6-K
Adastra Holdings Ltd. (XTXXF)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of May 2022
Commission File Number 000-56365
Adastra Holdings Ltd.
(Translation of registrant's name into English)
5451 - 275 Street, Langley, British Columbia Canada V4W 3X8
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1) [ ]
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ____
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant's "home country"), or under the rules of the home country exchange on which the registrant's securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant's security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
SUBMITTED HEREWITH
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Adastra Holdings Ltd.
/s/ Michael Forbes
Michael Forbes, Chief Executive Officer
Date: May 2, 2022
Adastra Holdings Ltd.: Exhibit 99.1 - Filed by newsfilecorp.com
Adastra Holdings Ltd.
(formerly Phyto Extractions Inc.)
Consolidated Financial Statements
For the years ended
December 31, 2021, 2020 and the eight months ended December 31, 2019
(Expressed in Canadian dollars)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Directors of
Adastra Holdings Ltd. (formerly Phyto Extractions Inc.)
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Adastra Holdings Ltd. (formerly Phyto Extractions Inc.) (the "Company"), as of December 31, 2021 and 2020, and the related consolidated statements of loss and comprehensive loss, changes in equity, and cash flows for the years ended December 31, 2021 and 2020 and eight months ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years ended December 31, 2021, 2020, and eight months ended December 31, 2019 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company had a working capital deficiency of $1,120,613 and had incurred losses since inception. These events and conditions indicate a material uncertainty exists that may cast significant doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2019.
| /s/ DAVIDSON & COMPANY LLP | |||
|---|---|---|---|
| Vancouver, Canada | Chartered Professional Accountants | ||
| May 2, 2022 | |||
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Consolidated Statements of Financial Position As at December 31, 2021 and 2020(Expressed in Canadian dollars) | |||
| --- | |||
| Note | 2021 | 2020 | |
| --- | --- | --- | --- |
| ASSETS | |||
| Current assets | |||
| Cash | 744,541 | 1,145,461 | |
| Amounts receivable | 7 | 1,497,812 | 972,680 |
| Prepaid expenses and deposits | 8 | 150,128 | 156,509 |
| Inventory | 9 | 1,828,173 | 1,421,237 |
| 4,220,654 | 3,695,887 | ||
| Long-term deposits | 8 | 109,800 | 4,000 |
| Property and equipment | 10 | 9,774,966 | 10,037,063 |
| Intangible assets | 11 | 3,541,608 | - |
| Goodwill | 12 | 11,108,422 | - |
| Total assets | 28,755,450 | 13,736,950 | |
| LIABILITIES | |||
| Current liabilities | |||
| Accounts payable and accrued liabilities | 13 | 1,829,025 | 1,147,964 |
| Current portion of lease liability | 14 | 10,688 | - |
| Mortgage payable | 15 | 3,501,554 | 2,442,830 |
| 5,341,267 | 3,590,794 | ||
| Deferred tax liability | 19 | 960,000 | - |
| Lease liability | 14 | 21,467 | - |
| Government loan | 3(h) | 60,000 | 60,000 |
| Total liabilities | 6,382,734 | 3,650,794 | |
| EQUITY | |||
| Share capital | 17 | 41,964,446 | 15,822,152 |
| Shares to be cancelled | 6, 17 | (12,000,000 | - |
| Reserves | 6,336,019 | 5,441,814 | |
| Deficit | (13,927,749 | (11,177,810 | |
| Total equity | 22,372,716 | 10,086,156 | |
| Total liabilities and equity | 28,755,450 | 13,736,950 |
All values are in US Dollars.
Nature of operations and going concern (Note 1)
Commitments and contingencies (Note 22)
Subsequent events (Note 24)
Approved on behalf of the Board of Directors on May 02, 2022:
| "Michael Forbes" | "Paul Morgan" |
|---|---|
| Director | Director |
The accompanying notes are an integral part of these consolidated financial statements.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Consolidated Statements of Loss and Comprehensive Loss For the years ended December 31, 2021, 2020, and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) | ||||
|---|---|---|---|---|
| Note | 2021 | 2020 | 2019 | |
| --- | --- | --- | --- | --- |
| Revenue | 5,628,616 | 2,499,355 | - | |
| Cost of sales | 9, 10 | (3,684,925 | (1,713,774 | - |
| Gross profit | 1,943,691 | 785,581 | - | |
| Operating expenses | ||||
| Advertising and promotion | 455,090 | 749,258 | 56,817 | |
| Automobile expenses | 4,741 | - | - | |
| Data program expenses | 288,804 | - | - | |
| Depreciation and amortization | 10, 11 | 272,616 | 92,700 | 78,172 |
| Insurance | 102,391 | 69,294 | 18,820 | |
| Office expenses | 323,778 | 227,271 | 179,938 | |
| Professional fees and consulting | 18 | 585,908 | 704,297 | 447,784 |
| Provision for expected credit losses | 7 | 134,083 | - | - |
| Rent | - | - | 10,806 | |
| Research expenses | 89,268 | 181,750 | - | |
| Share-based payments | 17 | 890,523 | 5,332,500 | - |
| Travel | 59,617 | 4,029 | 20,273 | |
| Wages and salaries | 1,128,610 | 526,327 | 302,513 | |
| Write-down of inventory | 9 | - | 63,169 | - |
| Total operating expenses | 4,335,429 | 7,950,595 | 1,115,123 | |
| Loss from operations | (2,391,738 | (7,165,014 | (1,115,123 | |
| Other income (expense) | ||||
| Accretion expense | - | (58,405 | (13,259 | |
| Gain on settlement of accounts payable | 53,396 | - | - | |
| Interest expense | 14, 15, 16 | (276,597 | (399,248 | (227,955 |
| Interest income | - | 8,303 | 7,764 | |
| Listing expense | 4 | - | - | (1,309,384 |
| Loss on disposal of capital assets | 10 | (150,000 | - | - |
| Realized loss on marketable securities | - | (1,500 | - | |
| Loss before income taxes | (2,764,939 | (7,615,864 | (2,657,957 | |
| Income tax expense | 19 | (16,000 | - | - |
| Deferred income tax recovery | 19 | 31,000 | - | - |
| Net loss and comprehensive loss | (2,749,939 | (7,615,864 | (2,657,957 | |
| Net loss per share | ||||
| Basic and diluted | (0.05 | (0.19 | (0.10 | |
| Weighted average number of common shares outstanding | ||||
| Basic and diluted | 50,225,704 | 39,695,235 | 27,495,882 |
All values are in US Dollars.
The accompanying notes are an integral part of these consolidated financial statements.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Consolidated Statements of Changes in Equity(Expressed in Canadian dollars, except number of shares) | |||||||
|---|---|---|---|---|---|---|---|
| Common shares | Share capital | Shares to be cancelled | Debenture reserves | Reserves | Deficit | Total equity | |
| --- | --- | --- | --- | --- | --- | --- | --- |
| # | $ | ||||||
| May 1, 2019 | 27,046,111 | 4,614,000 | - | - | - | (903,989 | 3,710,011 |
| Convertible debenture - pre-RTO | - | - | - | 298,461 | - | - | 298,461 |
| Shares issued pursuant to the reverse acquisition | 7,218,678 | 1,082,802 | - | - | - | - | 1,082,802 |
| Shares issued pursuant to the private placement | 1,964,152 | 2,651,605 | - | - | - | - | 2,651,605 |
| Loss the period | - | - | - | - | - | (2,657,957 | (2,657,957 |
| December 31, 2019 | 36,228,941 | 8,348,407 | - | 298,461 | - | (3,561,946 | 5,084,922 |
| Convertible debentures - settlement | 2,532,140 | 3,418,390 | - | (298,461 | 70,814 | - | 3,190,743 |
| Units issued for cash | 3,882,667 | 3,494,400 | - | - | - | - | 3,494,400 |
| Share issue cost | - | (60,100 | - | - | 38,500 | - | (21,600 |
| Shares issued for cash - warrants | 42,967 | 77,340 | - | - | - | - | 77,340 |
| Shares issued - services | 156,894 | 131,791 | - | - | - | - | 131,791 |
| Shares issued - debt settlement | 490,491 | 411,924 | - | - | - | - | 411,924 |
| Share-based payment | - | - | - | - | 5,332,500 | - | 5,332,500 |
| Loss for the year | - | - | - | - | - | (7,615,864 | (7,615,864 |
| December 31, 2020 | 43,334,100 | 15,822,152 | - | - | 5,441,814 | (11,177,810 | 10,086,156 |
| Shares issued on acquisition of PerceiveMD | 2,513,720 | 2,010,976 | - | - | - | - | 2,010,976 |
| Shares issued on acquisition of Phyto BrandCo | 20,000,000 | 24,000,000 | (12,000,000 | - | - | - | 12,000,000 |
| Shares issued pursuant to the private placement | 122,727 | 131,318 | - | - | 3,682 | - | 135,000 |
| Share-based payments | - | - | - | - | 890,523 | - | 890,523 |
| Loss for the year | - | - | - | - | - | (2,749,939 | (2,749,939 |
| December 31, 2021 | 65,970,547 | 41,964,446 | (12,000,000 | - | 6,336,019 | (13,927,749 | 22,372,716 |
All values are in US Dollars.
The accompanying notes are an integral part of these consolidated financial statements.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Consolidated Statements of Cash Flows For the years ended December 31, 2021, 2020, and the eight months ended December 31, 2019(Expressed in Canadian dollars) | |||
|---|---|---|---|
| 2021 | 2020 | 2019 | |
| --- | --- | --- | --- |
| Operating activities | |||
| Net loss for the year | (2,749,939 | (7,615,864 | (2,657,957 |
| Adjustments for non-cash items: | |||
| Depreciation and amortization | 272,616 | 92,700 | 78,172 |
| Depreciation - cost of sales | 825,783 | 479,490 | - |
| Services paid in shares | - | 131,791 | - |
| Provision for expected credit losses | 134,083 | - | - |
| Share-based payments | 890,523 | 5,332,500 | - |
| Accretion | - | 58,405 | 13,259 |
| Gain on settlement of accounts payable | (53,396 | - | - |
| Interest expense | 276,597 | 390,251 | 227,955 |
| Interest income | - | (8,303 | (7,764 |
| Listing expense | - | - | 1,309,384 |
| Loss on disposal of capital assets | 150,000 | - | - |
| Realized loss on marketable securities | - | 1,500 | - |
| Deferred income tax recovery | (31,000 | - | - |
| Net change in non-cash working capital items: | |||
| Amounts receivable | (344,914 | (668,972 | (461,167 |
| Prepaid expenses and deposits | (99,419 | 950 | - |
| Marketable securities | - | - | (1,500 |
| Inventory | (406,936 | (1,421,237 | - |
| Accounts payable and accrued liabilities | 81,909 | 419,069 | 66,174 |
| Cash used in operating activities | (1,054,093 | (2,807,720 | (1,433,444 |
| Financing activities | |||
| Proceeds on private placement of units, net of share issue costs | 135,000 | 3,472,800 | 2,651,605 |
| Proceeds from warrants exercise | - | 77,340 | - |
| Proceeds from mortgage renegotiation, net of transaction costs | 992,877 | - | - |
| Borrowing costs mortgage | - | (18,345 | - |
| Interest paid - mortgage | (208,537 | (196,699 | (134,530 |
| Interest paid - lease liability | (846 | - | - |
| Principal repaid - lease liability | (2,510 | - | - |
| Proceeds from convertible debenture | - | - | 3,177,000 |
| Proceeds from loan | - | 60,000 | - |
| Cash provided by financing activities | 915,984 | 3,395,096 | 5,694,075 |
| Investing activities | |||
| Consideration paid on acquisition of Perceive MD | (10,000 | - | - |
| Cash received from the acquisition of PerceiveMD | 26,302 | - | - |
| Cash received from the acquisition of Phyto BrandCo Ltd.) | 301,966 | - | - |
| Cash received from the reverse acquisition | - | - | 111,496 |
| Purchases of property and equipment | (581,079 | (1,827,044 | (4,365,559 |
| Interest income | - | 8,303 | 7,764 |
| Cash used in investing activities | (262,811 | (1,818,741 | (4,246,299 |
| Net increase (decrease) in cash | (400,920 | (1,231,365 | 14,332 |
| Cash, beginning of year | 1,145,461 | 2,376,826 | 2,362,494 |
| Cash, end of year | 744,541 | 1,145,461 | 2,376,826 |
All values are in US Dollars.
Supplemental cash flow information (Note 20)
The accompanying notes are an integral part of these consolidated financial statements.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN
Adastra Holdings Ltd. (formerly Phyto Extractions Inc.) (the "Company") was incorporated under the laws of the province of British Columbia on October 14, 1987. The Company is an extraction and processing solutions company. The Company's mission is to develop and deploy large-scale cannabis and hemp extraction technologies and provide turn-key processing solutions to help licensed standard and micro-cultivators maximize the value of every harvest. The Company is listed on the Canadian Securities Exchange ("CSE") under the symbol "XTRX". The Company's registered and records office is 5451 275th Street, Langley City, British Columbia, V4W 3X8.
On October 19, 2019, Health Canada issued an Analytical testing license on the Company's facility to Chemia Analytics Inc., ("Chemia"). Chemia is a wholly owned subsidiary of the Company. On March 13, 2020, Health Canada issued a Standard Processing License to the Company's facility to Adastra labs Inc., ("Labs"). Labs is a wholly owned subsidiary of the Company.
On December 20, 2019, Arrowstar Resources Ltd. ("Arrowstar") acquired all of the issued and outstanding common shares of Adastra Labs Holdings (2019) Ltd. ("Adastra") a private British Columbia cannabis extraction and processing solutions company incorporated on June 18, 2018. The acquisition was completed by entering into a share exchange agreement whereby the parties completed a business combination by way of a transaction that constituted a reverse takeover ("RTO") of the Company by Adastra (the "Transaction"). The Transaction was accounted for as an RTO of Arrowstar by Adastra for accounting purposes, with Adastra being identified as the accounting acquirer, and accordingly, these financial statements are a continuation of Adastra. The net assets of Arrowstar at the date of the RTO are deemed to have been acquired by Adastra (note 4). These consolidated financial statements include the results of operations of Arrowstar since December 20, 2019. The comparative figures are those of Adastra prior to the RTO. At the time of the transaction the Company changed its fiscal year end from April 30 to December 31.
On April 9, 2021, the Company consolidated its issued share capital on a ratio of three (3) old common shares for every one (1) new post-consolidated common share. All current and comparative references to the number of common shares, weighted average number of common shares, loss per share, stock options and warrants have been restated to give effect to this share consolidation.
On August 10, 2021, the Company completed the acquisition of all of the issued and outstanding shares of 1225140 B.C. Ltd., doing business as PerceiveMD ("PerceiveMD") from the shareholders of PerceiveMD, pursuant to the terms of a share purchase agreement dated August 10, 2021 (see note 5).
On September 1, 2021, the Company changed its name to Adastra Holdings Ltd. (formerly Phyto Extractions Inc.). Trading of the Company's common shares resumed under the new name and under the same ticker symbol "XTRX" on the Canadian Securities Exchange as market opened on September 1, 2021. Prior to this on April 9, 2021 the Company changed its name from Adastra Labs Holdings Ltd. to Phyto Extractions Inc. and on December 19, 2019 from Arrowstar Resources Ltd to Adastra Labs Holdings Ltd.
