Adastra Holdings Ltd 6-K, filed May 31, 2023
Adastra Holdings Ltd. (XTXXF)
About this 6-K
Adastra Holdings Ltd filed this 6-K on May 31, 2023.
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 date of May 30, 2023
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
- 2 -
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 30, 2023
Adastra Holdings Ltd.
(formerly Phyto Extractions Inc.)
Condensed Interim Consolidated Financial Statements
For the three months ended March 31, 2023 and 2022
(Unaudited - Expressed in Canadian dollars)
Notice of Disclosure of Non-Auditor Review
Pursuant to subsection 4.3(3)(a) of National Instrument 51-102 - Continuous Disclosure Obligations, issued by the Canadian Securities Administrators, if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
The accompanying unaudited condensed interim consolidated financial statements of Adastra Holdings Ltd. (the "Company") for the interim period ended March 31, 2023 and 2022, have been prepared in accordance with the International Accounting Standard 34 Interim Financial Reporting, as issued by the International Accounting Standards Board, and are the responsibility of the Company's management.
The Company's independent auditors have not performed a review of these condensed interim consolidated financial statements.
May 30, 2023
ADASTRA HOLDINGS LTD.
Condensed Interim Consolidated Statements of Financial Position
As at March 31, 2023 and December 31, 2022
(Unaudited - Expressed in Canadian dollars)
| Note | March 31, 2023 |
December 31, 2022 |
|||||||
| $ | $ | ||||||||
| ASSETS | |||||||||
| Current assets | |||||||||
| Cash | 1,935,680 | 1,013,867 | |||||||
| Amounts receivable | 4 | 4,293,602 | 3,561,765 | ||||||
| Prepaid expenses and deposits | 5 | 520,231 | 414,212 | ||||||
| Inventory | 6 | 4,256,067 | 4,005,282 | ||||||
| 11,005,580 | 8,995,126 | ||||||||
| Long-term deposits | 5 | 512,000 | 512,000 | ||||||
| Property and equipment | 7 | 9,526,032 | 9,726,822 | ||||||
| Intangible assets | 8 | 3,031,858 | 3,133,808 | ||||||
| Goodwill | 9 | 9,436,189 | 9,436,189 | ||||||
| Total assets | 33,511,659 | 31,803,945 | |||||||
| LIABILITIES | |||||||||
| Current liabilities | |||||||||
| Accounts payable and accrued liabilities | 10,15 | 10,852,423 | 8,545,048 | ||||||
| Current portion of lease liability | 11 | 17,640 | 17,640 | ||||||
| Mortgage payable | 12 | 3,512,176 | 3,507,389 | ||||||
| Loan payable | 13 | 314,555 | 314,555 | ||||||
| Deferred revenue | - | 275,575 | |||||||
| 14,696,794 | 12,660,207 | ||||||||
| Deferred tax liability | 792,000 | 808,000 | |||||||
| Lease liability | 11 | 41,701 | 45,948 | ||||||
| Government loan | 60,000 | 60,000 | |||||||
| Total liabilities | 15,590,495 | 13,574,155 | |||||||
| SHAREHOLDERS' EQUITY | |||||||||
| Share capital | 14 | 29,964,446 | 29,964,446 | ||||||
| Reserves | 14 | 6,474,732 | 6,474,732 | ||||||
| Deficit | (18,518,014 | ) | (18,209,388 | ) | |||||
| Total shareholders' equity | 17,921,164 | 18,229,790 | |||||||
| Total liabilities and shareholders' equity | 33,511,659 | 31,803,945 |
Nature of operations and going concern (Note 1)
Commitments and contingencies (Note 18)
Approved on behalf of the Board of Directors on May 30, 2023:
|
"Michael Forbes" |
|
"Paul Morgan" |
|
Director |
|
Director |
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
ADASTRA HOLDINGS LTD.
Condensed Interim Consolidated Statements of Loss and Comprehensive Loss
For the three months ended March 31, 2023 and 2022
(Unaudited - Expressed in Canadian dollars, except number of shares)
| Three months ended March 31, | |||||||||
| Note | 2023 | 2022 | |||||||
| $ | $ | ||||||||
| Revenue | 9,479,828 | 2,286,721 | |||||||
| Excise taxes | (3,708,029) | - | |||||||
| Net revenue | 5,771,799 | 2,286,721 | |||||||
| Cost of sales | 6,8 | (4,099,616 | ) | (1,459,008 | ) | ||||
| Gross profit | 1,672,183 | 827,713 | |||||||
| Operating expenses | |||||||||
| Advertising and promotion | 342,875 | 288,666 | |||||||
| Data program expenses | 205,173 | 140,082 | |||||||
| Depreciation and amortization | 7,8 | 127,863 | 147,328 | ||||||
| Insurance | 44,957 | 28,066 | |||||||
| Office expenses | 274,659 | 156,023 | |||||||
| Professional fees and consulting | 15 | 292,778 | 241,640 | ||||||
| Repair and maintenance expenses | 74,447 | 39,501 | |||||||
| Travel | 24,810 | 14,098 | |||||||
| Wages and salaries | 15 | 493,576 | 640,278 | ||||||
| Total operating expenses | 1,881,138 | 1,695,682 | |||||||
| Loss from operations | (208,955 | ) | (867,969 | ) | |||||
| Other expense | |||||||||
| Interest expense | 11,12,13 | (115,671 | ) | (68,122 | ) | ||||
| Loss before income taxes | (324,626 | ) | (936,091 | ) | |||||
| Deferred income tax recovery | 16,000 | 28,000 | |||||||
| Net loss and comprehensive loss | (308,626 | ) | (908,091 | ) | |||||
| Net loss per share | |||||||||
| Basic and diluted | (0.01 | ) | (0.01 | ) | |||||
| Weighted average number of common shares outstanding | |||||||||
| Basic and diluted | 55,970,547 | 65,970,547 | |||||||
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
ADASTRA HOLDINGS LTD.
