from cannabis products as opposed to 10.3% in the prior quarter. These costs relate to adult-use sales teams commission, Health Canada cannabis fees, and patient acquisition and maintenance costs. Patient acquisition and ongoing patient maintenance costs include funding to individual clinics to perform medical studies as well as support to assist with additional costs to clinics incurred by clinics resulting from the education of patients using the Company’s products.

For the year ended May 31, 2020, the Company incurred selling costs of $21,042 or 12.2% of net revenue from cannabis products, as opposed to $4,961 or 6.5% of net revenue from cannabis, in the comparable prior period. In the prior year, selling costs were incurred in the latter half of that year as a result of legalization of adult-use cannabis in October 2018.

Marketing and promotion costs

In a continued effort to increase transparency, the Company is disclosing selling costs separate from marketing and promotion costs. Selling costs are more variable to sales levels, while marketing and promotion costs are more fixed (or step variable) in nature. The selling costs disclosed are specific to Canadian cannabis operations.

For the three months ended May 31, 2020, the Company incurred marketing and promotion costs of $3,853, versus $2,625 in the same quarter last year. The current period costs are comprised of $2,330 of cannabis related marketing and promotion or 4.4% of net revenue from cannabis products and $1,523 of distribution marketing and promotion or 1.5% of distribution revenue. These costs relate to general marketing, research and education expense, call center operations and shipping costs.

For the year ended May 31, 2020, the Company incurred marketing and promotion costs of $20,464 or 3.8% of net revenue, as opposed to $ 23,010 or 9.7% of net revenue, in the prior year.

Research and development

Research and development costs of $576, or 1.1% of net revenue from cannabis products, were expensed during the three months ended May 31, 2020 compared to $294 in same period last year. These relate to costs associated with the development of new cannabis products. Although the Company spends a significant amount on research and development, the majority of these costs remain in production costs, as the Company does not reclassify research and development costs related to the cost of cannabis consumed in research and development activities.

For the year ended May 31, 2020, the Company incurred research and development costs of $2,568 as opposed to $1,391 in the same period in the previous year.

Transaction costs

Transaction costs of $1,859 were expensed during the three months ended May 31, 2020 compared to $20,329 in same period last year. These relate to costs associated with the various one-time litigation costs, restructuring costs and potential acquisitions the Company has considered and abandoned, or is still considering.

For the year ended May 31, 2020, the Company incurred transaction costs of $5,763 as opposed to $23,259 in the same period in the previous year.

 

 

 

		Management’s Discussion & Analysis  |  30

Non-operating income (loss), net

 

		For the three months ended May 31,								For the year ended May 31,
		2020				2019				2020				2019
Foreign exchange gain			$  11,897				$  1,063				$  8,237				$  915
Loss on marketable securities			--				(27	)			(338	)			(178	)
(Loss) gain on sale of capital assets			(10,824	)			55				(10,824	)			55
(Loss) gain from equity investees			--				(293	)			--				58,438
Deferred gain on sale of intellectual property			--				--				--				340
Loss on promissory notes receivable			(1,000	)			--				(13,000	)			--
Unrealized gain (loss) on convertible notes			228				(2,312	)			(7,341	)			(3,399	)
(Loss) gain on long-term investments			(4,424	)			(3,584	)			(32,568	)			19,651
Unrealized (loss) gain on convertible debentures			(27,016	)			48,439				59,414				48,439
Realized gain on settlement of convertible debentures			12,452				--				12,452				--
Legal settlement			(4,345	)			--				(4,345	)			--
Unrealized loss on financial liabilities			--				(217	)			--				(1,326	)
			$  (23,032)				$  43,124				$  11,687				$  122,935

For the three months ended May 31, 2020, the Company recognized a loss of $4,424 and $27,016 primarily related to the change in fair value of long-term investments and fair value of the convertible debentures. These changes in fair value result from a decline in the trading prices of participants in the cannabis market. Furthermore, the Company recognized a loss of $10,824, $1,000, and $4,345 resulting from the disposal of capital assets, loss on promissory notes receivable and the legal settlement respectively. These losses were offset by a gain on settlement of convertible debentures of $12,452 and foreign exchange gain of $11,897.

Net income (loss)

The Company recorded a net loss for the three months ended May 31, 2020 of $(98,843) or $(0.39) per share as opposed to net income of $15,760 or $0.05 per share in the same period of the prior year. The decrease in net income (loss) is a result of the non-cash impairment recognized in the current quarter as well as non-operating losses mainly driven by changes in fair value of various instruments mentioned above.

The Company recorded a net loss for the year ended May 31, 2020 of $(84,634) of $(0.33) per share as opposed to net loss of $(16,499) or $(0.07) per share in the same period of the prior year. The decrease for the year is associated with increase in gross profit of $116,554 offset by increased costs associated with operating expenses of $37,456 and decreased non-operating income and increased finance costs $144,170.

 

 

 

		Management’s Discussion & Analysis  |  31

Adjusted EBITDA

Adjusted EBITDA is a non-IFRS financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Company calculates adjusted EBITDA as net income (loss), plus (minus) income taxes (recovery), plus (minus) finance (income) expense, net, plus (minus) non-operating (income) loss, net, plus amortization, plus share-based compensation, plus (minus) non-cash fair value adjustments on sale of inventory and on growth of biological assets, plus impairment, plus transaction costs and certain one-time non-operating expenses, as determined by management, all as follows:

 

		For the three months ended May 31,								For the year ended May 31,
		2020				2019				2020				2019
Net income (loss)			$  (98,843	)			$  15,760				$  (84,634	)			$  (16,499	)
Income taxes (recovery)			(2,123	)			453				3,917				854
Finance (income) expense, net			8,732				2,918				26,347				(6,575	)
Non-operating (income) loss, net			23,032				(43,124	)			(11,687	)			(122,935	)
Amortization			14,439				8,611				49,271				22,940
Share-based compensation			4,855				3,084				22,500				26,080
Fair value adjustment on sale of inventory			20,979				9,649				57,039				27,724
Fair value adjustment on growth of biological assets			(28,343	)			(17,471	)			(115,255	)			(40,607	)
Impairment			63,971				--				63,971				58,039
Transaction costs			1,859				20,329				5,763				23,259
Adjusted EBITDA from businesses under development			2,745				5,514				13,385				16,240
Adjusted EBITDA from distribution operations			(1,943	)			(3,872	)			(10,511	)			(6,036	)
Adjusted EBITDA from cannabis operations			$  9,360				$  1,851				$  20,106				$  (17,516	)

 

		For the three months ended May 31,								For the year ended May 31,
		2020				2019				2020				2019
Adjusted EBITDA from cannabis operations			$  9,360				$  1,851				$  20,106				$  (17,516	)
Adjusted EBITDA from businesses under development			(2,745	)			(5,514	)			(13,385	)			(16,240	)
Adjusted EBITDA from distribution operations			1,943				3,872				10,511				6,036
Adjusted EBITDA			$  8,558				$   209				$  17,232				$  (27,720	)

The Company’s adjusted EBITDA increased by $2,822 from $5,736 in the prior quarter to $8,558.

 

 

 

		Management’s Discussion & Analysis  |  32