On September 15, 2021, the Company completed its previously-announced acquisition of privately held 1204581 B.C. Ltd., doing business as Phyto Extractions ("Phyto BrandCo"), the owner of the intellectual property rights for the Phyto Extractions brand (see note 6).
These consolidated financial statements ("financial statements) are prepared on the basis that the Company will continue as a going concern, which assumes that the Company will be able to continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of operations. These financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue in existence. The Company's ability to continue as a going concern is dependent on its ability to generate positive cash flows from operations, complete additional financings, and/or extend or modify its mortgage payable (note 15).
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN (continued)
As at December 31, 2021, the Company had a working capital deficiency of $1,120,613 (December 31, 2020 - working capital surplus of $105,093) and incurred a net loss of $2,749,939 for the year ended December 31, 2021 (2020 - $7,615,864, the eight months ended December 31, 2019 - $2,657,957). These events and conditions indicate a material uncertainty exists that may cast significant doubt on the Company's ability to continue as a going concern. If the going concern assumption were not appropriate for these financial statements, it could be necessary to restate the Company's assets and liabilities on a liquidation basis.
NOTE 2 - BASIS OF PRESENTATION
(a) Statement of compliance
These financial statements, including comparatives, have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and interpretations of the International Financial Reporting Interpretations Committee ("IFRIC"). These consolidated financial statements were approved by the Board of Directors and authorized for issue on May 02, 2022.
(b) Basis of measurement
These financial statements have been prepared on a historical cost basis except for those financial instruments which have been classified at fair value through profit or loss. In addition, except for cash flow information, these financial statements have been prepared using the accrual method of accounting.
All amounts on these financial statements are presented in Canadian dollars which is the functional currency of the Company and its subsidiaries.
(c) Reclassification of prior amounts
The Company has reclassified certain items on the consolidated statements of cash flows to conform with current year presentation.
(d) Principles of consolidation
These financial statements include the financial information of the Company and its subsidiaries. All intercompany transactions and balances are eliminated on consolidation. Control exists where the parent entity has power over the investee and is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. These consolidated financial statements incorporate the accounts of the Company and the following subsidiaries:
| Functional <br>currency | Ownership <br>percentage | |
|---|---|---|
| Adastra Labs Holdings (2019) Ltd. (formerly Adastra Labs Holdings Ltd.) | CAD | 100% |
| Adastra Labs Inc. | CAD | 100% |
| 1178562 B.C. Ltd. | CAD | 100% |
| Adastra Brands Inc. | CAD | 100% |
| Chemia Analytics Inc. | CAD | 100% |
| 1225140 B.C. Ltd (PerceiveMD) | CAD | 100% |
| 1204581 B.C. Ltd. (Phyto BrandCo) | CAD | 100% |
Subsidiaries are entities controlled by the Company and are included in the financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries are changed where necessary to align them with the policies adopted by the Company.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
(a) Significant accounting judgements and key sources of estimate uncertainty
The preparation of financial statements requires management to make judgements, and estimates that affect the application of accounting policies and the reported amounts of assets and liabilities, revenues and expenses. Management continually evaluates these judgements, estimates and assumptions based on experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates and judgements which may cause a material adjustment to the carrying amounts of assets and liabilities.
The areas which require management to make critical judgments include:
Going concern
These consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The assessment of the Company's ability to source future operations and continue as a going concern involves judgment. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. If the going concern assumption were not appropriate for the financial statements, then adjustments to the carrying value of assets and liabilities, the reported expenses and the statement of financial position would be necessary.
Impairment of property and equipment
Property and equipment are reviewed for impairment at each reporting period end or whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is the higher of its fair value, less costs to sell, and its value in use. If the carrying amount of an asset exceeds its recoverable amount, an impairment charge is recognized immediately in profit or loss by the amount by which the carrying amount of the asset exceeds the recoverable amount. If an impairment loss subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimate of recoverable amount, and the carrying amount that would have been recorded had no impairment loss been recognized previously.
Assessment of the transactions as asset acquisitions or business combinations
Determination of whether a set of assets acquired and liabilities assumed constitute the acquisition of a business or asset requires the Company to make certain judgments as to whether or not the assets acquired and liabilities assumed include the inputs, processes and outputs necessary to constitute a business as defined in IFRS 3 - Business Combinations. If an acquired set of assets and liabilities includes goodwill, the set is presumed to be a business. The values assigned to common shares and the allocation of the purchase price to the net assets in the acquisition are based on numerous estimates and judgements of the relative fair values of net assets.
Business combinations
Judgement was used in determining whether the acquisitions of PerceiveMD and Phyto BrandCo were a business combination or an asset acquisition. Estimates were made as to the fair value of assets and liabilities acquired. In certain circumstances, such as the valuation of equipment, intangible assets and goodwill acquired, the Company may rely on independent third-party valuators. The Company measured all the assets acquired and liabilities assumed at their acquisition-date fair values. The excess of the consideration paid over the acquisition-date fair values of the net assets acquired, was recognized as goodwill as of the acquisition date in business combination.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
In a business combination, all identifiable assets and liabilities acquired are recorded at their fair values, including the total consideration paid by the Company. One of the most significant estimates relates to the determination of the fair value of these assets and liabilities including assessing the fair value of any identifiable intangible assets. For any intangible asset identified, due to the complexity of determining its fair value, an independent valuation expert may be engaged to measure the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied. For any form of consideration paid by the Company, depending on the type of consideration paid and the complexity of determining its fair value, an independent valuation expert may be engaged to measure the fair value. In the event that there is contingent consideration in an acquisition management makes assumptions as to the probability of the consideration being paid.
The information about significant areas of estimation uncertainty considered by management in preparing these financial statements is as follows:
COVID-19 estimation uncertainty
The coronavirus pandemic continues to have global impacts on workforces, economies, and financial markets. It is not possible for the Company to predict the duration or magnitude of any adverse effects that the pandemic may have on the Company's business or ability to raise funds. As of the date of these financial statements, COVID-19 has had minimal impact on the Company's ability to conduct its operations but may impact the Company's ability to raise funding should restrictions related to COVID-19 be expanded in scope.
Inventory
The Company reviews the net realizable value of, and demand for, its inventory regularly to provide assurance that recorded inventory is stated at the lower of cost or net realizable value. Factors that could impact estimated demand and selling prices include competitor actions, supplier prices and economic trends.
Useful lives and depreciation of property and equipment and intangible assets
The depreciation methods and useful lives reflect the pattern in which management expects the assets' future economic benefits to be consumed by the Company. Judgments are required in determining these expected useful lives.
Goodwill impairment
Goodwill acquired in a business combination is reviewed for impairment at each reporting period end or whenever events or changes in circumstances indicate that the carrying amount of the underlying goodwill exceeds its recoverable amount of the associated CGU. The recoverable amount of a CGU is the estimate of future cashflows generated by the CGU, based on management's assumptions. If the carrying amount of goodwill exceeds the recoverable amount of the CGU, an impairment charge is recognized immediately in profit or loss by the amount by which the carrying amount of the goodwill exceeds the recoverable amount.
Valuation of receivables
The Company recognizes an impairment loss allowance for expected credit losses on trade accounts receivable using a probability-weighted estimate of credit losses. In its assessment, management estimates the expected credit losses based on actual credit loss experience and informed credit assessment, taking into consideration forward-looking information. If actual credit losses differ from estimates, future earnings would be affected.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Valuation of share-based compensation
The Company uses the Black-Scholes option pricing model for valuation of share-based compensation. Option pricing models require the input of subjective assumptions including expected price volatility, risk-free interest rate, and forfeiture rate. Changes in the input assumptions can materially affect the fair value estimate and the Company's earnings and equity reserves.
Income taxes
In assessing the probability of realizing income tax assets, management makes estimates related to expectation of future taxable income, applicable tax opportunities, expected timing of reversals of existing temporary differences and the likelihood that tax positions taken will be sustained upon examination by applicable tax authorities. In making its assessments, management gives additional weight to positive and negative evidence that can be objectively verified.
(b) Cash
Cash is comprised of deposits in financial institutions, and cash on hand.
(c) Inventory
Inventory is valued at the lower of cost and net realizable value. Cost of cannabis and hemp biomass is comprised of initial third-party acquisition costs, plus analytical testing costs. The Company uses the weighted average costing method to cost extracted cannabis and hemp oil inventory, costs comprised of initial acquisition cost of the biomass and all direct and indirect processing costs including labor related costs, consumables, materials, packaging supplies, utilities, facility costs, analytical testing costs, and production related depreciation. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. Packaging and supplies are initially valued at cost and subsequently at the lower of cost and net realizable value.
(d) Property and Equipment
Property and equipment is measured at cost less accumulated depreciation and impairment losses. The cost of an item of property and equipment consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. No depreciation is recorded in the year of disposal.
Depreciation is recognized over the following terms, intended to depreciate the cost of property and equipment, less its residual values if any, over its estimated useful lives:
Furniture and equipment 20% declining balance
Leasehold improvements 10 years straight line
Buildings 20 years straight line
Extraction equipment 20% declining balance
Laboratory equipment 20% declining balance
Computer software 20% declining balance
Right-of-use assets 4 years straight line over the lease term
Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. Repairs and maintenance costs are charged to profit or loss during the period they are incurred. Any gain or loss on the disposal or retirement of equipment is recognized in profit or loss.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
(e) Intangible assets
Intangible assets represent trademarks and patient relationships acquired from business acquisitions.
Intangible assets with finite lives are measured at cost less accumulated amortization and impairment losses. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Useful lives, residual values, and amortization methods for intangible assets with finite useful lives are reviewed at least annually.
At the end of each reporting period, the Company reviews the carrying amounts of its intangible asset to determine whether there is any indication of impairment. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount is less than the carrying amount, the carrying amount of the asset is reduced to its recoverable amount and an impairment loss is recognized immediately in profit or loss.
When an impairment subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been previously recognized. A reversal of an impairment loss is recognized immediately in profit or loss. An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset are recognized in profit or loss when the asset is derecognized.
The Company's intangible assets are comprised of trademarks and patient relationships which are amortized over their useful lives:
Trademarks 10 years straight line
Patient relationships 5 years straight line
(f) Goodwill
The Company allocates goodwill arising from business combinations to each cash generating unit ("CGU") or group of CGUs that are expected to receive the benefits from the business combination. The carrying amount of the CGU or group of CGUs to which goodwill has been allocated is tested annually for impairment or when there is an indication that the goodwill may be impaired. Any impairment is recognized as an expense immediately. Should there be a recovery in the value of a CGU, any impairment of goodwill previously recorded is not subsequently reversed.
(g) Leases liabilities
Leases are recognized as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Company. Assets and liabilities arising from a lease are initially measured on a present value basis. Right-of-use assets are measured at cost comprising the following:
• the amount of the initial measurement of lease liability;
• any lease payments made at or before the commencement date less any lease incentives received;
• any initial direct costs; and
• restoration costs
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company assesses whether a contract is or contains a lease, at inception of a contract. The Company recognizes a right-of-use asset and a corresponding lease liability with respect to all lease agreements in which it is the lessee. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company uses its incremental borrowing rate.
The lease liability is subsequently measured by increasing its carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect lease payments made. The right-of-use asset is depreciated over the shorter of the lease term and the useful life of the underlying asset. The Company applies IAS 36 - Impairment of Assets, to determine whether the asset is impaired and account for any identified impairment loss.
As a practical expedient, IFRS 16 permits a lease not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement. The Company has not used this practical expedient, and accordingly allocates the consideration in the contract to lease and non-lease components based on the stand-alone price of the lease component and aggregate stand-alone price of the non-lease components.
Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognized as an expense in the period in which the event or condition that triggers those payments occurs and are presented as such in profit or loss.
Recognition exemptions
The Company has elected not to recognize the ROU asset and lease obligations for short-term leases that have a lease term of 12 months or less or for leases of low-value assets. Payments associated with these leases are recognized as general and administrative expense on a straight-line basis over the lease term on the consolidated statement of loss and comprehensive loss.
(h) Government assistance
Government grants and assistance are recognized as a reduction in the related expense in the period in which the grant or assistance become receivable on all conditions, if any, have been satisfied.
During the year ended December 31, 2020, the Company qualified for a government-guaranteed bank loan of $60,000 which is interest-free. If the balance of the loan is repaid on or before December 31, 2022, 25% will not have to be repaid ($15,000). Funds can be used to pay non-deferrable operating expenses including payroll. As at December 31, 2021, the principal of $60,000 is outstanding (December 31, 2020 - $60,000).
(i) Share capital
Common shares are classified as shareholders' equity. Transaction costs directly attributable to the issue of common shares are recognized as a deduction from shareholders' equity. Common shares issued for consideration other than cash, are valued based on their market value at the date the shares are issued.
Company has adopted a residual value method with respect to the measurement of warrants attached to private placement units. The residual value method first allocates value to the more easily measurable component based on fair value and then the residual value, if any, to the less easily measurable component. The Company considers the fair value of common shares issued in the private placements to be the more easily measurable component. The balance, if any, is allocated to the attached warrants. Any fair value attributed to the warrants is recorded as warrant reserve.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
(j) Financial instruments
All financial instruments are recognized initially at fair value on the date at which the Company becomes a party to the contractual provisions of the instrument.
Classification and measurement of financial assets and liabilities
A financial asset is classified as measured at: amortized cost, fair value through other comprehensive income ("FVOCI") or fair value through profit or loss ("FVTPL"). The classification of financial assets is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. Derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never separated. Instead, the hybrid financial instrument as a whole is assessed for classification.
The Company classifies its financial instruments in the following categories based on the purpose for which the asset was acquired: FVTPL, amortized cost and FVOCI. The Company's financial assets and financial liabilities are classified and measured as follows:
| Asset/Liability | Classification |
|---|---|
| Cash | FVTPL |
| Amounts receivable | Amortized cost |
| Deposits | FVTPL |
| Accounts payable and accrued liabilities | Amortized cost |
| Mortgage payable | Amortized cost |
| Lease liability | Amortized cost |
| Government loan | Amortized cost |
Impairment
An 'expected credit loss' ("ECL") model applies to financial assets measured at amortized cost. The Company's receivables and deposits are measured at amortized cost and are therefore subject to the ECL model.
Financial assets, other than those classified at FVTPL, are assessed for indicators of impairment at each reporting date. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset (a "loss event"), and that loss event has an impact on the estimated future cash flows of that asset. Objective evidence may include significant financial difficulty of the debtor/obligor and/or delinquency in payment. When impairment has occurred, the cumulative loss is recognized in profit or loss.
For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate. Impairment losses may be reversed in subsequent periods.