Condensed Interim Consolidated Statements of Cash Flows
For the three months ended March 31, 2023 and 2022
(Unaudited - Expressed in Canadian dollars, except number of shares)
| Three months ended March 31, | ||||||
| 2023 | 2022 | |||||
| $ | $ | |||||
| Operating activities | ||||||
| Net loss and comprehensive loss for the period | (308,626 | ) | (908,091 | ) | ||
| Adjustments for non-cash items: | ||||||
| Depreciation and amortization | 127,863 | 147,328 | ||||
| Depreciation - cost of sales | 208,741 | 175,928 | ||||
| Interest expense | 115,671 | 68,122 | ||||
| Deferred income tax recovery | (16,000 | ) | (28,000 | ) | ||
| Net change in non-cash working capital items: | ||||||
| Amounts receivable | (731,837 | ) | (96,739 | ) | ||
| Prepaid expenses and deposits | (106,019 | ) | (242,336 | ) | ||
| Inventory | (250,785 | ) | 656,917 | |||
| Accounts payable and accrued liabilities | 2,736,635 | 330,593 | ||||
| Deferred revenue | (275,575 | ) | - | |||
| Cash provided by operating activities | 1,500,068 | 103,722 | ||||
| Investing activities | ||||||
| Purchases of property and equipment | (476,650 | ) | (16,649 | ) | ||
| Cash used in investing activities | (476,650 | ) | (16,649 | ) | ||
| Financing activities | ||||||
| Interest paid - mortgage | (95,803 | ) | (37,917 | ) | ||
| Interest paid - lease liability | (1,555 | ) | (783 | ) | ||
| Principal repaid - lease liability | (4,247 | ) | (2,573 | ) | ||
| Cash used in financing activities | (101,605 | ) | (41,273 | ) | ||
| Net increase (decrease) in cash | 921,813 | 45,800 | ||||
| Cash, beginning of period | 1,013,867 | 744,541 | ||||
| Cash, end of period | 1,935,680 | 790,341 | ||||
Supplemental cash flow information (Note 16)
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
ADASTRA HOLDINGS LTD.
Condensed Interim Consolidated Statements of Changes in Shareholder’s Equity
(Unaudited - Expressed in Canadian dollars, except number of shares)
| Common shares |
Share capital | Shares to be cancelled |
Reserves | Deficit | Total | |||||||||||||
| # | $ | $ | $ | $ | $ | |||||||||||||
| Balance, December 31, 2021 | 65,970,547 | 41,964,446 | (12,000,000 | ) | 6,336,019 | (13,927,749 | ) | 22,372,716 | ||||||||||
| Loss for the period | - | - | - | - | (908,091 | ) | (908,091 | ) | ||||||||||
| Balance, March 31, 2022 | 65,970,547 | 41,964,446 | (12,000,000 | ) | 6,336,019 | (14,835,840 | ) | 21,464,625 | ||||||||||
| Balance, December 31, 2022 | 55,970,547 | 29,964,446 | - | 6,474,732 | (18,209,388 | ) | 18,229,790 | |||||||||||
| Loss for the period | - | - | - | - | (308,626 | ) | (308,626 | ) | ||||||||||
| Balance, March 31, 2023 | 55,970,547 | 29,964,446 | - | 6,474,732 | (18,518,014 | ) | 17,921,164 |
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
| ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN
Adastra Holdings Ltd. (the "Company") was incorporated under the laws of the province of British Columbia on October 14, 1987. The Company extracts and processes cannabis for sale to the recreational and medical markets in Canada. The Company is listed on the Canadian Securities Exchange ("CSE") under the symbol "XTRX". The Company's registered and records office is located at 5451 275th Street, Langley City, British Columbia, V4W 3X8.
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.
On September 15, 2021, the Company completed the 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.
These condensed interim consolidated 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 condensed interim consolidated 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 12).
As at March 31, 2023, the Company had a working capital deficiency of $3,691,214 (December 31, 2022 - $3,665,081). During the three months ended March 31, 2023, the Company incurred a net loss and comprehensive loss of $308,626 (2022 - $908,091). 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 condensed interim 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 condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34 - Interim Financial Reporting using accounting policies consistent 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"). As such, these condensed interim consolidated financial statements do not contain all the disclosures required by IFRS for annual financial statements and should be read in conjunction with the Company's audited annual consolidated financial statements for the years ended December 31, 2022, 2021, and 2020.
These condensed interim consolidated financial statements were approved by the Board of Directors and authorized for issue on May 30, 2023.
(b) Basis of measurement
These condensed interim consolidated 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 condensed interim consolidated financial statements have been prepared using the accrual method of accounting.
All amounts in these condensed interim consolidated financial statements are presented in Canadian dollars which is the functional currency of the Company and its subsidiaries.
| ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 2 - BASIS OF PRESENTATION (continued)
(c) Principles of consolidation
These condensed interim consolidated financial statements include the financial information of the Company and entities controlled by the Company. 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. Subsidiaries are included in the condensed interim consolidated financial statements from the date control commences until the date control ceases. All intercompany transactions and balances are eliminated on consolidation. The accounting policies of subsidiaries are changed where necessary to align them with the policies adopted by the Company. These condensed interim consolidated financial statements incorporate the accounts of the Company and the following subsidiaries:
| Functional currency |
Ownership 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. ("Chemia") | CAD | 100% |
| 1225140 B.C. Ltd ("PerceiveMD") | CAD | 100% |
| 1204581 B.C. Ltd. ("Phyto BrandCo") | CAD | 100% |
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
The accounting policies applied in the preparation of these condensed interim consolidated financial statements are consistent with those applied and disclosed in note 3 of the consolidated financial statements for the year ended December 31, 2022, 2021 and 2020.
The preparation of the condensed interim consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, revenues and expenses. Management continually evaluates these judgments, 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 judgments which may cause a material adjustment to the carrying amounts of assets and liabilities. The Company's interim results are not necessarily indicative of its results for a full year. The critical judgements and estimates applied in the preparation of these interim financial statements are consistent with those applied and disclosed in Note 3 to the consolidated financial statements for the year ended December 31, 2022, 2021 and 2020.
(a) 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 April 1, 2023. 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.
Amendments to IAS 1 - Presentation of Financial Statements
In October 2022, the IASB issued amendments to IAS 1, Presentation of Financial Statements titled Non-current liabilities with covenants. These amendments sought to improve the information that an entity provides when its right to defer settlement of a liability is subject to compliance with covenants within 12 months after the reporting period. These amendments to IAS 1 override but incorporate the previous amendments, Classification of liabilities as current or non-current, issued in January 2020, which clarified that liabilities are classified as either current or non-current, depending on the rights that exist at the end of the reporting period. Liabilities should be classified as non-current if a company has a substantive right to defer settlement for at least 12 months at the end of the reporting period. The amendments are effective January 1, 2024, with early adoption permitted. Retrospective application is required on adoption. We do not expect these amendments to have a material effect on our financial statements.
| ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 4 - AMOUNTS RECEIVABLE
As at March 31, 2023 and December 31, 2022, amounts receivables consisted of the following:
| March 31, 2023 |
December 31, 2022 |
|||||
| $ | $ | |||||
| Trade receivables, net of expected credit losses | 4,293,602 | 3,561,765 | ||||
| 4,293,602 | 3,561,765 |
During the three months ended March 31, 2023, the Company recorded no provision for expected credit losses against trade receivables (2022 - $nil).
NOTE 5 - PREPAID EXPENSES AND DEPOSITS
As at March 31, 2023 and December 31, 2022, prepaid expenses and deposits consisted of the following:
| March 31, 2023 |
December 31, 2022 |
|||||
| $ | $ | |||||
| Prepaid expenses | 485,475 | 379,456 | ||||
| Deposits | 34,756 | 34,756 | ||||
| 520,231 | 414,212 |
As at March 31, 2023, deposits of $34,756 (December 31, 2022 - $34,756), consist of security deposits. Long-term deposits of $512,000 (December 31, 2022 - $512,000) consist of deposits held in trust for excise bond and other deposits.
NOTE 6 - INVENTORY
As at March 31, 2023 and December 31, 2022, inventory consisted of the following:
| March 31, 2023 |
December 31, 2022 |
|||||
| $ | $ | |||||
| Dried cannabis and terpenes | 324,061 | 262,517 | ||||
| Packaging | 687,080 | 446,994 | ||||
| Production work in process | 838,892 | 1,616,623 | ||||
| Finished goods | 2,406,034 | 1,679,148 | ||||
| 4,256,067 | 4,005,282 |
Inventory expensed to cost of sales during the three months ended March 31, 2023 was $2,960,604 (2022 - $1,283,080).
During the three months ended March 31, 2023, the Company recognized $nil (2022 - $nil) in relation to the write down of slow-moving inventory.
| ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 7 - PROPERTY AND EQUIPMENT
The following table summarizes the continuity of property and equipment as at March 31, 2023 and December 31, 2022:
| Land | Building | Furniture and equipment |
Computer software |
Laboratory equipment |
Extraction equipment |
Building improvements |
Right-of- use asset |
Total | |||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Cost |
|||||||||||||||||||||||||||
| 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 | ||||||||||||||||||
| Additions | - | - | 21,361 | - | 772,956 | 45,652 | 30,127 | 49,968 | 920,064 | ||||||||||||||||||
| Balance, December 31, 2022 | 1,592,232 | 1,999,328 | 179,145 | 12,105 | 1,242,171 | 3,299,640 | 3,958,408 | 90,344 | 12,373,373 | ||||||||||||||||||
| Additions | - | - | 9,606 | - | 21,462 | 2,795 | - | - | 33,863 | ||||||||||||||||||
| Balance, March 31, 2023 | 1,592,232 | 1,999,328 | 188,751 | 12,105 | 1,263,633 | 3,302,435 | 3,958,408 | 90,344 | 12,407,236 | ||||||||||||||||||
| Accumulated depreciation | |||||||||||||||||||||||||||
| Balance, December 31, 2021 | - | 316,479 | 40,024 | 3,872 | 98,189 | 873,897 | 342,517 | 3,365 | 1,678,343 | ||||||||||||||||||
| Depreciation | - | 99,967 | 27,326 | 1,649 | 144,721 | 480,881 | 197,539 | 16,125 | 968,208 | ||||||||||||||||||
| Balance, December 31, 2022 | - | 416,446 | 67,350 | 5,521 | 242,910 | 1,354,778 | 540,056 | 19,490 | 2,646,551 | ||||||||||||||||||
| Depreciation | - | 24,992 | 6,070 | 329 | 51,036 | 97,383 | 49,479 | 5,364 | 234,653 | ||||||||||||||||||
| Balance, March 31, 2023 | - | 441,438 | 73,420 | 5,850 | 293,946 | 1,452,161 | 589,535 | 24,854 | 2,881,204 | ||||||||||||||||||
| Carrying value | |||||||||||||||||||||||||||
| Balance, December 31, 2022 | 1,592,232 | 1,582,882 | 111,795 | 6,584 | 999,261 | 1,944,862 | 3,418,352 | 70,854 | 9,726,822 | ||||||||||||||||||
| Balance, March 31, 2023 | 1,592,232 | 1,557,890 | 115,331 | 6,255 | 969,687 | 1,850,274 | 3,368,873 | 65,490 | 9,526,032 |
During the three months ended March 31, 2023, the Company allocated $208,741 (2022 - $175,928) of depreciation to the production of inventory and $25,912 (2022 - $45,378) to operating expenses.
| ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 8 - INTANGIBLE ASSETS
The following table summarizes the continuity of intangible assets as at March 31, 2023 and December 31, 2022:
| Trademarks | Patient relationships |
Total | |||||||
| $ | $ | $ | |||||||
| Cost | |||||||||
| Balance, December 31, 2022 and 2021 | 3,250,000 | 414,000 | 3,664,000 | ||||||
| Additions | - | - | - | ||||||
| Balance, March 31, 2023 | 3,250,000 | 414,000 | 3,664,000 | ||||||
| Accumulated depreciation | |||||||||
| Balance, December 31, 2021 | 94,792 | 27,600 | 122,392 | ||||||
| Amortization | 325,000 | 82,800 | 407,800 | ||||||
| Balance, December 31, 2022 | 419,792 | 110,400 | 530,192 | ||||||
| Amortization | 81,250 | 20,700 | 101,950 | ||||||
| Balance, March 31, 2023 | 501,042 | 131,100 | 632,142 | ||||||
| Carrying value | |||||||||
| Balance, December 31, 2022 | 2,830,208 | 303,600 | 3,133,808 | ||||||
| Balance, March 31, 2023 | 2,748,958 | 282,900 | 3,031,858 |
During the year ended December 31, 2021, the Company acquired a total of $3,250,000 in Trademarks. 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.
On October 3, 2022, the Company terminated the license agreement with the previous Trademark licensee who had sole use of the Trademarks acquired pursuant to the Phyto BrandCo acquisition. As a result, the Company now retains all rights to the Trademarks and will begin selling the related cannabis consumer packaged goods directly to provincial distributors and retailers. During the year ended December 31, 2022, the Company recorded a $1,542,492 loss on the termination of the license agreement.
During the year ended December 31, 2021, the Company acquired a total of $414,000 in Patient Relationships. 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.