(k) Revenue
Cannabis concentrate sales
Cannabis concentrate sales revenue, earned under fee for service agreements, is recognized at a point in time when the Company is considered to have satisfied its performance obligations. The performance obligations are considered satisfied once all of the following have been met: (i) the manufacturing process (services) are complete; (ii) regulatory quality assurance, and customer quality assurance specifications (acceptance of the finished goods) have been met; and (iii) when the transaction price can be reliably measured in instances of variable consideration or non-monetary consideration.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
At times, the Company may enter into contracts with customers where payment for the services provided by the Company is in the form of retention of a certain portion of the finished goods. In such instances, the consideration amount is variable and it's determined based on fair market values for the same or similar goods. As fair market values are readily available for cannabis concentrate, the level of estimation uncertainty is limited.
Revenues are recorded net of discounts but inclusive of freight in the sale of goods. Once the customer has accepted the finished goods, the Company has no obligations for returns, refunds, warranties or similar obligations.
Revenue from the sale of cannabis biomass and oil is recognized at a point in time when the Company has satisfied the performance obligations under the customer contracts. Revenue from toll processing and white label manufacturing, under fee for service agreements, is recognized over time under the customer contracts.
Consulting revenue
MSP remittance revenue is received from the provincial government of British Columbia for providing medical assessments and consultations to British Columbian residents under the Medical Services Plan ("MSP"). MSP remittance revenue is recognized at the point of service, being the provision of the consultation by the licensed physician.
Referral revenue (educational service fees) is earned under referral agreements with licensed producers ("LP's") of medical cannabis in Canada, duly licensed in accordance with the Cannabis Act. Under the agreements, LP's pay the Company an educational service fee of 20% of the gross revenue they receive from sales of all products purchased by customers who have been referred by the Company, including medicinal cannabis and any oils, derivatives, compounds, or other related products.
Licensing revenue
Licensing revenue is a royalty arrangement whereby the Company recognizes revenue from the licensing of its intellectual property for the sale of consumer packaged goods ("CPG") by a third party (the "Licensee"). The Company recognizes revenue as a percentage of the Licensee's gross revenue when the Licensee sells and delivers products to their customers.
(l) Cost of sales
Cost of sales represents costs directly related to manufacturing and distribution of the Company's products and services. Primary costs include raw materials, packaging, direct labor, overhead, shipping and the depreciation of production equipment and facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance and property taxes. The Company recognizes the cost of sales as the associated revenue is recognized.
(m) Share-based payment transactions
The Company has a stock option plan that provides for the granting of options to Officers, Directors, related company employees and consultants to acquire shares of the Company. The fair value of the options is measured on grant date and is recognized as an expense with a corresponding increase in reserves as the options vest.
Options granted to employees and others providing similar services are measured at grant date at the fair value of the instruments issued. Fair value is determined using the Black-Scholes option pricing model taking into account the terms and conditions upon which the options were granted. The amount recognized as an expense is adjusted to reflect the actual number of share options that are expected to vest. Each tranche in an award with graded vesting is considered a separate grant with a different vesting date and fair value. Each grant is accounted for on that basis.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Options granted to non-employees are measured at the fair value of the goods or services received, unless that fair value cannot be estimated reliably, in which case the fair value of the equity instruments issued is used. The value of the goods or services is recorded at the earlier of the vesting date, or the date the goods or services are received.
Over the vesting period, share-based payments are recorded as an operating expense and as an increase in reserves. When options are exercised the consideration received is recorded as share capital and the related share-based payments originally recorded as reserves are transferred to share capital. When an option is cancelled or expires, the initial recorded value is reversed from reserves and credited to deficit.
(n) Related party transactions
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence, related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
(o) Impairment of non-financial assets
The carrying amount of the Company's long-lived assets is reviewed for an indication of impairment at the end of each reporting period. If an indication of impairment exists, the Company makes an estimate of the asset's recoverable amount. Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets (cash generating units "CGU"). The recoverable amount of an asset group is the higher of its fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows are adjusted for the risks specific to the CGU and are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money.
Where the carrying amount of an asset group exceeds its recoverable amount, the CGU is considered impaired and is written down to its recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated to reduce the carrying amounts of the assets in the CGU on a pro rata basis.
An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized.
(p) Income taxes
Income tax comprises current and deferred income taxes. Current income tax and deferred income tax are recognized in profit or loss, except to the extent that they relate to items recognized directly in shareholders' equity.
Current income tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted at the reporting date, adjusted for any amendments to tax payable in respect of previous years.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred income tax is provided for, based on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and recognized only to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
(q) Loss per share
Basic loss per common share is calculated by dividing the loss attributed to shareholders for the period by the weighted average number of common shares outstanding in the period. Diluted loss per common share is calculated by adjusting the weighted average number of common shares outstanding to assume conversion of all dilutive potential common shares. Diluted loss per share is equal to basic loss per share for the periods presented as the effect would be anti-dilutive.
(r) Standards issued but not yet effective
Certain pronouncements have been issued by the IASB or IFRIC that are effective for accounting periods beginning on or after January 1, 2022. The Company has reviewed these updates and determined that many of these updates are not applicable or consequential to the Company and have been excluded from discussion within these significant accounting policies.
NOTE 4 - REVERSE ACQUISITION
On December 20, 2019, Arrowstar and Adastra completed the Transaction which constituted a reverse acquisition.
The Transaction resulted in the shareholders of Adastra obtaining control of the combined entity by obtaining control of the voting rights, governance and management decision making processes, and the resulting power to govern the financial and operating policies of the combined entity.
The transaction constitutes an RTO of Arrowstar by Adastra and has been accounted for as a reverse acquisition transaction in accordance with the guidance provided in IFRS 2 - Share-based payments. As Arrowstar did not qualify as a business according to the definition in IFRS 3, the RTO does not constitute a business combination; rather it is treated as an issuance of common shares by Adastra for the net assets of Arrowstar and Arrowstar's public listing, with Adastra as the continuing entity. Accordingly, no goodwill was recorded with respect to the transaction as it does not constitute a business combination.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 4 - REVERSE ACQUISITION (continued)
For accounting purposes, Adastra was treated as an accounting parent company (legal subsidiary) and Arrowstar has been treated as the accounting subsidiary (legal parent) in these financial statements. As Adastra was deemed to be the acquirer for accounting purposes, its assets, liabilities, and operations since incorporation are included in these financial statements at their historical carrying values. Arrowstar's results of operations have been included from December 20, 2019.
| December 20, 2019 | |
|---|---|
| Assets and (liabilities) of Arrowstar acquired | |
| Cash | 111,496 |
| Receivables | 10,802 |
| Other assets | 7,504 |
| Accounts payable | (356,384 |
| Net liabilities acquired | (226,582 |
| Consideration paid in RTO of Arrowstar | |
| Common shares (7,218,678 common shares at $0.15 fair value per share) | 1,082,802 |
| Listing expense | 1,309,384 |
All values are in US Dollars.
The Transaction was measured at the fair value of the shares that Adastra would have to issue to the shareholders of Arrowstar, to give the shareholders of Arrowstar the same percentage of equity interest in the combined entity that results from the reverse acquisition had it taken the legal form of Adastra acquiring Arrowstar.
NOTE 5 - ACQUISITION OF PERCEIVEMD
On August 10, 2021, the Company acquired all of the issued and outstanding shares of PerceiveMD. At closing, the Company issued 2,513,720 common shares to the former shareholders of PerceiveMD at a share price on the date of acquisition of $0.80 per share for $2,010,976 and $10,000 in cash, for total consideration of $2,020,976.
PerceiveMD is a multidisciplinary, patient-focused center providing comprehensive assessments for medical cannabis and other therapies. The acquisition will allow the Company to generate revenue from providing cannabis under medical prescriptions.
The transaction has been accounted for as a business combination under IFRS 3 - Business Combinations. The allocation of the purchase consideration is as follows:
| Assets acquired: | |
|---|---|
| Cash | 26,302 |
| Accounts receivable | 13,647 |
| Corporate taxes receivable | 26,000 |
| 65,949 | |
| Liabilities assumed: | |
| Accounts payable and other accrued liabilities | (19,206 |
| Fair value of net assets acquired | 46,743 |
| Purchase consideration | |
| Share consideration | 2,010,976 |
| Cash consideration | 10,000 |
| **** | 2,020,976 |
| Identifiable intangible asset: | |
| Patient relationships | 414,000 |
| Deferred tax liability | (112,000 |
| Goodwill | 1,672,233 |
All values are in US Dollars.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 5 - ACQUISITION OF PERCEIVEMD (continued)
The carrying value of the assets and liabilities acquired equates to fair value due to their short term nature, other than patient relationships (the "Patient Relationships") which are depreciated over their estimated useful economic lives.
The intangible assets are comprised of Patient Relationships with a fair value of $414,000. The fair value of the Patient Relationships was determined using the discounted cash flow method taking into account the future cashflows expected to be received from the current list of patients, adjusted to reflect attrition. The key assumptions used in the cash flow projection related to the Patient Relationships include: (1) a discount rate of 16%; (2) patient attrition rate of 20.00%; (3) number of patients of 3,492 at the acquisition date; (4) annual spending of $143 per patient, assumed to grow at a long term growth rate of 2% per year.
The goodwill generated as a result of this acquisition relates to other intangible assets that do not qualify for separate recognition.
Included in the consolidated statement of loss and comprehensive loss is $185,496 of revenue and $47,829 of income from PerceiveMD since the acquisition date of August 10, 2021. If the acquisition occurred on January 1, 2021, management estimates that revenue would have increased by $494,656 (unaudited) and net income would have been increased to approximately $127,545 (unaudited), respectively.
The Company's acquisition of PerceiveMD constitutes a related party transaction as Michael Forbes, Chief Executive Officer and a director of the Company is also a director and controlling shareholder of PerceiveMD.
NOTE 6 - ACQUISITION OF PHYTO BRANDCO
On September 15, 2021, the Company acquired all of the issued and outstanding shares of Phyto BrandCo, the owner of the intellectual property rights for the Phyto Extractions brand consisting of 21 registered trademarks. At closing, the Company issued 20,000,000 common shares to the former shareholders of Phyto BrandCo at a share price on the date of acquisition of $1.20 per share, for total consideration of $24,000,000.
Subsequent to the closing of the acquisition, the Company renegotiated the terms of the acquisition with the former shareholders of Phyto BrandCo due to certain conditions in the acquisition agreement not being met. It was resolved that the consideration be amended from $24,000,000 to $12,000,000 by a voluntary return to treasury of 10,000,000 common shares. As a result, the revised consideration is 10,000,000 common shares at a share price on the date of acquisition of $1.20 per share, for total consideration of $12,000,000.
Phyto BrandCo licenses its intellectual property to Canadian cannabis license holders and collects royalties by selling cannabis consumer packaged goods to provincial distributors and retailers.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 6 - ACQUISITION OF PHYTO BRANDCO (continued)
The transaction has been accounted for as a business combination under IFRS 3 - Business Combinations. The allocation of the purchase consideration is as follows:
| Assets acquired: | |
|---|---|
| Cash | 301,966 |
| Accounts receivable | 255,154 |
| Prepayments | 19,500 |
| Property and equipment | 85,108 |
| 661,728 | |
| Liabilities assumed: | |
| Accounts payable and other accrued liabilities | (434,252 |
| Lease liability | (34,665 |
| Fair value of net identifiable assets acquired | 192,811 |
| Purchase consideration | |
| Share consideration | 24,000,000 |
| Shares to be cancelled | (12,000,000 |
| **** | 12,000,000 |
| Identifiable intangible assets: | |
| Trademarks | 3,250,000 |
| Deferred tax liability | (879,000 |
| Goodwill | 9,436,189 |
All values are in US Dollars.
The carrying value of the assets and liabilities acquired equates to fair value due to their short term nature, other than property and equipment and trademarks which are depreciated over their estimated useful economic lives.
Property and equipment acquired included $40,376 of right-of-use assets.
The intangible asset is comprised of trademarks (the "Trademarks") with a fair value of $3,250,000. The fair value of the Trademarks was determined using the relief from royalty method. The key assumptions used in the cash flow projection related to the asset include: (1) a discount rate of 12.50%; (2) royalty rate of 10.00% for the remaining period of the licensing agreement and 2.0% thereafter, and (3) annual net profit of the Licensee.
The goodwill generated as a result of this acquisition relates to other intangible assets that do not qualify for separate recognition.
The lease liability represents one lease with a fair value of $34,665 on the date of acquisition, which is the net present value of the minimum future lease payments determined using the following assumptions: (1) remaining number of payments - 36; (2) monthly payment - $1,119; and (3) incremental borrowing rate - 10%.
Included in the consolidated statement of loss and comprehensive loss is $385,119 of revenue and a loss of $130,535 from Phyto BrandCo since the acquisition date of September 15, 2021. If the acquisition occurred on January 1, 2021, management estimates that revenue would have increased by $1,320,407 (unaudited) and net income would have been increased to approximately $295,106 (unaudited), respectively.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 7 - AMOUNTS RECEIVABLE
As at December 31, 2021 and 2020, receivables consisted of the following:
| 2021 | 2020 | |
|---|---|---|
| $ | $ | |
| Trade receivables, net of expected credit losses | 1,441,601 | 971,102 |
| Sales tax recoverable | 36,211 | 1,578 |
| Income tax receivable | 20,000 | - |
| 1,497,812 | 972,680 |
During the year ended December 31, 2021, the Company recorded a provision for expected credit losses against trade receivables in the amount of $134,083 (2020 - $nil, the eight months ended December 31, 2019 - $nil).
NOTE 8 - PREPAID EXPENSES AND DEPOSITS
| 2021 | 2020 | |
|---|---|---|
| $ | $ | |
| Prepaid expenses | 115,372 | 156,509 |
| Deposits | 34,756 | - |
| **** | 150,128 | 156,509 |
As at December 31, 2021, long-term deposits of $109,800 consist of security deposits held in trust for excise stamps and other deposits.
NOTE 9 - INVENTORY
As at December 31, 2021 and 2020, inventory consisted of the following:
| 2021 | 2020 | |
|---|---|---|
| $ | $ | |
| Dried cannabis and hemp biomass | 545,765 | 239,183 |
| Production work in process - distillate | 462,737 | 273,937 |
| Extracted cannabis and hemp oils (finished goods) | 819,671 | 908,117 |
| 1,828,173 | 1,421,237 |
Inventory expensed to cost of sales in the year ended December 31, 2021 was $3,353,267 (2020 - $1,148,692, the eight months ended December 31, 2019 - $nil).