NOTE 9 - GOODWILL
The following table summarizes the continuity of goodwill for the three months ended March 31, 2023 and the year ended December 31, 2022:
| March 31, 2023 |
December 31, 2022 |
|||||
| $ | $ | |||||
| Opening balance | 9,436,189 | 11,108,422 | ||||
| Impairment - PerceiveMD | - | (1,672,233 | ) | |||
| Closing balance | 9,436,189 | 9,436,189 |
| ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As at March 31, 2023 and December 31, 2022, accounts payable and accrued liabilities consisted of the following:
| March 31, 2023 |
December 31, 2022 |
|||||
| $ | $ | |||||
| Accounts payable | 2,741,183 | 2,992,928 | ||||
| Accrued liabilities | 810,459 | 549,747 | ||||
| Excise tax payable | 6,118,597 | 4,153,096 | ||||
| Income tax payable | 89,658 | 89,658 | ||||
| Sales tax payable | 1,092,526 | 759,619 | ||||
| 10,852,423 | 8,545,048 |
NOTE 11 - LEASE LIABILITY
A summary of the Company's lease liabilities for the three months ended March 31, 2023 and the year ended December 31, 2022 is as follows:
| March 31, 2023 |
December 31, 2022 |
|||||
| $ | $ | |||||
| Opening balance | 63,588 | 32,155 | ||||
| Additions - equipment | - | 49,968 | ||||
| Interest | 1,555 | 3,810 | ||||
| Repayments | (5,802 | ) | (22,345 | ) | ||
| Closing balance | 59,341 | 63,588 | ||||
| Less: current portion | (17,640 | ) | (17,640 | ) | ||
| Long-term portion | 41,701 | 45,948 |
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 discount the lease liability was 10%.
On August 15, 2022, the Company entered into a five-year lease agreement for a forklift. The base monthly payment is $815 with an initial payment of $6,477. The incremental borrowing rate used to discount the lease liability was 10%.
NOTE 12 - MORTGAGE PAYABLE
| Fourth Mortgage |
Fifth Mortgage |
Total | |||||||
| $ | $ | $ | |||||||
| Balance, December 31, 2021 | 3,501,554 | - | 3,501,554 | ||||||
| New mortgage (refinancing) | (3,500,000 | ) | 3,500,000 | - | |||||
| Transaction costs | - | (35,000 | ) | (35,000 | ) | ||||
| Finance expense | 131,154 | 174,884 | 306,038 | ||||||
| Repayments | (132,708 | ) | (132,495 | ) | (265,203 | ) | |||
| Balance, December 31, 2022 | - | 3,507,389 | 3,507,389 | ||||||
| Finance expense | - | 100,590 | 100,590 | ||||||
| Repayments | - | (95,803 | ) | (95,803 | ) | ||||
| Balance, March 31, 2023 | - | 3,512,176 | 3,512,176 |
| ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 12 - MORTGAGE PAYABLE (continued)
a) 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 6.5% per annum, calculated monthly, for one year. The Forth 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). At March 31, 2023, the carrying value of the Fourth Mortgage was $nil (December 31, 2022 - $nil).
The Company maintained minimum interest-only payments of $18,959 per month. Total interest expense during the year ended December 31, 2022 was $131,154. On September 28, 2022, the Forth Mortgage was refinanced.
b) On September 28, 2022, the Company refinanced the Fourth Mortgage (the "Fifth Mortgage") which bears interest at the greater of 9.75% or the prime rate plus 4.30% per annum, calculated monthly, for one year. The Fifth Mortgage has a maturity date of November 1, 2023 and is secured by the mortgage property and building improvements. The Fifth Mortgage payable was recorded at amortized cost (principal value less $35,000 transaction costs). At December 31, 2022, the carrying value of the Fifth Mortgage was $3,507,389 (2021 - $nil).
The Company maintains minimum interest-only payments of $18,959 per month. As at December 31, 2022, the total non-discounted remaining scheduled payments related to the mortgage including interest payments totaled $3,822,505. Total interest expense during the year ended December 31, 2022 was $174,884.
NOTE 13 - LOAN PAYABLE
During the year ended December 31, 2022, the Company received a short-term loan of $300,000 with an interest rate of 1.5% per month. The loan is unsecured and is due on demand. Total interest expense related to the loan during the three months ended March 31, 2023 was $13,500. (2022 - $nil)
NOTE 14 - SHARE CAPITAL
(a) Authorized
Unlimited number of voting common shares without par value.
(b) Issued share capital
As at March 31, 2023, 55,970,547 common shares were issued and outstanding.
(c) Share issuances
During the three months ended March 31, 2023, the Company had no share issuances.
During the year ended December 31, 2022, the Company had the following share transactions:
-
- On April 29, 2022, 10,000,000 common shares related to the amended agreement between the Company and former owners of Phyto BrandCo were returned to treasury and cancelled for no consideration.
(d) Escrow shares
The Company entered into an Escrow Agreement in connection with closing the Reverse takeover ("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 March 31, 2023, no common shares were held in escrow (December 31, 2022 - 1,300,000).
| ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 14 - 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.
Options belonging to 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 three months ended March 31, 2023, the Company had no stock option grants.
During the year ended December 31, 2022, the Company had the following stock option grants:
- On August 19, 2022, the Company granted 300,000 stock options to a certain director for the purchase of up to 300,000 common shares at a price of $0.75 per share. Each stock option is exercisable for a period of five years. The fair value of these options was $138,713 ($0.46 per option) and was recognized as a share-based payment expense.
A summary of the changes in the Company's stock options outstanding and exercisable is as follows:
| Stock options outstanding and exercisable |
Weight average exercise price |
|||||
| # | $ | |||||
| As at December 31, 2021 | 3,715,001 | 1.45 | ||||
| Granted | 300,000 | 0.75 | ||||
| Cancelled | (283,334 | ) | 1.51 | |||
| Expired | (66,667 | ) | 1.35 | |||
| As at December 31, 2022 and March 31, 2023 | 3,665,000 | 1.40 |
As at December 31, 2022, the Company had stock options outstanding and exercisable as follows:
|
Expiry date |
Options outstanding and exercisable |
Weighted average |
Weighted average |
|
|
# |
$ |
Years |
|
January 30, 2025 |
1,583,334 |
1.35 |
1.83 |
|
August 5, 2025 |
683,333 |
2.34 |
2.35 |
|
August 5, 2026 |
33,333 |
1.35 |
3.34 |
|
October 25, 2026 |
900,000 |
1.06 |
3.57 |
|
October 28, 2026 |
165,000 |
0.95 |
3.58 |
|
August 19, 2027 |
300,000 |
0.75 |
4.39 |
|
|
3,665,000 |
1.40 |
2.66 |
| ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 14 - SHARE CAPITAL (continued)
(f) Warrants
As an incentive to complete a private placement the Company may issue units which include common shares and common share purchase warrants. Finders' warrants may be issued as a private placement share issue cost and are valued using the Black-Scholes option pricing model.
A summary of the changes in the Company's warrants outstanding and exercisable is as follows:
| Warrants outstanding and exercisable |
Weight average exercise price |
|||||
| # | $ | |||||
| As at December 31, 2021 | 8,458,719 | 1.80 | ||||
| Expired | (8,335,992 | ) | 1.80 | |||
| As at December 31, 2022 and March 31, 2023 | 122,727 | 1.75 |
As at March 31, 2023, the Company had warrants outstanding and exercisable as follows:
| Expiry date | Warrants outstanding and exercisable |
Weighted average exercise price |
Weighted average remaining life |
||||||
| # | $ | Years | |||||||
| October 18, 2023 | 122,727 | 1.75 | 0.55 | ||||||
| 122,727 | 1.75 | 0.55 |
NOTE 15 - 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 at March 31, 2023 and December 31, 2022.
During the three months ended March 31, 2023, no options were granted to Officers and Directors (2022 - nil).
The following related parties transacted with the Company or Company-controlled entities during the three months ended March 31, 2023 and the year ended December 31, 2022:
a) George Routhier was a Director. He is the owner of Pipedreemz Inc., which provides advisory services to the Company. He resigned on June 23, 2022.
b) 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.
c) Donald Dinsmore was a Director and the Company's COO. He was appointed on April 29, 2021 and left the Company on March 24, 2022.
d) Oliver Foeste was the Company's CFO until January 1, 2023. He is the Managing Partner of Invictus Accounting Group LLP which provides the Company with CFO, accounting and tax services.
e) Paul Morgan is a Director of the Company. He was appointed on July 14, 2021.
f) Smoke Wallin is a Director of the Company. He was appointed on May 16, 2022.
g) Lachlan McLeod was appointed CFO of the Company on January 1, 2023 and is an employee of Fehr & Associates CPA, which provides accounting services to the Company.
| ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 15 - RELATED PARTY TRANSACTIONS (continued)
The aggregate value of transactions, excluding share-based payments, with key management personnel and directors and entities over which they have control or significant influence during the three months ended March 31, 2023 and 2022 were as follows:
| Three months ended March 31 | 2023 | 2022 | ||||
| $ | $ | |||||
| Donald Dinsmore | - | 104,863 | ||||
| Fehr & Associates | 40,231 | - | ||||
| Invictus Accounting Group LLP | 21,033 | 85,075 | ||||
| MDC Forbes Inc. | 30,000 | 25,000 | ||||
| Pipedreemz Inc. | - | 3,001 | ||||
| 91,264 | 217,939 |
As at March 31, 2023 and December 31, 2022, the Company had an outstanding accounts payable balance with related parties as follows:
| March 31, 2023 |
December 31, 2022 |
|||||
| $ | $ | |||||
| Fehr & Associates | 25,000 | - | ||||
| Invictus Accounting Group LLP | 969 | 13,884 | ||||
| MDC Forbes Inc. | 91,838 | 62,427 | ||||
| Michael Forbes | - | 20,000 | ||||
| Pipedreemz Inc. | - | 3,350 | ||||
| 117,807 | 99,661 |
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 and professional fees
Includes CEO services by Michael Forbes, charged to the Company via MDC Forbes Inc., accounting services of the Company's former CFO, Oliver Foeste, charged to the Company via Invictus Accounting Group LLP, and accounting services of the Company's CFO, Lachlan McLeod, charged to the Company via Fehr & Associates.
(b) Wages and salaries
Includes services provided by Donald Dinsmore as former COO.
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION
| Three months ended March 31 | 2023 | 2022 | ||||
| $ | $ | |||||
| Non-cash investing activities | ||||||
| Equipment additions included in accounts payable and accrued liabilities | - | - |
Total income tax paid in the three months ended March 31, 2023 was $nil (2022 - $nil).
| ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 17 - FINANCIAL RISK MANAGEMENT
(a) Capital management
The Company's capital structure consists of all components of shareholders' equity. The Company's objective when managing capital is to maintain adequate levels of funding to support the current operations including corporate and administrative functions and to support operations. The Company obtains funding primarily through issuing common stock and through its mortgage payable. Future financings are dependent on market conditions and there can be no assurance the Company will be able to raise funds in the future.
There were no changes in the Company's approach to capital management during the three months ended March 31, 2023. 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, loan payable and government loan, all of which are classified as and measured at amortized cost.
As at March 31, 2023, the carrying values of cash, trade receivables, deposits and accounts payable and accrued liabilities approximate their fair value because of the short-term nature of these instruments.
(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
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to fulfill its contractual obligations.
The Company is exposed to credit risk through its cash balances held in financial institutions and trade receivables. The maximum exposure to credit risk is equal to the carrying value of such financial assets.
The objective of managing credit risk is to minimize potential losses on financial assets. The Company assesses the quality of its counterparties, taking into account their credit worthiness and reputation, past performance and other factors. The Company has recognized a provision for expected credit losses on its trade receivables.
Cash is only deposited with or held by institutions of high credit worthiness.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities. The Company manages its liquidity risk by reviewing on an ongoing basis its cash position and if required raises funding through additional share capital issuances or debt financing.
As at March 31, 2023, the Company had a cash balance of $1,935,680 and current liabilities of $14,696,794 (December 31, 2022 - $1,013,867 and $12,660,207 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 liabilities carry fixed interest rates and as such, the Company is not exposed to interest rate risk.
| ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 17 - FINANCIAL RISK MANAGEMENT (continued)
(d) 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 three months ended March 31, 2023, three customers represented approximately 82% of the Company's revenue (2022 - two customers representing 93%).
NOTE 18 - COMMITMENTS AND CONTINGENCIES
A summary of undiscounted liabilities and future operating commitments as at March 31, 2023, are as follows:
|
|
Total |
Within 1 year |
2 - 5 years |
|
Maturity analysis of financial liabilities |
$ |
$ |
$ |
|
Accounts payable and accrued liabilities |
10,852,423 |
10,852,423 |
- |
|
Loan payable |
314,555 |
314,555 |
- |
|
Lease liability |
72,507 |
23,205 |
49,302 |
|
Mortgage payable |
3,709,632 |
3,709,632 |
- |
|
Government loan |
60,000 |
- |
60,000 |
|
|
15,009,117 |
14,899,815 |
109,302 |
Contingencies
On March 15, 2023, the Company was served with a civil claim filed in the Supreme Court of British Columbia pursuant to the Class Proceedings Act, R.S.B.C. 1996, c. 50 alleging that the Company's press release of February 22, 2023 misstated certain material facts which mislead the plaintiff in the claim. The suit also names the Company's subsidiary ALI. and the Company's Chief Executive Officer. The Company denies the allegations in the claim and specifically that the press release was misleading. No specific amount of damages is claimed.