During the year ended December 31, 2021, the Company recognized $nil (2020 - $63,169, the eight months ended December 31, 2019 - $nil) in relation to the write down of slow moving inventory.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 10 - PROPERTY AND EQUIPMENT
| Land | Building | Furnitureandequipment | Computersoftware | Laboratory equipment | Extraction equipment | Building improvements | Right-of-use asset | Total | |
|---|---|---|---|---|---|---|---|---|---|
| $ | $ | $ | $ | $ | $ | $ | |||
| Cost | |||||||||
| Balance, December 31, 2019 | 1,592,232 | 1,999,328 | 59,442 | 12,105 | 62,295 | 1,048,502 | 3,863,759 | - | 8,637,663 |
| Additions | - | - | 25,407 | - | 149,100 | 1,862,707 | 64,522 | - | 2,101,736 |
| Balance, December 31, 2020 | 1,592,232 | 1,999,328 | 84,849 | 12,105 | 211,395 | 2,911,209 | 3,928,281 | - | 10,739,399 |
| Acquisition of Phyto BrandCo | - | - | 44,729 | - | - | - | - | 40,376 | 85,105 |
| Additions | - | - | 28,206 | 150,000 | 257,820 | 342,779 | - | - | 778,805 |
| Impairment | - | - | - | (150,000 | - | - | - | - | (150,000 |
| Balance, December 31, 2021 | 1,592,232 | 1,999,328 | 157,784 | 12,105 | 469,215 | 3,253,988 | 3,928,281 | 40,376 | 11,453,309 |
| Accumulated depreciation | |||||||||
| Balance, December 31, 2019 | - | 122,679 | 7,467 | - | - | - | - | - | 130,146 |
| Depreciation | - | 93,832 | 12,936 | 1,816 | 20,527 | 296,978 | 146,101 | - | 572,190 |
| Balance, December 31, 2020 | - | 216,511 | 20,403 | 1,816 | 20,527 | 296,978 | 146,101 | - | 702,336 |
| Depreciation | - | 99,968 | 19,621 | 2,056 | 77,662 | 576,919 | 196,416 | 3,365 | 976,007 |
| Balance, December 31, 2021 | - | 316,479 | 40,024 | 3,872 | 98,189 | 873,897 | 342,517 | 3,365 | 1,678,343 |
| Carrying value | |||||||||
| Balance, December 31, 2020 | 1,592,232 | 1,782,817 | 64,446 | 10,289 | 190,868 | 2,614,231 | 3,782,180 | - | 10,037,063 |
| Balance, December 31, 2021 | 1,592,232 | 1,682,849 | 117,760 | 8,233 | 371,026 | 2,380,091 | 3,585,764 | 37,011 | 9,774,966 |
All values are in US Dollars.
During the year ended December 31, 2021, the Company allocated $825,783 (2020 - $479,490, the eight months ended December 31, 2019 - $nil) of depreciation to cost of sales and $150,224 (2020 - $92,700, the eight months ended December 31, 2019 - $78,172) to operating expense.
During the year ended December 31, 2021, the Company recognized an impairment expense of $150,000 (2020 - $nil, the eight months ended December 31, 2019 - $nil) related to a developing software for which no future economic benefits are expected to occur.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 11 - INTANGIBLE ASSETS
The following table summarizes the continuity of intangible assets for the years ended December 31, 2021 and 2020:
| Trademarks | Patient relationships | Total | |
|---|---|---|---|
| $ | $ | $ | |
| Cost | |||
| Balance, December 31, 2019 and 2020 | - | - | - |
| Additions | 3,250,000 | 414,000 | 3,664,000 |
| Impairment | - | - | - |
| Balance, December 31, 2021 | 3,250,000 | 414,000 | 3,664,000 |
| Accumulated depreciation | |||
| Balance, December 31, 2019 and 2020 | - | - | - |
| Amortization | 94,792 | 27,600 | 122,392 |
| Balance, December 31, 2021 | 94,792 | 27,600 | 122,392 |
| Carrying value | |||
| Balance, December 31, 2019 and 2020 | - | - | - |
| Balance, December 31, 2021 | 3,155,208 | 386,400 | 3,541,608 |
During the year ended December 31, 2021, the Company acquired a total of $3,250,000 in trademarks (note 6). These trademarks have a useful life of 10 years and are measured at cost less accumulated amortization and impairment losses. These trademarks are amortized on a straight-line basis over their estimated useful lives. Useful lives, residual values, and amortization methods for intangible assets with finite useful lives are reviewed at least annually.
During the year ended December 31, 2021, the Company acquired a total of $414,000 in patient relationships (note 5). These relationships have a useful life of 5 years and are measured at cost less accumulated amortization and impairment losses. These relationships are amortized on a straight-line basis over their estimated useful lives. Useful lives, residual values, and amortization methods for intangible assets with finite useful lives are reviewed at least annually.
During the year ended December 31, 2021, the Company recognized no impairment expense related to the intangible assets (2020 - $nil).
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 12 - GOODWILL
| 2021 | 2020 | |
|---|---|---|
| **** | $ | $ |
| Opening balance | - | - |
| Addition - PerceiveMD acquisition (note 5) | 1,672,233 | - |
| Addition - Phyto BrandCo acquisition (note 6) | 9,436,189 | - |
| Ending balance | 11,108,422 | - |
As at December 31, 2021, the Company assessed for impairment the goodwill recorded through the PerceiveMD acquisition. The Company performed a discounted cash flow analysis to determine PerceiveMD's CGU's value in use, which incorporated the following assumptions: (1) discount rate - 19.60%; (2) income tax rate - 27.00%; (3) conversion rate - range from 80.0% to 90.0%; (4) churn rate - range from 17.0% to 25.0%, and (5) Internal growth rate - range from 5.6% to 7.6% based on MSP revenues with an assumption of $143.0 per patient and certain government grants provided by expected patient count. The Company noted that the recoverable amount was greater than the carrying value and that no impairment was required as at December 31, 2021.
As at December 31, 2021, the Company assessed for impairment the goodwill recorded through the Phyto BrandCo acquisition. The Company performed a discounted cash flow analysis to determine Phyto BrandCo CGU's value in use, which incorporated the following assumptions: (1) discount rate - 13.00%; (2) income tax rate - 27.00%; and (3) sustaining working capital expenditure of 7% which is the financing cost of growth and is applied to the growth in income from operations annually. The Company noted that the recoverable amount was greater than the carrying value and that no impairment was required as at December 31, 2021.
NOTE 13 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As at December 31, 2021 and 2020, accounts payables and accrued liabilities consisted of the following:
| 2021 | 2020 | |
|---|---|---|
| $ | $ | |
| Accounts payable | 1,408,210 | 987,614 |
| Accrued liabilities | 420,815 | 160,350 |
| **** | 1,829,025 | 1,147,964 |
NOTE 14 - LEASE LIABILITY
A summary of the Company's lease liability for the years ended December 31, 2021 and 2020 is as follows:
| 2021 | 2020 | |
|---|---|---|
| $ | ||
| Opening balance | - | - |
| Additions - Phyto BrandCo acquisition | 34,665 | - |
| Interest | 846 | - |
| Repayments | (3,356 | - |
| Closing balance | 32,155 | - |
| Less: current portion | 10,688 | - |
| Long-term portion | 21,467 | - |
All values are in US Dollars.
On October 15, 2020, prior to being acquired by the Company, Phyto BrandCo entered into a four-year lease agreement for a promotional vehicle. The base monthly payment is $1,119 with an initial payment of $9,732. The incremental borrowing rate used to determine discount the lease liability was 10%.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 15 - MORTGAGE PAYABLE
| First Mortgage | Second Mortgage | Third Mortgage | Fourth Mortgage | Total | |
|---|---|---|---|---|---|
| Balance, December 31, 2019 | 2,437,175 | - | - | - | 2,437,175 |
| New mortgage (refinancing) | (2,446,000 | 2,446,000 | - | - | - |
| Transaction costs | - | (18,345 | - | - | (18,345 |
| Interest expense | 42,457 | 178,242 | - | - | 220,699 |
| Repayments | (33,632 | (163,067 | - | - | (196,699 |
| Balance, December 31, 2020 | - | 2,442,830 | - | - | 2,442,830 |
| New mortgage (refinancing) | - | (2,446,000 | - | 3,500,000 | 1,054,000 |
| Transaction costs | - | - | (18,345 | (42,778 | (61,123 |
| Interest expense | - | 35,783 | 104,723 | 133,878 | 274,384 |
| Repayments | - | (32,613 | (86,378 | (89,546 | (208,537 |
| Balance, December 30, 2021 | - | - | - | 3,501,554 | 3,501,554 |
All values are in US Dollars.
(i) On January 7, 2019, the Company entered into a mortgage for $2,446,000 (the "First Mortgage") which bore interest at the rate of 8.25% per annum, calculated monthly. The First Mortgage matured on February 1, 2020 and was renewed as discussed below.
The carrying value of the First Mortgage at December 31, 2019 was $2,437,175. Included in mortgage payable on initial recognition were the related mortgage transaction costs of $50,755 which were amortized over the term of the First Mortgage using the effective interest rate method.
The Company maintained minimum interest-only payments of $16,816 per month in connection with the First Mortgage. Total interest expense of the First Mortgage during the year ended December 31, 2021 was $nil (2020 - $42,457, the eight months ended December 31, 2019 - $164,242).
(ii) On February 1, 2020, the Company renewed the First Mortgage of $2,446,000 (the "Second Mortgage") which bore interest at the rate of 8.00% per annum, calculated monthly. The Second Mortgage matured on February 1, 2021 and was renewed as discussed below.
The carrying value of the Second Mortgage payable as at December 31, 2020 was $2,442,830. Included in mortgage payable on initial recognition were the related mortgage transaction costs of $18,345 which were being amortized over the term of the Second Mortgage using the effective interest rate method.
The Company maintained minimum interest-only payments of $16,307 per month in connection with the Second Mortgage. Total interest expense of the Second Mortgage during the year ended December 31, 2021 was $35,783 (2020 - $178,242, the eight months ended December 31, 2019 - $nil).
(iii) On February 1, 2021, the Company renewed the Second Mortgage of $2,446,000 (the "Third Mortgage") which bears interest at the rate of 8.00% per annum, calculated monthly. The Third Mortgage matures on February 1, 2022, can be repaid before maturity without penalty and is secured by the mortgage property and building improvements. The Third Mortgage payable was recorded at amortized cost (principal value less $18,345 transaction costs).
On July 9, 2021, the Third Mortgage was refinanced (see below). As a result, the carrying value of the Third Mortgage payable at December 31, 2021 was $nil (2020 - $nil).
Until refinancing, the Company maintained minimum interest-only payments of $16,307 per month. Total interest expense during the year ended December 31, 2021 was $104,723 (2020 and the eight months ended December 31, 2019 - $nil).
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 15 - MORTGAGE PAYABLE
(iv) On July 9, 2021, the Company refinanced the Third Mortgage and increased the facility to $3,500,000 (the "Fourth Mortgage") which bears interest at the rate of 6.50% per annum, calculated monthly for one year. The mortgage has a maturity date of July 1, 2022 and is secured by the mortgage property and building improvements. The Fourth Mortgage payable was recorded at amortized cost (principal value less $42,778 transaction costs). The carrying value of the Fourth Mortgage at December 30, 2021 was $3,501,554.
The Company maintains minimum interest-only payments of $18,958 per month. As at December 31, 2021 the total non-discounted remaining scheduled payments related to the mortgage including interest payments totaled $3,613,750. Total interest expense during the year ended December 31, 2021 was $133,878 (2020 and the eight months ended December 31, 2019 - $nil).
NOTE 16 - CONVERTIBLE DEBENTURES
On October 31, 2019, the Company closed a 2,353,333 convertible debenture unit offering at a price of $1.35 per debenture unit for gross proceeds $3,177,000. Each debenture consisted of a 12% secured convertible debenture with a maturity of two years from the date of issuance. If the holder converted their debenture unit, they were entitled to one common share and one share purchase warrant exercisable at $2.25 per share two years from the date of the convertible debenture closing October 31, 2021 at the holder's discretion.
If the closing price of the Common Shares of the Company was higher than $3.00 for any 10 consecutive trading days, the expiry date of the Warrants may be accelerated to the 30th day after the date of a news release announcing such acceleration. The debentures were secured to the facility subordinate to the mortgage currently on the facility.
As the debentures were convertible into units, the liability and equity components were presented separately on the consolidated statement of financial position. The initial carrying amount of the financial liability was determined by discounting the stream of future payments of interest and principal at a market interest rate of 16% totaling $2,878,539. Using the residual method, the carrying amount of the conversion feature is the difference between the principal amount and the initial carrying value of the financial liability. The equity component was recorded in debenture reserves on the consolidated statement of financial position totaling $298,461. The debentures, net of the equity components were accreted using the effective interest method over the term of the debentures, such that the carrying amount of the financial liability was equal to the principal balance at maturity.
During the year ended December 31, 2020, the Company settled principal plus accrued interest of $3,418,390 relating to the debentures through the issuance of 2,532,140 units. Accordingly, the Company reallocated $298,461 from debenture reserves to share capital.
During the year ended December 31, 2021, the Company recorded interest expense of $nil, (2020 - $169,552, the eight months ended December 31, 2019 - $63,713) and accretion expense of $nil (2020 - $58,405, the eight months ended December 31, 2019 - $13,259).
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 17 - SHARE CAPITAL
(a) Authorized
Unlimited number of voting common shares without par value.
(b) Issued share capital
As at December 31, 2021, 65,970,547 common shares were issued and outstanding.
(c) Share issuances
During the year ended December 31, 2021, the Company had the following share transactions:
(i) On August 10, 2021, the Company issued 2,513,720 common shares at $0.80 per share for a total consideration of $2,010,976 pursuant to the acquisition of PerceiveMD (note 5).
(ii) On September 15, 2021, the Company issued 20,000,000 common shares at $1.20 per share for total consideration of $24,000,000 pursuant to the acquisition Phyto BrandCo. Subsequent to the closing of the acquisition, the Company renegotiated terms of the acquisition with the former shareholders of Phyto BrandCo due to certain conditions in the acquisition agreement not being met. It was resolved that the consideration be amended from $24,000,000 to $12,000,000 by a voluntary return to treasury of 10,000,000 common shares (note 6).
(iii) On October 18, 2021, the Company completed a non-brokered private placement whereby the Company issued 122,727 units at a price of $1.10 per unit for gross proceeds of $135,000 (note 17(g)). Each unit is comprised of one common share and one transferrable common share purchase warrant with each warrant entitling the holder thereof to acquire one common share at a price of $1.75 per share for two years from the date of the closing. The $131,318 fair value of the 122,727 shares issued was determined based on the Company's share price of $1.07 on the grant date, and the residual value of $3,682 was allocated to warrants reserves. The warrants are subject to an acceleration provision whereby if the daily closing price of the common shares closes at or above $2.00 per share for 50 consecutive trading days, then the Company may accelerate the expiration date of the warrants to the date that is 30 trading days from the date that notice of such acceleration is given via news release. From and after the new accelerated expiration date, no warrants may be exercised, and all unexercised warrants would be void.
During the year ended December 31, 2020, the Company had the following share transactions:
(i) On January 17, 2020, the Company issued 189,934 units on conversion of $250,000 of principal and $6,411 of accrued interest on the convertible debenture. Each unit consists of one common share of the Company and one share purchase warrant exercisable at $2.25 for two years from the date of conversion. No value was attributed to the warrant component of the units issued.
(ii) On January 27, 2020, the Company issued 266,760 units on conversion of $350,000 of principal and $10,126 of accrued interest on the convertible debenture. Each unit consists of one common share of the Company and one share purchase warrant exercisable at $2.25 for two years from the date of conversion. No value was attributed to the warrant component of the units issued.
(iii) On July 10, 2020, the Company issued 200,589 units on conversion of $250,000 of principal and $20,795 of accrued interest on the convertible debenture. Each unit consists of one common share of the Company and one share purchase warrant exercisable at $2.25 for two years from the date of conversion. No value was attributed to the warrant component of the units issued.