NOTE 19 - 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's chief operating decision makers are the Chief Executive Officer and the Chief Financial Officer. They review the operating performance of the Company by two segments comprised of manufacturing and non-manufacuring operations. The manufacturing operations includes the manufacturing, sale and distribution of cannabis related products. The non-manufacturing operations include PerceiveMD. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The chief operating decision makers utilize gross profit as a key measure in making operating decisions and assessing performance. The non-manufacturing segment is immaterial and, accordingly, segmented figures are not presented.
Adastra Holdings Ltd.
(formerly Phyto Extractions Inc.)
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the three months ended March 31, 2023 and 2022
This management's discussion and analysis ("MD&A") of the financial condition and results of operations of Adastra Holdings Ltd., together with its wholly-owned subsidiaries (the "Company" or "Adastra") constitutes management's review of the factors that affected the Company's financial and operating performance for the three months ended March 31, 2023 and 2022. 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 unaudited condensed interim consolidated financial statements for the three months ended March 31, 2023 and 2022, and the audited consolidated financial statements for the years ended December 31, 2022 and 2021 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 IFRS issued by the International Accounting Standards Board and interpretations of the International Financial Reporting Interpretations Committee.
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 30, 2023.
The Company's condensed interim consolidated 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 condensed interim consolidated 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.
FORWARD-LOOKING STATEMENTS
This MD&A contains certain forward-looking information within the meaning of Canadian securities laws (collectively referred to herein as "forward looking statements"). These statements relate to future events or the Company's future performance. All statements other than statements of historical fact are forward-looking statements. 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".
Such forward-looking statements are based on numerous assumptions, including among others, the Company's ability to create long-term value for its shareholders and establish itself as a premier cannabis processing company; the Company's ability to grow market share; the Company's ability to develop new and innovative products, including but not limited to cannabis extracts such as oils, tinctures, sprays, capsules and soft gels; the Company's ability to operate in a cost-efficient manner; the Company's ability to fulfill consumer demand in Canada; the Company's expectations with respect to future increases in product output; the Company's ability to fulfill current and future orders; the Company's expectations with respect to continuing demand for its products; the Company's expectations with respect to the expansion of its line of cannabis products; the Company's ability to achieve positive cash flow from operations; the Company's ability to expand into new provincial and territorial markets; the Company's expectations with respect to maintaining a competitive advantage over competitors; the Company's ability to finance operating costs with current cash on hand and cash flow from operations; the Company's expectations with respect to other economic, business, and/or competitive factors; the Company's expectations with respect to the validity, use and scope of its licences throughout Canada; and the Company's expectations with respect to its regulatory and statutory obligations.
Forward-looking statements are not guarantees of future performance, but are instead based on the reasonable assumptions and estimates of management of the Company at the time they are made and involve known and unknown risks, uncertainties and other factors that may cause actual results and developments to differ materially from those expressed or implied by the forward-looking statements contained in this MD&A. Such factors include, but are not limited to the factors discussed in the section entitled "Risks and Uncertainties" herein.
Forward-looking statements contained herein are made as of the date of this MD&A and, other than as required by law, the Company disclaims any obligation to update publicly or otherwise revise any forward-looking statements or the foregoing list of factors, whether as a result of new information, future events or results or otherwise. Additionally, the Company undertakes no obligation to comment on analysis, expectations or statements made by third parties in respect of its financial/operating results or securities.
There can be 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. Readers are cautioned that the foregoing list of important factors and assumptions is not exhaustive and all forward-looking statements herein are qualified by this cautionary statement. Accordingly, readers should not place undue reliance on forward-looking statements.
The forward-looking statements contained herein are based on information available as of May 30, 2023.
NATURE OF OPERATIONS AND GOING CONCERN
Adastra Holdings Ltd. was incorporated under the laws of the province of British Columbia on October 14, 1987. The Company extracts and processes cannabis for sale to the recreational and medical markets in Canada using its state-of-the-art large scale extraction facility to produce a variety of products including vape pens, wax, resin, infused pre-rolls, diamonds and shatter. The Company is listed on the Canadian Securities Exchange ("CSE") under the symbol "XTRX". The Company's head office is located at 5451 275th Street, Langley City, British Columbia, V4W 3X8 and its registered and records office is located at 900-885 West Georgia Street, Vancouver, British Columbia, V6C 3H1.
On October 19, 2019, the Company, through its wholly owned subsidiary, Chemia Analytics Inc. ("Chemia"), received a licence from Health Canada (the "Analytical Testing Licence") to conduct analytical testing on cannabis at its facility (the "Langley Facility") located at 5451 275th Street, Langley City, British Columbia.
On March 13, 2020, the Company, through its wholly owned subsidiary, Adastra Labs Inc. ("ALI"), received a Standard Processing licence (the "Processing Licence") for the Langley Facility.
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 allows the Company to process over 400 kg per day of dried cannabis into a variety of shatter cannabis products.
On August 10, 2021, the Company acquired all of the issued and outstanding shares of 1225140 B.C. Ltd., doing business as PerceiveMD ("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 therapies.
On September 1, 2021, the Company changed its name to Adastra Holdings Ltd. Trading of the Company's common shares resumed under the new name and under the same ticker symbol "XTRX" on the CSE 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. 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 licences its intellectual property to Canadian cannabis licence holders and collects royalties from the licence holders, from sales of cannabis consumer packaged goods to provincial distributors and retailers.
HIGHLIGHTS
The Company's focus for the three months ended March 31, 2023 included the expansion and increased efficiency of its operations at its centralized processing facility in Langley, BC. As of the date of this MD&A, the Company is focused on generating revenue from four primary verticals: processing cannabis for sale to the recreational and medical markets; service fees for cannabis consultations; educational fees for clients' referral to licenced cannabis producers; and the licensing of cannabis trademarks.
During the three months ended March 31, 2023, the Company had the following breakdown of revenues:
- Cannabis manufacturing revenues
- Cannabis product sales of $9,125,558
- White label manufacturing and tolling revenues of $271,339
- Cannabis consultation fees of $50,247
- Referral revenues of $32,684
- Licensing revenues of $nil
The Company had gross revenue of $9,479,828 for the three months ended March 31, 2023 compared to $2,286,721 for the three months ended March 31, 2022. This represents a 315% increase in gross revenues from the prior year. Excise taxes of $3,708,029 were incurred during the three months ended March 31, 2023 compared to $nil in the comparable period.
The Company achieved a gross profit of $1,672,183 for three months ended March 31, 2023 compared to $827,713 in the comparable period, achieving a growth of 102%. This was achieved by increasing the economies of scale of production as well as managing the costs of inputs of production. Inflation had a minimal impact on the costs of inputs for the Company as these were offset by the Company being able to purchase larger quantities at lower prices per unit. In addition, the Company has continued its transition to increase the sales of higher margin products.
The Company had cash of $1,935,680 at March 31, 2023 compared to $1,013,867 as at December 31, 2022. The Company continues to closely monitor and manage cash.
Working capital deficit as at March 31, 2023 was $3,691,214 compared to $3,665,081 as at December 31, 2022. The working capital includes the $3,500,000 mortgage in both periods, which is expected to be renewed for a longer term and on more favourable conditions.
Operating expenses increased from $1,695,682 in the three months ended March 31, 2022 to $1,881,138 during the three months ended March 31, 2023. This represents an increase in operating expenses of 11% from the comparable period. The Company reduced operating expenses as a percentage of revenues from 74% during the three months ended March 31, 2022 to 20% during the three months ended March 31, 2023. This reduction in operating expenses as a percentage of revenues demonstrates the Company's ability to keep operation costs stable while continuing to grow revenues.
For the three months ended March 31, 2023, the Company had a net loss of $308,626 (2022 - $908,091). The rate in the reduction in the net loss demonstrates that the Company on track to become profitable later in 2023 or early 2024.
On February 14, 2023, the Company announced that it had appointed Lachlan McLeod as the Chief Financial Officer.
On March 15, 2023, the Company announced that it has been served with a civil claim filed in the Supreme Court of British Columbia pursuant to the Class Proceedings Act, R.S.B.C. 1996, c. 50 alleging that the Company's press release of February 22, 2023 (the "Press Release") misstated certain material facts which misled the plaintiff in the claim. The suit also names the Company's subsidiary ALI and the Company's Chief Executive Officer, Mr. Michael Forbes. The Company denies the allegations in the claim and specifically that the Press Release was misleading, and the Company intends to vigorously defend against these allegations should the class action be certified. Currently, no specific amount of damages is claimed.
On March 16, 2023, the Company announced that it has engaged Hybrid Brand Management ("Hybrid") to expand its sales coverage and product sell-through in British Columbia, Alberta, Saskatchewan, Manitoba, and Ontario, with regular in-store activations and staff product education sessions. Hybrid serves approximately 2,800 cannabis retailers in Canada. In addition, the Company announced that during January and February 2023 it has shipped a record volume of 379,343 grams of cannabis products and achieved this result with over 1,300 orders.
Licences
On March 13, 2020, the Company, through its wholly-owned subsidiary, ALI, received a Standard Processing licence (the "Processing Licence") for the Langley Facility authorizing the sale of cannabis extract, cannabis edibles, and cannabis topicals.
On April 16, 2021, the Company received an amendment to its Analytical Testing Licence allowing for organoleptic testing of its products.
In August 2021, the Company submitted a further sales licence amendment for dried flower and a controlled substance dealer's licence for cannabis products. On December 16, 2021 the Company received its Flower Sales Licence from Health Canada ("Flower Licence"), that permits the Company to sell dried cannabis flower products provincially and territorially in Canada.
On August 12, 2022, the Company received its medical sales licence (the "Medical Sales Licence") that permits the Company to sell cannabis extracts to medical cannabis patients and licenced health practitioners and to develop products classed as cannabis extracts such as tinctures, oils, capsules, soft gels and sprays.
On August 24, 2022, the Company received its Controlled Substances Dealer's Licence (the "Dealer's Licence") which allows the Company to procure and process controlled substances, including synthesis, propagation, cultivation, and harvesting of psychedelic mushrooms for Psilocybin extraction, research and manufacture controlled substances such as Psilocybin and business-to-business sale of controlled substances, including by export. The Dealer's License does not permit the Company to sell controlled substances to the public. For such substances, the Company is only permitted to sell to other licensed dealers who have such substances listed on their license including pharmacists, practitioners, hospitals, or the holder of a Section 56(1) exemption for research purposes under the Controlled Drugs and Substances Act (CDSA).
On February 22 and March 3, 2023, the Company announced that its wholly-owned subsidiary, ALI, received approval from Health Canada on February 17, 2023, for its amendment of the Dealer's License to include the following regulated activities: possession, production, assembling, sale/provision and sending, transportation and delivery of coca leaf, cocaine, and psilocybin. ALI may only produce 1,000 grams of psilocybin and 250 grams of cocaine in 2023. The Dealer's Licence does not permit ALI to sell such controlled substances to the general public. Under the Dealer's Licence, ALI is only permitted to sell to other licenced dealers who have such substances listed on their licence including pharmacists, practitioners, hospitals or the holder of a section 56(1) exemption for research purposes under the CDSA.
The Company is not currently undertaking any activities with psilocybin, cocaine, or coca leaf under the Dealer's Licence, including selling to other licenced dealers, business-to-business sale, or export, and does not intend to undertake any activities relating to controlled substances for the foreseeable future. As such, the Company has no plan to use or rely upon the Dealer's Licence as at the date of this MD&A. At this time, and for the foreseeable future, the Company solely intends to pursue its cannabis extracts business. As such the Company expects the capital resource requirements to pursue psilocybin, cocaine or coca leaf to be immaterial as of the date of the MD&A.
Below is a chart containing all of the Company's current licences, the activities permitted under each licence, any restrictions on the use of each licence, and expiry dates:
|
Licence |
Permitted Activities |
Restrictions |
Expiry Date |
|
Standard Processing (Health Canada Licence No. LIC-SRIM66H586-2023) |
|
|
February 16, 2028 |
|
Sale for Medical Purposes (Health Canada Licence No. LIC-SRIM66H586-2023) |
|
N/A |
February 16, 2028 |
|
Analytical Testing (Health Canada Licence No. LIC-WOUX7802CE-2022)
[issued to Chemia Analytics Inc.] |
|
|
August 24, 2027 |
|
Research (Health Canada Licence No. LIC-ZIDPSA6BYY-2021-2) |
|
|
April 16, 2026 |
|
Dealer's Licence (Health Canada Licence No. 6-1360) |
|
|
July 31, 2023 |
ACQUISITION OF PERCEIVEMD
On August 10, 2021, the Company acquired all of the issued and outstanding shares of PerceiveMD. PerceiveMD is a multidisciplinary, patient-focused center providing comprehensive assessments for medical cannabis and other therapies. The acquisition allows the Company to generate revenue from providing cannabis under medical prescriptions. 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. The transaction was 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 |
The carrying value of the assets and liabilities acquired equates to fair value due to their short-term nature, other than patient relationships ("Patient Relationships") which are amortized over their estimated useful economic lives. The fair value of Patient Relationships was determined using the discounted cash flow method considering the future cashflows expected to be received from patients, adjusted to reflect attrition. The key assumptions used in the cash flow projection related to Patient Relationships include: a discount rate of 16%; patient attrition rate of 20%; number of patients of 3,492 at the acquisition date; annual spending of $143 per patient, assumed growth at a long-term annual rate of 2%.