(iv) On July 13, 2020, the Company completed a non-brokered private placement whereby 3,882,667 units were issued at a price of $0.90 per unit for gross proceeds of $3,494,400. Each unit consists of one common share and one common share purchase warrant with each warrant exercisable into one common share at an exercise price of $1.50 until July 13, 2022.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 17 - SHARE CAPITAL (continued)
In conjunction with the financing, finders' fees of $21,600 in cash were paid and 24,067 compensation options (each a "Compensation Option") were granted. Each Compensation Option entitles the holder to purchase a unit on the same terms as the offering for a period of two years from the date of issuance.
Each underlying common share purchase warrant (a "Compensation Option Warrant") will be subject to the same terms as the warrants attached to the units sold in the financing. If the Compensation Option Warrants are accelerated prior to the exercise of the Compensation Option, each Compensation Option Warrant will expire 30 days after the date of exercise of the Compensation Option. The fair value of the Compensation Option was $38,500 ($1.59 per Compensation Option) and was recognized as a share issuance cost. The fair value of the Compensation Options was estimated using the Black-Scholes option pricing model using the following assumptions: risk-free interest rate of 0.28%, annualized volatility of 100%, expected dividend yield of nil%, and an expected life of 2 years.
Additionally, the Company settled services and outstanding indebtedness of $543,715 through the issuance of 647,385 common shares at a fair value price of $0.84 per common share. The common shares issued in connection with the services and debt settlement are subject to a hold period that expires four months and one day from the date of issuance.
(v) On July 16, 2020, the Company issued 759,605 units on conversion of $945,000 of principal and $80,467 of accrued interest of the convertible debenture. Each unit consists of one common share of the Company and one share purchase warrant exercisable at $2.25 for two years from the date of conversion. No value was attributed to the warrant component of the units issued.
(vi) On July 28, 2020, the Company issued 953,564 units on conversion of $1,182,000 of principal and $105,311 of accrued interest of the convertible debenture. Each unit consists of one common share of the Company and one share purchase warrant exercisable at $2.25 for two years from the date of conversion. No value was attributed to the warrant component of the units issued.
(vii) On August 5, 2020, the Company issued 161,688 units on conversion of $200,000 of principal and $18,279 of accrued interest of the convertible debenture. Each unit consists of one common share of the Company and one share purchase warrant exercisable at $2.25 for two years from the date of conversion. No value was attributed to the warrant component of the units issued.
During the year ended December 31, 2019, the Company had the following share transactions:
(i) On December 20, 2019, the Company closed 1,964,152 unit offering at a price of $1.35 per unit for gross proceeds of $2,651,605, with each unit consisting of one (1) common share of the Company and one underlying share purchase warrant exercisable at $1.80 for three years from the date of closing December 20, 2022. The warrants were given a value of $nil using the residual value method.
(d) Escrow shares
The Company entered into an Escrow Agreement in connection with closing the RTO on December 20, 2019, in relation to certain of its common shares which were placed in escrow. Pursuant to the Escrow Agreement the escrowed common shares are subject to a timed-release schedule whereby a 10% portion of the escrow shares will be released beginning on listing date, and 15% every six months thereafter until January 6, 2023.
As at December 31, 2021, 4,635,001 common shares were held in escrow (2020 - 6,500,000, 2019 - 8,666,667).
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 17 - SHARE CAPITAL (continued)
(e) Stock options
The Company has an incentive stock option plan (the "Plan") which provides for the granting of options. Under the Plan the maximum number of stock options issued cannot exceed 10% of the Company's currently issued and outstanding common shares. Options granted under the Plan may have a maximum term of ten years. A participant, who is not a consultant conducting investor relations activities, who is granted an option that is exercisable at the market price at the date of grant, will have their options vest immediately, unless otherwise determined by the Board of Directors. Options granted at below market prices will vest one-sixth every three months.
A participant who is a consultant conducting investor relations activities who is granted an option under the Plan will become vested with the right to exercise one-quarter of the option upon conclusion of every three months subsequent to the grant date. All options are to be settled by physical delivery of shares.
During the year ended December 31, 2021, the Company, the Company had the following grants:
(i) On August 4, 2021, the Company granted 33,333 stock options with exercise price of $1.35 to certain Directors, Officers, employees, and consultants. The options expire in five years from the date of grant and vest immediately. The fair value of these options was $19,456 ($0.584 per option) and was recognized as a share-based payment expense.
(ii) On October 25, 2021, the Company granted an aggregate of 900,000 stock options to certain directors and officers for the purchase of up to 900,000 common shares at a price of $1.06 per share. Each stock option is exercisable for a period of five years. The fair value of these options was $718,762 ($0.799 per option) and was recognized as a share-based payment expense.
(iii) On October 28, 2021, the Company granted an aggregate of 215,000 stock options to certain employees and a consultant for the purchase of up to 215,000 common shares at a price of $0.95 per share. Each stock option is exercisable for a period of five years. The fair value of these options was $152,305 ($0.708 per option) and was recognized as a share-based payment expense.
During the year ended December 31, 2020, the Company had the following grants:
(i) On January 30, 2020, the Company granted 2,523,333 stock options with exercise price of $1.35 to certain Directors, Officers, employees, and consultants. The options expire in five years from the date of grant and vest immediately. The fair value of these options was $2,537,300 ($1.02 per option) and was recognized as a share-based payments.
(ii) On June 1, 2020, the Company granted 66,667 stock options with exercise price of $1.35 to an employee. The options expire two years from the date of grant and vest immediately. The fair value of these options was $22,200 ($0.33 per option) and was recognized as share-based payments.
(iii) On August 5, 2020, the Company granted 1,616,667 stock options with exercise price of $2.34 to certain Directors, Officers, employees, and consultants. The options expire in five years from the date of grant and vest immediately. The fair value of these options was $2,813,800 ($1.74 per option) and was recognized as a share-based payments.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 17 - SHARE CAPITAL (continued)
The fair value of the stock options granted during the years ended December 31, 2021, 2020, and the eight months ended December 31, 2019 was estimated using the Black-Scholes option pricing model using the following assumptions:
| 2021 | 2020 | |
|---|---|---|
| Risk-free interest rate | 0.71 - 1.42% | 0.34 - 1.29% |
| Annualized volatility | 100% | 100% |
| Expected dividend yield | 0.00% | 0.00% |
| Expected life | 5 years | 2 - 5 years |
A summary of the changes in the Company's stock options outstanding and exercisable is as follows:
| Stock options<br>outstanding and<br>exercisable | Weight average<br>exercise price | ||
|---|---|---|---|
| # | $ | ||
| As at December 31, 2019 | - | - | |
| Granted | 4,206,667 | 1.73 | |
| Cancelled | (40,000 | ) | 1.35 |
| As at December 31, 2020 | 4,166,667 | 1.73 | |
| Granted | 1,148,333 | 1.05 | |
| Cancelled | (1,599,999 | ) | 1.89 |
| As at December 31, 2021 | 3,715,001 | 1.45 | |
| As at December 31, 2020 | 4,166,667 | 1.73 | |
| As at December 31, 2021 | 3,715,001 | 1.45 |
As at December 31, 2021, the Company had stock options outstanding and exercisable as follows:
| Options outstanding<br><br> <br>and exercisable | Weighted average exercise price | Weighted average<br>remaining life (years) |
|---|---|---|
| # | ||
| 66,667 | 1.35 | 0.67 |
| 1,750,001 | 1.35 | 3.34 |
| 750,000 | 2.34 | 3.85 |
| 33,333 | 1.35 | 4.85 |
| 900,000 | 1.06 | 4.82 |
| 215,000 | 0.95 | 4.83 |
| 3,715,001 | 1.45 | 3.68 |
All values are in US Dollars.
(f) Compensation options
As at December 31, 2021, the Company has 24,067 compensation options outstanding and exercisable. These options have an exercise price of $0.50 and expire on July 13, 2022.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 17 - SHARE CAPITAL (continued)
(g) Warrants
As an incentive to complete a private placement the Company may issue units which include common shares and common share purchase warrants. Using the residual value method, the Company determines whether a value should be allocated to the warrants attached to private placement units. Finders' warrants may be issued as a private placement share issue cost and are valued using the Black-Scholes option pricing model.
The fair value of the warrants granted during the years ended December 31, 2021, 2020, and the eight months ended December 31, 2019 was estimated using the Black-Scholes option pricing model using the following assumptions:
| 2021 | 2020 | 2019 | |
|---|---|---|---|
| Risk-free interest rate | 0.88% | N/A | N/A |
| Annualized volatility | 100% | N/A | N/A |
| Expected dividend yield | 0.00% | N/A | N/A |
| Expected life | 2 years | N/A | N/A |
A summary of the changes in the Company's warrants outstanding and exercisable is as follows:
| Warrants outstanding <br>and exercisable | Weight average<br>exercise price | ||
|---|---|---|---|
| # | $ | ||
| As at inception | - | - | |
| Issued | 2,470,552 | 2.19 | |
| As at December 31, 2019 | 2,470,552 | 2.19 | |
| Issued | 6,414,807 | 1.80 | |
| Exercised | (42,967 | ) | 1.80 |
| Expired | (506,400 | ) | 2.76 |
| As at December 31, 2020 | 8,335,992 | 1.86 | |
| Issued | 122,727 | 1.75 | |
| As at December 31, 2021 and 2020 | 8,458,719 | 1.86 |
As at December 31, 2021, the Company had warrants outstanding and exercisable as follows:
| Warrants outstanding<br><br> <br>and exercisable | Weighted average<br> exercise price | Weighted average<br>remaining life (years) |
|---|---|---|
| # | ||
| 189,934 | 2.25 | 0.05 |
| 266,760 | 2.25 | 0.07 |
| 200,589 | 2.25 | 0.52 |
| 3,882,667 | 1.50 | 0.53 |
| 759,605 | 2.25 | 0.54 |
| 953,564 | 2.25 | 0.57 |
| 161,688 | 2.25 | 0.59 |
| 1,921,185 | 1.80 | 0.97 |
| 122,727 | 1.75 | 1.80 |
| 8,458,719 | 1.86 | 0.63 |
All values are in US Dollars.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 18 - RELATED PARTY TRANSACTIONS
Key management personnel are those having the authority and responsibility for planning, directing, and controlling the Company. There were no loans to key management personnel or Directors, or entities over which they have control or significant influence during the years ended December 31, 2021, or 2020.
During the year ended December 31, 2021, 933,333 options were granted (2020 - 1,933,333, the eight months ended December 31, 2019 - $nil) to Officers and Directors having a fair value on grant of $738,219 (2020 - $2,531,999, the eight months ended December 31, 2019 - $nil).
The following related parties transacted with the Company or Company controlled entities ended December 31, 2021, 2020 and the eight months ended December 31, 2019:
(i) Andrew Hale was a Director and the Company's President and CEO. He resigned on March 1, 2021.
(ii) Blaine Bailey was a Director and Chairman of the Company's Audit Committee. He resigned on March 26, 2021.
(iii) Stephen Brohman was the Company's CFO. He is a principal of Donaldson Brohman Martin CPA Inc. ("DBM CPA") a firm in which he has significant influence. DBM CPA provided the Company with CFO, accounting and tax services. Stephen Brohman resigned on July 14, 2021.
(iv) George Routhier is a Company Director. He is the owner of Pipedreemz Inc. ("Pipedreemz"), which provides advisory services to the Company.
(v) Michael Forbes is a Director and the Company's President and CEO. He was appointed on April 29, 2021 and is the owner of MDC Forbes, which provides CEO services to the Company.
(vi) Donald Dinsmore was a Director and the Company's COO. He was appointed on April 29, 2021 and left the Company on February 22, 2022.
(vii) Oliver Foeste is the Company's CFO. He was appointed on July 14, 2021 and is the Managing Partner of Invictus Accounting Group LLP which provides the Company with CFO, accounting and tax services.
(viii) Paul Morgan is the Company's Director. He was appointed on July 14, 2021.
The aggregate value of transactions with key management personnel and Directors and entities over which they have control or significant influence during the years ended December 31, 2021, 2020, and the eight months ended December 31, 2019 were as follows:
| 2021 | 2020 | 2019 | |
|---|---|---|---|
| $ | $ | $ | |
| Andrew Hale | 134,666 | 180,091 | 120,115 |
| DBM CPA | 61,091 | 150,900 | 107,298 |
| Donald Dinsmore | 172,535 | - | - |
| Invictus Accounting Group LLP | 74,518 | - | - |
| MDC Forbes | 40,000 | - | - |
| Pipedreemz | - | 2,500 | 17,500 |
| 482,810 | 333,491 | 244,913 |
In addition to the above, the Company's acquisition of PerceiveMD constitutes a related party transaction as Michael Forbes, was also a Director and controlling shareholder of PerceiveMD prior to the transaction (note 5).
As at December 31, 2021 and 2020, the Company had an outstanding accounts payable balance with related parties as follows:
| 2021 | 2020 | |
|---|---|---|
| $ | $ | |
| DBM CPA | - | 12,915 |
| Donald Dinsmore | 50,000 | - |
| Invictus Accounting Group LLP | 8,933 | - |
| MDC Forbes | 10,500 | - |
| Michael Forbes | 1,188 | - |
| 70,621 | 12,915 | |
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) | ||
| --- |
NOTE 18 - RELATED PARTY TRANSACTIONS (continued)
All related party balances are unsecured and are due within thirty days without interest and incurred in the normal course of business.
The transactions with the key management personnel and Directors are included in operating expenses as follows:
(a) Consulting fees
Includes advisory services of George Routhier, charged to the Company via Pipedreemz, and CEO services by Michael Forbes, charged to the Company via MDC Forbes.
(b) Professional fees
Includes accounting and tax services of the Company's former CFO, Stephen Brohman, charged to the Company via DBM CPA and accounting services of the Company's new CFO, Oliver Foeste, charged to the Company via Invictus Accounting Group LLP.
(c) Wages and salaries
Includes services by Andrew Hale as the prior CEO, and Donald Dinsmore as prior COO.
NOTE 19 - INCOME TAXES
Income tax expense differs from the amount that would result by applying the combined Canadian federal and provincial income tax rates to net income before income taxes. The statutory rate in Canada was 27% for the year ended December 31, 2021 (2020 - 27%, the eight months ended December 31, 2019 - 27%).
| 2021 | 2020 | |
|---|---|---|
| **** | ||
| Loss for the period | (2,764,939 | (7,615,864 |
| Combined federal and provincial statutory income tax rates | 27% | 27% |
| Expected income tax (recovery) | (747,000 | (2,056,000 |
| Change in statutory rates and other | (37,000 | (61,000 |
| Permanent differences | 244,000 | 1,439,000 |
| Adjustment to prior years provision versus statutory tax returns | 34,000 | (18,000 |
| Change in unrecognized deductible temporary differences | 491,000 | 696,000 |
| Total income tax recovery | (15,000 | - |
| Current income tax expense | 16,000 | - |
| Deferred tax (recovery) | (31,000 | - |
All values are in US Dollars.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 19 - INCOME TAXES (continued)
Deductible temporary differences
The components of the Company's unrecognized deferred tax assets and liabilities are as follows as at December 31, 2021 and 2020:
| 2021 | 2020 | |
|---|---|---|
| **** | ||
| Deferred tax assets (liabilities) | ||
| Property equipment and other | 487,000 | 185,000 |
| Intangible assets | (956,000 | - |
| Non-capital losses available for future period | 1,222,000 | 1,037,000 |
| 753,000 | 1,222,000 | |
| Less: unrecognized deferred tax assets | (1,713,000 | (1,222,000 |
| Deferred tax liability | (960,000 | - |
All values are in US Dollars.
The significant components of the Company's temporary differences, unused tax credits and unused tax losses that have not been included on the consolidated statement of financial position are as follows:
| December 31, 2021 | December 31, 2020 | |
|---|---|---|
| Temporary differences | ||
| Property equipment and other | 1,820,000 | 683,000 |
| Non-Capital losses | 4,529,000 | 3,840,000 |
All values are in US Dollars.
The Company has non-capital losses, for which deductions against future taxable income are uncertain, of approximately $4,529,000 (2020 - $3,840,000) which, if not utilized, will expire from 2038 through 2041. Tax attributes are subject to review, and potential adjustment, by tax authorities.
NOTE 20 - SUPPLEMENTAL CASH FLOW INFORMATION
| 2021 | 2020 | 2019 | |
|---|---|---|---|
| $ | $ | ||
| Non-cash financing activities | **** | ||
| Conversion of convertible debentures - debenture reserves | - | 298,461 | - |
| Convertible debentures - settlement | - | (3,418,390 | - |
| Convertible debentures - reserves | - | (70,814 | 298,461 |
| Share issuance costs - Compensation Options | - | (38,500 | - |
| Non-cash investing activities | **** | ||
| Equipment purchases included in accounts payable and accrued liabilities | 197,726 | 274,692 | 385,894 |
| Shares issued for debt settlement | - | 411,924 | - |
All values are in US Dollars.
During the years ended December 31, 2021, 2020, and the eight months ended December 31, 2019 no amounts were paid for income tax expense.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 21 - FINANCIAL RISK MANAGEMENT
(a) Capital management
The Company defines capital as the components of shareholders' equity. The Company's objectives when managing capital are to support further advancement of the Company's business objectives, as well as to ensure that the Company is able to meet its financial obligations as they come due.
The Company manages its capital structure to maximize its financial flexibility making adjustments to it in response to changes in economic conditions and the risk characteristics of the underlying assets and business opportunities. The Company relies on the expertise of the Company's management to sustain the future development of the business. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.
There were no changes in the Company's approach to capital management during the year ended December 31, 2021. The Company is not subject to externally imposed capital requirements.
(b) Financial instruments - fair value
The Company's financial instruments consist of cash, trade receivables, deposits, accounts payable and accrued liabilities, mortgage payable, lease liability and loan payable.
As at December 31, 2021, the carrying values of cash, amounts receivable, accounts payable and accrued liabilities approximated their fair value because of the short-term nature of these instruments.
Financial instruments measured at fair value on the consolidated statements of financial position are summarized into the following fair value hierarchy levels:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices).
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
(c) Financial instruments - risk
The Company's financial instruments are exposed to certain financial risks, including credit risk, liquidity risk and interest rate risk.
Credit risk
Counterparty credit risk is the risk that the financial benefits of contracts with a specific counterparty will be lost if a counterparty defaults on its obligations under the contract. This includes amounts owed to the Company by these counterparties, less any amounts owed to the counterparty by the Company where a legal right of offset exists and also includes the fair values of contracts with individual counterparties which are recorded in the consolidated financial statements.
The Company's credit risk is predominantly related to cash balances held in financial institutions and accounts receivable. The maximum exposure to credit risk is equal to the carrying value of such financial assets. At December 31, 2021, the Company expects to recover the full amount of such assets having already incurred a bad debt expense in relation to accounts receivable during the year.
The objective of managing counterparty credit risk is to minimize potential losses in financial assets. The Company assesses the quality of its counterparties, taking into account their credit worthiness and reputation, past performance and other factors.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 21 - FINANCIAL RISK MANAGEMENT (continued)
Cash is only deposited with or held by major financial institutions where the Company conducts its business.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities as they come due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements.
As at December 31, 2021, the Company had a cash balance of $744,541 and current liabilities of $5,341,267 (December 31, 2020 - $1,145,461 and $3,590,794 respectively).
Interest rate risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company's mortgage payable, and lease liability carry fixed interest rates and as such, the Company is not exposed to interest rate risk.
Foreign currency risk
Foreign currency risk derives from fluctuations in exchange rates between currencies when transacting business in multiple currencies. The Company's business is substantially all conducted in Canadian dollars so it is not subject to any significant foreign currency risk.
Economic dependence
Economic dependence risk is the risk of reliance upon a select number of customers which significantly impact the financial performance of the Company. During the year ended December 30, 2021, two customers represented approximately 99% of the Company's revenue (2020 - three customers' representing 79%,16% and 5% of revenue).
NOTE 22 - COMMITMENTS AND CONTINGENCIES
A summary of undiscounted liabilities and future operating commitments as at December 31, 2021, are as follows:
| Total | Within 1 year | 2 - 5 years | |
|---|---|---|---|
| $ | $ | $ | |
| Maturity analysis of financial liabilities | **** | ||
| Accounts payable and accrued liabilities | 1,829,025 | 1,829,025 | - |
| Mortgage payable | 3,500,000 | 3,500,000 | - |
| Lease liability | 36,912 | 13,423 | 23,489 |
| Government loan | 60,000 | - | 60,000 |
| **** | 5,425,937 | 5,342,448 | 83,489 |
NOTE 23 - SEGMENTED INFORMATION
Reportable segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources, and in assessing performance. The Company has a single reportable segment: the provision of goods and services to the cannabis industry in Canada. All the Company's revenues are generated in Canada, and its non-current assets are located in Canada.
| ADASTRA HOLDINGS LTD. (formerly Phyto Extractions Inc.) Notes to the Consolidated Financial Statements December 31, 2021, 2020 and the eight months ended December 31, 2019(Expressed in Canadian dollars, except number of shares) |
|---|
NOTE 24 - SUBSEQUENT EVENTS
(i) On January 6, 2022, 1,300,000 shares were released from escrow.
Adastra Holdings Ltd.: Exhibit 99.2 - Filed by newsfilecorp.com
Adastra Holdings Ltd.
(formerly Phyto Extractions Inc.)
MANAGEMENT DISCUSSION AND ANALYSIS
For the years ended December 31, 2021 and 2020
This management discussion and analysis ("MD&A") of the financial condition and results of operations of Adastra Holdings Ltd., (the "Company" or "Adastra") (formerly Phyto Extractions Inc.) constitutes management's review of the factors that affected the Company's financial and operating performance for the years ended December 31, 2021 and 2020. This MD&A has been prepared in compliance with the requirements of National Instrument 51-102 - Continuous Disclosure Obligations. This MD&A should be read in conjunction with Adastra's audited consolidated financial statements ("financial statements) and related notes for the years ended December 31, 2021 and 2020, which have been prepared in accordance with International Financial Reporting Standards ("IFRS").
The results for the periods presented are not necessarily indicative of the results that may be expected for any future period. Except as otherwise indicated, all financial data in this MD&A has been prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and interpretations of the International Financial Reporting Interpretations Committee ("IFRIC"). The first, second, third and fourth quarters of the Company's fiscal years are referred to as "Q1", "Q2", "Q3" and "Q4", respectively. Periods for the years ended December 31, 2021 and 2020 are referred to as "YTD 2021" and "YTD 2020", respectively.
All monetary amounts in the MD&A are expressed in Canadian dollars, except number of shares, or as otherwise indicated. Additional information regarding the Company is available on SEDAR at www.sedar.com, and the Company's website www.adastraholdings.ca. This MD&A has been prepared effective as of May 02, 2022.
FORWARD-LOOKING STATEMENTS
This MD&A includes forward-looking statements that are based upon current expectations, which involve risks and uncertainties associated with our business and the environment in which the business operates. Any statements contained herein that are not statements of historical fact may be deemed to be forward looking statements, including those identified by the expressions "considers", "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved", or the negative of these terms or comparable terminology. In this document, certain forward-looking statements are identified by words including "may", "future", "expected", "will", "intends", and "estimates". By their very nature forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. The Company provides no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.
NATURE OF OPERATIONS AND GOING CONCERN
Adastra Holdings Ltd. (formerly Phyto Extractions Inc.) was incorporated under the laws of the province of British Columbia on October 14, 1987. The Company is in the business of extraction and processing service for cannabis and hemp material. The Company's mission is to develop and deploy large-scale cannabis and hemp extraction technologies and provide turn-key processing solutions to help licensed standard and micro-cultivators maximize the value of every harvest. The Company is listed on the Canadian Securities Exchange ("CSE") under the symbol "XTRX". The Company's registered and records office is 5451 275th Street, Langley City, British Columbia, V4W 3X8.
On October 19, 2019, the Company, through its wholly owned subsidiary, Chemia Analytics Inc. ("Chemia"), received a license from Health Canada (the "Analytical Testing License") to conduct analytical testing on cannabis at its facility located at 5451 275th Street, Langley City, British Columbia, V4W 3X8 (the "Langley Facility").
On March 13, 2020, the Company, through its wholly owned subsidiary, Adastra Labs Inc. ("Labs"), received a Standard Processing license (the "Processing License") for the Langley Facility.
On August 10, 2021, the Company acquired all of the issued and outstanding shares of 1225140 B.C. Ltd., doing business as PerceiveMD ("PerceiveMD") from the shareholders of PerceiveMD. Aggregate consideration in the acquisition had a fair value of $2,020,976 and was comprised of cash of $10,000 and 2,513,720 common shares of the company with a fair value of $2,010,976 based on the closing price on the day of the transaction of $0.80 per share. PerceiveMD is a multidisciplinary, patient-focused center providing comprehensive assessments for medical cannabis therapies.
On September 1, 2021, the Company changed its name to Adastra Holdings Ltd. (formerly Phyto Extractions Inc.). Trading of the Company's common shares resumed under the new name and under the same ticker symbol "XTRX" on the Canadian Securities Exchange as the market opened on September 1, 2021. Prior to this on April 9, 2021 the Company changed its name from Adastra Labs Holdings Ltd. to Phyto Extractions Inc. and on December 19, 2019 from Arrowstar Resources Ltd to Adastra Labs Holdings Ltd.
On September 15, 2021, the Company acquired all of the issued and outstanding shares of Phyto BrandCo, the owner of the intellectual property rights for the Phyto Extractions brand. At closing, the Company issued 20,000,000 common shares to the former shareholders of Phyto BrandCo at a share price on the date of acquisition of $1.20 per share, for total consideration of $24,000,000. Subsequent to the closing of the acquisition, the Company renegotiated terms of the acquisition with the former shareholders of Phyto BrandCo due to certain conditions in the acquisition agreement not being met. It was resolved that the consideration be amended from $24,000,000 to $12,000,000 by a voluntary return to treasury of 10,000,000 common shares. Phyto BrandCo licenses its intellectual property to Canadian cannabis license holders and collects royalties by selling cannabis consumer packaged goods to provincial distributors and retailers.
The Company's financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes that the Company will be able to continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of operations. The Company's ability to continue as a going concern is dependent on its ability to generate positive cash flows from operations, complete additional financings, and/or extend or modify its mortgage payable. The Company's financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue in existence.
OVERALL PERFORMANCE
Total revenue of $5,628,616 for YTD 2021 compared to $2,499,355 for YTD 2020.
Net loss of $2,749,939 for YTD 2021 compared to $7,615,864 for YTD 2020.
Cash used in operating activities was $1,054,093 for YTD 2021 compared to $2,807,720 for YTD 2020.
Cash as at December 31, 2021 of $744,541 compared to $1,145,461 as at December 31, 2020.
Working capital deficit as at December 31, 2021 of $1,120,613 compared to working capital surplus of $105,093 as at December 31, 2020. This is predominantly the result of the refinancing of the mortgage payable which matures within 1 year and is thus classified as a current liability on the Statement of Financial Position.
Mortgage payable as at December 31, 2021 $3,501,554 compared to $2,442,830 as at December 31, 2020.
The Company has a single reportable segment: the provision of goods and services to the cannabis industry in Canada. All of the Company's revenues are generated in Canada, and its non-current assets are located in Canada.
Operations and Facility
The Company's focus for the year ended December 31, 2021, included the expansion of its centralized processing facility in Langley, BC. On March 13, 2020, the Company received an amendment to its Processing License authorizing the sale of cannabis extract, cannabis edibles, and cannabis topicals. On April 16, 2021, the Company received an amendment to its Analytical Testing License allowing for organoleptic testing of its products. In April 2021, the Company commissioned its hydrocarbon extraction line and in August 2021, it submitted a further sales licence amendment for dried flower and a controlled substance dealer's licence for cannabis products.
As of the date of this MD&A, the Company is focused on generating revenue from four primary verticals: wholesale activities; service fees for cannabis consultations; educational fees for clients referral to licensed cannabis producers; and the licensing of cannabis trademarks.
As of April 23, 2020 the Company has completed the commissioning and commencement of operations at its 13,000 square foot facility in the Langley Facility. It operates a primary supercritical CO2 extraction line for the production of crude cannabis/hemp extracts, wiped film short path distillation plant for the production of high potency cannabis distillate, a formulation lab, filling line and packaging line for the manufacture of tincture bottles and vaporizer products and shatter as consumer-packaged goods.
During September 2020, the Company installed and commissioned its cryo-ethanol and hydrocarbon extraction production lines that triple the Company's cannabis oil production capacity while reducing overall costs. This production line allows the re-purposing of the CO2 supercritical extraction line for other cannabis concentrate products such as high terpene full spectrum extracts.
During April 2021, the Company completed the installation of its hydrocarbon extraction line, allowing it to produce Shatter products for the Canadian Market. This high performance hydrocarbon extractor will allow the Company to process over 400 kg per day of dried cannabis into a variety of shatter cannabis products.
On December 16, 2021 the Company received its Flower Sales License from Health Canada ("Flower License"), this will allow the Company to sell dried cannabis flower products provincially and territorially in Canada.
On March 23, 2022 the Company submitted its application for a Controlled Substances Dealer's License (the "Dealer's License") which will allow the Company to procure controlled substances, including synthesis, propagation, cultivation, and harvesting of psychedelic mushrooms for Psilocybin extraction, research and manufacture controlled substances such as Psilocybin and Psilocin and business-to-business sale of controlled substances, including by export. The Dealer's License application was originally filed in September, 2021 with a Health Canada audit performed on March 9, 2022. The Company responded to Health Canada's request for more information and successfully submitted its Dealer's License application on March 23, 2022. Unless Health Canada comes back with an additional request for information, the Company expects the Dealer's License to be received in May 2022.
On April 11, 2022 the Company submitted its application for a medical sales license (the "Medical Sales License") which will allow the Company to sell cannabis extracts to medical cannabis patients and licensed health practitioners and to develop products classed as cannabis extracts such as tinctures, oils, capsules, soft gels and sprays. The Company expects this license to be received in 6 to 8 weeks following the submission on April 11, 2022.
Wholesale Bulk Extracts Production
During the year ended December 31, 2021, the Company continued processing its own inventory of dried cannabis through supercritical CO2, cryo-ethanol and hydrocarbon extraction lines and distillation lines for the purpose of selling the resulting bulk cannabis concentrates to licensed clients or using it to fulfill contract manufacturing orders, primarily for vape cartridges. The Company has procured all of its bulk shipments of dried cannabis for its wholesale production lines from various licensed cultivators under the Cannabis Act. During the year ended December 31, 2021, the Company recognized revenue of $5,628,616.
ACQUISITION OF PERCEIVEMD
PerceiveMD is a multidisciplinary, patient-focused center providing comprehensive assessments for medical cannabis and other therapies. The Company expects to realize synergies by leveraging Adastra' s high capacity laboratory and PerceiveMD's digital care platform to become a leader in drug development and patient care.
The transaction has been accounted for as a business combination under IFRS 3 - Business Combinations. The allocation of the purchase consideration is as follows:
| Assets acquired: | |
|---|---|
| Cash | 26,302 |
| Accounts receivable | 13,647 |
| Corporate taxes receivable | 26,000 |
| 65,949 | |
| Liabilities assumed: | |
| Accounts payable and other accrued liabilities | (19,206 |
| Fair value of net assets acquired | 46,743 |
| Purchase consideration | |
| Cash consideration | 2,010,976 |
| Share consideration | 10,000 |
| **** | 2,020,976 |
| Identifiable intangible assets | |
| Patient relationships | 414,000 |
| Deferred tax liability | (112,000 |
| Goodwill | 1,672,233 |
All values are in US Dollars.
The carrying value of the assets and liabilities acquired equates to fair value due to their short term nature, other than patient relationships (the "Patient Relationships") which are depreciated over their estimated useful economic lives.
The intangible assets are comprised of Patient Relationships with a fair value of $414,000. The fair value of the Patient Relationships was determined using the discounted cash flow method taking into account the future cashflows expected to be received from the current list of patients, adjusted to reflect attrition. The key assumptions used in the cash flow projection related to the Patient Relationships include: (1) a discount rate of 16.00%; (2) patient attrition rate of 20.00%; (3) number of patients of 3,492 at the acquisition date; (4) annual spending of $143 per patient, assumed to grow at a long term growth rate of 2.00% per year.
The goodwill generated as a result of this acquisition relates to other intangible assets that do not qualify for separate recognition.
Included in the consolidated statement of loss and comprehensive loss is $185,496 of revenue and $47,829 of income from PerceiveMD from the date of acquisition on August 10, 2021. If the acquisition occurred on January 1, 2021, management estimates that revenue would have increased by $494,656 (unaudited) and net income would have been increased to approximately $127,545 (unaudited), respectively.
The Company's acquisition of PerceiveMD constitutes a related party transaction as Michael Forbes, Chief Executive Office and a director of the Company is also a director and controlling shareholder of PerceiveMD.
ACQUISITION OF PHYTO BRANDCO
Phyto BrandCo licenses its intellectual property to Canadian cannabis license holders and collects royalties from the license holders, resulting from sales of cannabis consumer packaged goods to provincial distributors and retailers. The Company expects to realize synergies by leveraging Phyto BrandCo's suite of branded products to drive revenue and develop integration efficiencies.
The transaction has been accounted for as a business combination under IFRS 3 - Business Combinations. The allocation of the purchase consideration is as follows:
| Assets acquired: | |
|---|---|
| Cash | 301,966 |
| Accounts receivable | 255,154 |
| Prepayments | 19,500 |
| Property and equipment | 85,108 |
| 661,728 | |
| Liabilities assumed: | |
| Accounts payable and other accrued liabilities | (434,252 |
| Lease liability | (34,665 |
| Fair value of net identifiable assets acquired | 192,811 |
| Purchase consideration | |
| Share consideration | 24,000,000 |
| Shares to be cancelled | (12,000,000 |
| **** | 12,000,000 |
| Identifiable intangible assets: | |
| Trademarks | 3,250,000 |
| Deferred tax liability | (879,000 |
| Goodwill | 9,436,189 |
All values are in US Dollars.
The carrying value of the assets and liabilities acquired equates to fair value due to their short term nature, other than property and equipment and trademarks which are depreciated over their estimated useful economic lives.
Property and equipment acquired included $40,376 of right-of-use assets.
The intangible asset is comprised of trademarks (the "Trademarks") with a fair value of $3,250,000. The fair value of the Trademarks was determined using the relief from royalty method. The key assumptions used in the cash flow projection related to the asset include: (1) a discount rate of 12.50%; (2) royalty rate of 10.00% for the remaining period of the licensing agreement and 2.0% thereafter, and (3) annual net profit of the Licensee.
The goodwill generated as a result of this acquisition relates to other intangible assets that do not qualify for separate recognition.
The lease liability represents one lease with a fair value of $34,665 on the date of acquisition, which is the net present value of the minimum future lease payments determined using the following assumptions: (1) remaining number of payments: 36; (2) monthly payment: $1,119; and (3) incremental borrowing rate: 10%.
Included in the consolidated statement of loss and comprehensive loss is $385,119 of revenue and $17,809 of income from Phyto BrandCo from the date of acquisition on September 15, 2021. If the acquisition occurred on January 1, 2021, management estimates that revenue would have increased by $1,320,407 (unaudited) and net income would have been increased to approximately $295,106 (unaudited), respectively.
SELECTED ANNUAL AND FORTH QUARTER INFORMATION
Results of Operations
For the three months and years ended December 31, 2021 and 2020
| **** | Q4 2021 | Q4 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| **** | ||||
| Revenue | 1,989,604 | 1,245,097 | 5,628,616 | 2,499,355 |
| Cost of sales | (1,712,154 | (625,053 | (3,684,925 | (1,713,774 |
| Gross profit | 277,450 | 620,044 | 1,943,691 | 785,581 |
| Operating expenses | (2,292,255 | (426,180 | (4,335,429 | (7,950,595 |
| Net income (loss) and comprehensive income (loss) | (1,668,673 | 90,473 | (2,749,939 | (7,615,864 |
All values are in US Dollars.
As at December 31, 2021 and 2020
| **** | 2021 | 2020 |
|---|---|---|
| **** | $ | $ |
| Total assets | 28,755,450 | 13,736,950 |
| Non-current liabilities | 1,041,467 | 60,000 |
Results - Q4 2021 compared to Q4 2020
Revenues increased to $1,989,604 during the three months ended December 31, 2021, compared to $1,245,097 during the three months ended December 31, 2020, resulted from increased processing of cannabis biomass for third-party licensed producers, in-house distillate production, hydrocarbon extraction and licensing revenues from the acquisition of Phyto BrandCo.
Cost of sales increased to $1,712,154 during the three months ended December 31, 2021, compared to $625,053 during the three months ended December 31, 2020 as a result of increased production, and consists of biomass, production labour, solvents and an allocation of production overheads such as facility costs and amortization of production equipment.
For the three months ended December 31, 2021, the Company had operating expenses of $2,292,255 and a loss and comprehensive loss of $1,668,673, compared to operating expenses of $426,180 and income and comprehensive income of $90,473 during the three months ended December 31, 2020.
The increase in operating expenses and loss and comprehensive loss were the result of the Company's expenses with respect to advertising and promotion, increase in wages and salaries, the addition of data program expenses, share-based payments, and provision for expected credit losses. The most significant changes in operating expenses and other expenses were as follows:
- Advertising and promotion increased to $126,606 during the three months ended December 31, 2021, compared to $54,878 during the three months ended December 31, 2020, due to the Company efforts to raise awareness of its recent acquisitions.
- Wages and salaries increased to $386,264 during the three months ended December 31, 2021, compared to $173,277 during the three months ended December 31, 2020, due to increased hiring activity and production output related to the Langley Facility.
- An addition to data program expenses of $288,804 during the three months ended December 31, 2021, compared to $nil during the three months ended December 31, 2020 was related to a cannabylitics data sharing program subscribed to by Phyto BrandCo.
- Share-based payments increased to $871,067 during the three months ended December 31, 2021, compared to $nil during the three months ended December 31, 2020, as during the three months ended December 31, 2021 the Company granted 1,115,000 stock options (Q4 2020 - nil), all granted options vest immediately.
- During the three months ended December 31, 2021, the Company recognized a provision for expected credit losses of $134,083 (Q4 2020 - $nil) related to a significantly aged account receivable which management deemed to have uncertain collectability.
Results - YTD 2021 compared to YTD 2020
Revenues increased to $5,628,616 during the year ended December 31, 2021, compared to $2,499,355 during the year ended December 31, 2020, from increased processing of cannabis biomass for third party licensed producers and in-house distillate production, hydrocarbon extraction and licensing revenues from the acquisition of Phyto BrandCo.
Cost of sales increased to $3,684,925 during the year ended December 31, 2021, compared to $1,713,774 during the year ended December 31, 2020, and consists of biomass, labour, solvents and an allocation of production overheads such as facility costs and amortization of production equipment.
For the year ended December 31, 2021, the Company had operating expenses of $4,335,429 and loss and comprehensive loss of $2,749,939, compared to operating expenses of $7,950,595 and loss and comprehensive loss of $7,615,864 during the year ended December 31, 2020.
The decrease in operating expenses was the result of the Company's expenses with respect to advertising and promotion, professional fees and consulting, and share-based payments having decreased as the Company moved from its startup phase into production and expansion of its business during the year ended December 31, 2021, offset by a rise in wages and salary costs. The most significant changes in operating expenses and other expenses were as follows:
- Advertising and promotion decreased to $455,090 during the year ended December 31, 2021, compared to $749,258 during the year ended December 31, 2020, due to the Company developing a more focused investor awareness campaign and being more established in the market.
- Professional fees and consulting decreased to $585,908 during the year ended December 31, 2021, compared to $704,297 during the year ended December 31, 2020, primarily due to the decrease of consultants needed to prepare the extraction process, commissioning of equipment and testing.
- Share-based payments decreased to $890,523 during the year ended December 31, 2021, compared to $5,332,500 during the year ended December 31, 2020, as a result of 1,148,333 stock options granted during YTD 2021 (YTD 2020 - 4,206,667); all granted options vest immediately.
- Wages and salaries increased to $1,128,610 during the year ended December 31, 2021, compared to $526,327 during the year ended December 31, 2020, due to increased hiring activity and production output related to the Langley Facility.
- During the year ended December 31, 2021, the Company incurred an impairment of property and equipment of $150,000 related to an ERP software in development that the Company determined would not be completed. No impairment of property and equipment was recorded during the year ended December 31, 2020.
- During the year ended December 31, 2021, the Company recognized a provision for expected credit losses of $134,083 (Q4 2020 - $nil) related to a significantly aged account receivable which management deemed to have uncertain collectability.
SUMMARY OF QUARTERLY RESULTS
The following table shows results from the previous eight fiscal quarters:
| Period ending | Revenue | Income (loss) and comprehensiveincome (loss) | Weightedaverage numberof shares | Basic and dilutedincome (loss) per share |
|---|---|---|---|---|
| $ | # | |||
| December 31,2021 | 1,989,604 | (1,668,673 | 65,872,770 | (0.03 |
| September 30, 2021 | 1,808,111 | (207,864 | 44,908,364 | - |
| June 30, 2021 | 1,241,763 | (509,890 | 43,334,100 | (0.01 |
| March 31, 2021 | 589,138 | (363,512 | 43,334,100 | (0.01 |
| December 31, 2020 | 1,245,097 | 90,470 | 39,695,235 | - |
| September 30, 2020 | 825,903 | (3,895,719 | 38,511,533 | (0.10 |
| June 30, 2020 | 428,355 | (467,584 | 36,685,635 | (0.01 |
| March 31, 2020 | - | (3,343,034 | 36,571,004 | (0.09 |
All values are in US Dollars.
The Company's loss and comprehensive loss for the three months ended December 31, 2021, was $1,668,673. The increase of revenues to $1,989,604 are driven by the licensing revenue in Phyto BrandCo. The Company recognized a provision of expected credit losses of $134,083 relating to a significantly aged account receivable the Company no longer considered collectible and share-based payments of $871,067 related to the granting of 1,115,000 options in the quarter which vest immediately.
The Company's loss and comprehensive loss for the three months ended September 30, 2021, was $207,864. The increase of revenues to $1,808,111 are driven by the expansion of operations at the Langley Facility resulting in increased production and sales.
The Company's loss and comprehensive loss for the three months ended June 30, 2021, was $509,890. The increase of revenues to $1,241,763 were driven by the commencement of operations at the Langley Facility resulting in increased production and sales. The Company recognized impairment of property and equipment of $150,000 related to an ERP software in development that the Company determined would not be completed and a write-down of inventory of $210,001 relating to some older inventory that was deemed to have lower value.
The Company's loss and comprehensive loss for the three months ended March 31, 2021, was $363,512. Revenues of $589,138 represent the Company's fourth quarter of production revenue. The Company recognized a write-down of inventory of $81,511, representing the total fair market adjustments to inventory, and a gain on the settlement of accounts payable of $57,500 representing the value of consulting fees that were forgiven.
LIQUIDITY AND CAPITAL RESOURCES
Capital resource management
The Company's objectives when managing its liquidity and capital structure are to support further advancement of the Company's business objectives and existing service offerings, as well as to ensure that the Company is able to meet its financial obligations as they come due.
The Company manages its capital structure to maximize its financial flexibility making adjustments to it in response to changes in economic conditions and the risk characteristics of the underlying assets and business opportunities. The Company relies on the expertise of the Company's management to sustain the future development of the business. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.
There were no changes in the Company's approach to capital management during the years ended December 31, 2021. The Company is not subject to externally imposed capital requirements.
Cash and working capital
As at December 31, 2021 the Company has working capital deficit of $1,120,613 (December 31, 2020 - working capital surplus of $105,093).
As at December 31, 2021, the Company had a current mortgage payable liability of $3,501,554 this mortgage matures on July 1, 2022.
Cash flow activity
| **** | Q4 2021 | Q4 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| **** | ||||
| Cash used in operating activities | (378,858 | (549,800 | (1,054,093 | (2,807,720 |
| Cash provided by (used in) financing activities | 64,769 | (28,918 | 915,984 | 3,395,096 |
| Cash provided used in investing activities | (149,058 | (584,911 | (262,811 | (1,818,741 |
| Net decrease in cash | (463,147 | (1,163,629 | (400,920 | (1,231,365 |
| Cash, beginning of the year | 1,207,688 | 2,309,090 | 1,145,461 | 2,376,826 |
| Cash, end of the year | 744,541 | 1,145,461 | 744,541 | 1,145,461 |
All values are in US Dollars.
Cashflow - Q4 2021 compared to Q4 2020
Cash used in operating activities of $378,858 (Q4 2020 - $549,800) was the result of an increase in amounts receivables and the operating loss explained above, offset by a reduction in inventory. During the Q4 2020 the cash used in operating activities was largely due to significant increase in amounts receivable and cash spent on inventory.
Cash provided by financing activities of $64,769 (used in financing activities in Q4 2020 - $28,918) was the result of cash received pursuant to the units issued during Q4 2021, offset by interest payments on the mortgage payable. During Q4 2020, cash used in was the result of interest payments on the mortgage payable offset by government loan proceeds.
Cash used in investing activities of $149,058 (Q4 2020 - $584,911), respectively were the result of cash payments for the purchase of property and equipment.
Cashflow - YTD 2021 compared to YTD 2020
Cash used in operating activities of $1,054,093 (YTD 2020 - $2,807,720) was the result significant addition to amounts receivable and cash spent on inventory. During the prior year there was a significant cash outflows from cash spend on operating expenses such as advertising and promotion and professional fees in addition to cash spent on inventory.
Cash provided by financing activities of $915,984 (YTD 2020 - $3,395,096) was the result of cash received from mortgage refinancing and units issued for cash offset by interest payments of the mortgage payable. During the prior period cash was provided by the issuance of unit financing, warrants exercised and proceeds from the government loan offset by interest payments of the mortgage payable.
Cash used in investing activities of $262,811 (YTD 2020 - $1,818,741) was the result of cash payments made for the purchase of property and equipment offset by net cash received from the acquisitions of Perceive MD and Phyto BrandCo. In the prior period cash used in investing activities was due to cash payments made for the purchase of property and equipment.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements as at December 31, 2021 and 2020, and as at the date hereof.
TRANSACTIONS BETWEEN RELATED PARTIES
Key management personnel are those having the authority and responsibility for planning, directing, and controlling the Company. There were no loans to key management personnel or Directors, or entities over which they have control or significant influence during the years ended December 31, 2021 and 2020.
During the year ended December 31, 2021, 933,333 options were granted (2020 - 1,933,333) to Officers and Directors having a fair value on grant of $738,219 (2020 - $2,531,999).
The following related parties transacted with the Company or Company controlled entities ended December 31, 2021 and 2020:
(i) Andrew Hale was a Director and the Company's President and CEO. He resigned on March 1, 2021.
(ii) Blaine Bailey was a Director and Chairman of the Company's Audit Committee. He resigned on March 26, 2021.
(iii) Stephen Brohman was the Company's CFO. He is a principal of Donaldson Brohman Martin CPA Inc. ("DBM CPA") a firm in which he has significant influence. DBM CPA provided the Company with CFO, accounting and tax services. Stephen Brohman resigned on July 14, 2021.
(iv) George Routhier is a Company Director. He is the owner of Pipedreemz Inc. ("Pipedreemz"), which provides advisory services to the Company.
(v) Michael Forbes is a Director and the Company's President and CEO. He was appointed on April 29, 2021 and is the owner of MDC Forbes, which provides CEO services to the Company.
(vi) Donald Dinsmore was a Director and the Company's COO. He was appointed on April 29, 2021 and left the Company on February 22, 2022.
(vii) Oliver Foeste is the Company's CFO. He was appointed on July 14, 2021 and is the Managing Partner of Invictus Accounting Group LLP which provides the Company with CFO, accounting and tax services.
(viii) Paul Morgan is the Company's Director. He was appointed on July 14, 2021.
The aggregate value of transactions with key management personnel and Directors and entities over which they have control or significant influence during the years ended December 31, 2021 and 2020 were as follows:
| 2021 | 2020 | |
|---|---|---|
| $ | $ | |
| Andrew Hale | 134,666 | 180,091 |
| DBM CPA | 61,091 | 150,900 |
| Donald Dinsmore | 172,535 | - |
| Invictus Accounting Group LLP | 74,518 | - |
| MDC Forbes | 40,000 | - |
| Pipedreemz | - | 2,500 |
| 482,810 | 333,491 |
In addition to the above, the Company's acquisition of PerceiveMD constitutes a related party transaction as Michael Forbes, was also a director and controlling shareholder of PerceiveMD prior to the transaction (See Acquisition of PerceiveMD above, for more details).
As at December 31, 2021 and 2020, the Company had an outstanding accounts payable balance with related parties as follows:
| 2021 | 2020 | |
|---|---|---|
| $ | $ | |
| DBM CPA | - | 12,915 |
| Donald Dinsmore | 50,000 | - |
| Invictus Accounting Group LLP | 8,933 | - |
| MDC Forbes | 10,500 | - |
| Michael Forbes | 1,188 | - |
| 70,621 | 12,915 |
All related party balances are unsecured, due within thirty days without interest and incurred in the normal course of business.
The transactions with the key management personnel and Directors are included in operating expenses as follows:
(a) Consulting fees
Includes advisory services of George Routhier, charged to the Company via Pipedreemz, and CEO services by Michael Forbes, charged to the Company via MDC Forbes.
(b) Professional fees
Includes accounting and tax services of the Company's former CFO, Stephen Brohman, charged to the Company via DBM CPA and accounting services of the Company's new CFO, Oliver Foeste, charged to the Company via Invictus Accounting Group LLP.
(c) Wages and salaries
Includes services by Andrew Hale as the prior CEO, and Donald Dinsmore as COO.
PROPOSED TRANSACTIONS
As at December 31, 2021, the Company had no proposed transactions.
CRITICAL ACCOUNTING ESTIMATES
Refer to the Company's annual audited financial statements for the year ended December 31, 2021 and 2020.
CHANGES IN ACCOUNTING STANDARDS
Accounting standards issued but not yet effective
Certain pronouncements have been issued by the IASB or IFRIC that are effective for accounting periods beginning on or after January 1, 2021. The Company has reviewed these updates and determined that many of these updates are not applicable or consequential to the Company and have been excluded from discussion within these significant accounting policies.
FINANCIAL RISK MANAGEMENT
Financial instruments - fair value
The Company's financial instruments consist of cash, trade receivables, deposits, accounts payable and accrued liabilities, mortgage payable, lease liability and loan payable.
As at December 31, 2021, the carrying values of cash, amounts receivable, accounts payable and accrued liabilities approximated their fair value because of the short-term nature of these instruments.
Financial instruments measured at fair value on the consolidated statements of financial position are summarized into the following fair value hierarchy levels:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Financial instruments - risk
The Company's financial instruments are exposed to certain financial risks, including credit risk, liquidity risk and interest rate risk.
Credit risk
Counterparty credit risk is the risk that the financial benefits of contracts with a specific counterparty will be lost if a counterparty defaults on its obligations under the contract. This includes amounts owed to the Company by these counterparties, less any amounts owed to the counterparty by the Company where a legal right of offset exists and also includes the fair values of contracts with individual counterparties which are recorded in the consolidated financial statements.
The Company's credit risk is predominantly related to cash balances held in financial institutions and accounts receivable. The maximum exposure to credit risk is equal to the carrying value of such financial assets. At December 31, 2021, the Company expects to recover the full amount of such assets having already incurred a bad debt expense in relation to accounts receivable during the year.
The objective of managing counterparty credit risk is to minimize potential losses in financial assets. The Company assesses the quality of its counterparties, taking into account their credit worthiness and reputation, past performance and other factors.
Cash is only deposited with or held by major financial institutions where the Company conducts its business.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities as they come due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements.
As at December 31, 2021, the Company had a cash balance of $744,541 and current liabilities of $5,341,267 (December 31, 2020 - $1,145,461 and $3,590,794 respectively).
Interest rate risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company's mortgage payable, and lease liability carry fixed interest rates and as such, the Company is not exposed to interest rate risk.
Foreign currency risk
Foreign currency risk derives from fluctuations in exchange rates between currencies when transacting business in multiple currencies. The Company's business is substantially all conducted in Canadian dollars so it is not subject to any significant foreign currency risk.
Economic dependence
Economic dependence risk is the risk of reliance upon a select number of customers which significantly impact the financial performance of the Company. During the year ended December 30, 2021, two customers represented approximately 99% of the Company's revenue (2020 - three customers' representing 79%,16% and 5% of revenue).
OUTSTANDING SHARE DATA
The Company's authorized share capital consists of an unlimited number of voting common shares without par value. The Company had the following securities outstanding as at the date of this MD&A:
| # | |
|---|---|
| Common shares | 65,970,547 |
| Stock options | 3,715,001 |
| Warrants | 8,458,719 |
| Fully diluted securities | 78,144,267 |
On April 9, 2021, the Company completed a share consolidation on the basis of three common shares to one post-consolidation common share, resulting in 130,001,985 common shares being consolidated into 43,333,995 post-consolidation common shares at the date of the share consolidation. All current and comparative references to the number of common shares, weighted average number of common shares, loss per share, stock options and warrants have been restated to give effect to this share consolidation.
Share issuances
During the year ended December 31, 2021, the Company had the following share transactions:
a) On August 10, 2021, the Company issued 2,513,720 unrestricted common shares at $0.80 per share for a total of $2,010,976 pursuant to the acquisition of PerceiveMD.
b) On September 15, 2021, the Company issued 20,000,000 common shares at $1.20 per share for total consideration of $24,000,000 pursuant to the acquisition Phyto BrandCo. Subsequent to the closing of the acquisition, the Company renegotiated terms of the acquisition with the former shareholders of Phyto BrandCo due to certain conditions in the acquisition agreement not being met. It was resolved that the consideration be amended from $24,000,000 to $12,000,000 by a voluntary return to treasury of 10,000,000 common shares.
c) On October 18, 2021, the Company completed a non-brokered private placement whereby the Company issued 122,727 units at a price of $1.10 per unit for gross proceeds of $135,000. Each unit is comprised of one common share and one transferrable common share purchase warrant with each warrant entitling the holder thereof to acquire one common share at a price of $1.75 per share for two years from the date of the closing. The $131,318 fair value of the 122,727 shares issued was determined based on the Company's share price of $1.07 on the acquisition date, and the residual value of $3,682 was allocated to warrants reserves. The warrants are subject to an acceleration provision whereby if the daily closing price of the common shares closes at or above $2.00 per share for 50 consecutive trading days, then the Company may accelerate the expiration date of the warrants to the date that is 30 trading days from the date that notice of such acceleration is given via news release. From and after the new accelerated expiration date, no warrants may be exercised, and all unexercised warrants would be void.
SUBSEQUENT EVENT
a) On January 6, 2022, 1,300,000 shares were released from escrow.
RISKS AND UNCERTAINTIES
The Company operates in a rapidly changing environment that involves risks and uncertainties and as a result, management's expectation may not be realized for a number of reasons. An investment in the Company's common shares is speculative and involves a high degree of risk and uncertainty. The current regulatory uncertainty poses additional risks and uncertainties which may materially affect management's expectations.
Regulatory risks
The operations of the Company will be subject to various laws governing the production and distribution of cannabis oil, taxes, labour standards and occupational health, toxic substances, land use, water use, and other matters.
The Cannabis Act is a new regime and as such, revisions to the regime could be implemented which could have an impact on operations.
Furthermore, although the operations of the Company are currently carried out in accordance with all applicable rules and regulations, no assurance can be given that new rules and regulations will not be enacted or that existing rules and regulations will not be applied in a manner which could limit or curtail the ability to produce cannabis oil and related products. Amendments to current laws and regulations governing the distribution, transportation and/or production of cannabis oil or related products, or a more stringent implementation thereof, could have a substantial adverse impact.
Ongoing need for financing
The Company's ability to continue operations will be largely reliant on its continued attractiveness to equity investors. The Company is expected to incur operating losses as it continues to expend funds to develop its business operations. Even if its financial resources are sufficient to fund its current operations, there is no guarantee that the Company will be able to achieve its business objectives. The continued development of the Company will require substantial additional financing. The failure to raise such capital could result in the delay or indefinite postponement of current business objectives or the going out of business. The primary source of funding available to the Company will consist of equity financing. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, the terms of such financing will be favorable. In addition, from time to time, the Company may enter into transactions to acquire assets or the shares of other corporations. These transactions may be financed wholly or partially with debt, which may temporarily increase the Company's debt levels above industry standards.
Competition
The marijuana production industry is competitive in all of its phases. The Company will face strong competition from other companies in connection with such matters. Many of these companies have greater financial resources, operational experience and technical capabilities than Adastra. As a result of this competition, the Company may be unable to maintain its operations or develop them as currently proposed, on terms it considers acceptable or at all. Consequently, the revenues, operations and financial condition of the Company could be materially adversely affected.
Because of the early stage of the industry in which the Company operates, the Company may face additional competition from new entrants. If the number of users of marijuana in Canada increases, the demand for products will increase and management expects that competition will become more intense as current and future competitors begin to offer an increasing number of diversified products. To remain competitive, the Company will require a continued high level of investment in research and development, marketing, sales and client support. The Company may not have sufficient resources to maintain research and development, marketing, sales and client support efforts on a competitive basis which could materially and adversely affect the business, financial condition and results of operations.
COVID-19 pandemic
The COVID-19 outbreak continues to rapidly evolve and is causing business disruptions across the entire global economy and society. The Company has taken various measures to prioritize the health and safety of its employees, customers and partners, including restricted work travel and site access, improved safety & hygiene, and the requirement of nonessential staff members to work remotely. As a manufacturer of consumable and medicinal products, the Company's practice is to always operate consistently with global pharma-quality standards to the best of its abilities, with strict hygiene practices and mandated personal protective equipment. It is not possible for the Company to predict the duration or magnitude of any adverse effects that the pandemic may have on the Company's business or ability to raise funds. As of the date of these financial statements, COVID-19 has had minimal impact on the Company's ability to conduct its operations but may impact the Company's ability to raise funding should restrictions related to COVID-19 be expanded in scope.
Adastra Holdings Ltd.: Exhibit 99.3 - Filed by newsfilecorp.com
Form 52-109FV1
Certification of Annual Filings
Venture Issuer Basic Certificate
I, Michael Forbes, Chief Executive Officer of Adastra Holdings Ltd. (formerly Phyto Extractions Inc.), certify the following:
1. Review: I have reviewed the AIF, if an, annual financial statements and annual MD&A (together, the "annual filings") of Adastra Holdings Ltd. (formerly Phyto Extractions Inc.) (the "issuer") for the financial year ended December 31, 2021.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the annual filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the annual filings.
Date: May 2, 2022
/s/ "Michael Forbes"
Michael Forbes
Chief Executive Officer
| NOTE TO READER<br><br> <br>In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of<br><br> <br>i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, annual filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and<br><br> <br>ii) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.<br><br> <br>The issuer's certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of annual and annual filings and other reports provided under securities legislation. |
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Adastra Holdings Ltd.: Exhibit 99.4 - Filed by newsfilecorp.com
Form 52-109FV1
Certification of Annual Filings
Venture Issuer Basic Certificate
I, Oliver Foeste, Chief Financial Officer of Adastra Holdings Ltd. (formerly Phyto Extractions Inc.), certify the following:
1. Review: I have reviewed the AIF, if an, annual financial statements and annual MD&A (together, the "annual filings") of Adastra Holdings Ltd. (formerly Phyto Extractions Inc.) (the "issuer") for the financial year ended December 31, 2021.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the annual filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the annual filings.
Date: May 2, 2022
/s/ "Oliver Foeste"
Oliver Foeste
Chief Financial Officer
| NOTE TO READER<br><br> <br>In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of<br><br> <br>i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, annual filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and<br><br> <br>ii) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer's GAAP.<br><br> <br>The issuer's certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of annual and annual filings and other reports provided under securities legislation. |
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