The Company's acquisition of PerceiveMD constituted a related party transaction as Michael Forbes, Chief Executive Officer and a director of the Company was also a director and controlling shareholder of PerceiveMD.
The goodwill generated as a result of this acquisition relates to other intangible assets that do not qualify for separate recognition. The two companies have operating synergies that can be leveraged subsequent to the acquisition by allowing the Company to sell manufactured products directly to clinical patients, increasing margins of both companies.
During the year ended December 31, 2022, the Company impaired the goodwill of PerceiveMD by $1,672,233 due to delays in the Company's ability to realize business synergies.
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. Phyto BrandCo licenses its intellectual property to Canadian cannabis license holders and collects royalties from the license holders, from sales of cannabis consumer packaged goods to provincial distributors and retailers. 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 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.
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 |
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.
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: a discount rate of 12.5%; royalty rate of 10.0% for the remaining period of the licensing agreement and 2.0% thereafter, and 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 Company believes that by acquiring Phyto BrandCo, certain synergies related to marketing, distribution networks, and brand loyalty can be leveraged.
SELECTED QUARTERLY INFORMATION
Results of Operations
| Q1 2023 | Q1 2022 | |||||
| $ | $ | |||||
| Revenue | 9,479,828 | 2,286,721 | ||||
| Excise taxes | (3,708,029 | ) | - | |||
| Cost of sales | (4,099,616 | ) | (1,459,008 | ) | ||
| Gross profit | 1,672,183 | 827,713 | ||||
| Operating expenses | (1,881,138 | ) | (1,695,682 | ) | ||
| Net loss and comprehensive loss | (308,626 | ) | (908,091 | ) |
The three months ended March 31, 2023 ("Q1 2023") compared to the three months ended March 31, 2022 ("Q1 2022")
Revenues increased to $9,479,828 during Q1 2023, compared to $2,286,721 during Q1 2022, due to revenue from a range of provincial distributors which were only beginning to come online in early 2022. These sales augmented the existing revenue from the processing of cannabis biomass for third-party licenced producers, in-house distillate production, hydrocarbon extraction, licensing revenues from the acquisition of Phyto BrandCo, and MSP remittance and referral revenue from the acquisition of PerceiveMD.
Excise taxes of $3,708,029 are included in total sales in Q1 2023 compared to $nil in Q1 2022. In the comparable period, the Company only had sales which did not require excise taxes to be charged. In Q1 2023, the Company is now selling to distributors and retailers which require excise stamps to be used on the sale.
Cost of sales increased to $4,099,616 during Q1 2023, compared to $1,459,008 during Q1 2022, as a result of increased sales. Cost of sales consists of biomass, terpenes, packaging, production labour, solvents and an allocation of production overheads such as facility costs and depreciation of production equipment.
During Q1 2023, the Company had operating expenses of $1,881,138 and a net loss and comprehensive loss of $308,626, compared to operating expenses of $1,695,682 and net loss and comprehensive loss of $908,091 during Q1 2022.
The decrease in operating expenses and net loss and comprehensive loss were the result of the Company's expansion during the period. The most significant changes in operating expenses and other expenses were as follows:
- Advertising and promotion increased to $342,875 during Q1 2023, compared to $288,666 during Q1 2022, as the Company raised awareness of its operational successes and incurred costs by the sales team as it expanded its reach to more provincial distributors.
- Data program expenses increased to $205,173 during Q1 2023, compared to $140,082 during Q1 2022, as the Company incurred higher costs for programs that share sales data from stores across Canada to help manage the Company's product mix.
- Depreciation and amortization charged to operating expenses decreased to $127,863 during Q1 2023, compared to $147,328 during Q1 2022, due to the Company using the declining balance method of amortization for a portion of the fixed asset.
- Office expenses increased to $274,659 during Q1 2023, compared to $156,023 during Q1 2022 due to additional costs in relation to computer, internet, utilities, meals and entertainment as well as equipment and vehicle rentals.
- Professional fees and consulting expenses increased to $292,778 during Q1 2023, compared to $241,640 during Q1 2022 due to an increase in legal expenses related to increased licencing compliance and the defense relate to the ongoing class action lawsuit.
- Repairs and maintenance expenses were $74,447 during Q1 2023 compared to $39,501 in Q1 2022. These costs are related to refrigeration suppliers, mechanical services, and other maintenance services. These costs are mainly based on timing of maintenance being performed.
- Wages and salaries decreased to $493,576 during Q1 2023, compared to $640,278 during Q1 2022, due to the Company allocating a higher amount of wages and salaries to cost of goods sold. During Q1 2023, more staff are directly related to manufacturing and indirectly related to production than in the comparable period.
During the three months ended December 31, 2022, the Company included the following in other expenses:
- Interest expense increased to $115,671 in Q1 2023, compared to $68,122 in Q1 2022. This increase is mainly due a raise in interest rates of the Company's mortgage.
SUMMARY OF QUARTERLY RESULTS
The following table shows results from the previous eight fiscal quarters:
|
Period ended |
Revenue, net |
Net (loss) |
Weighted |
Basic and |
|
|
$ |
$ |
# |
$ |
|
March 31, 2023 |
5,771,799 |
(308,626) |
55,970,547 |
(0.01) |
|
December 31, 2022 |
4,153,016 |
(2,679,924) |
55,970,547 |
(0.05) |
|
September 30, 2022 |
3,803,787 |
(459,265) |
55,970,547 |
(0.01) |
|
June 30, 2022 |
3,051,554 |
(478,136) |
59,081,658 |
(0.01) |
|
March 31, 2022 |
2,286,721 |
(664,314) |
65,970,547 |
(0.01) |
|
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 |
(0.00) |
|
June 30, 2021 |
1,241,763 |
(509,890) |
43,334,100 |
(0.01) |
The Company's revenue net of excise taxes in Q1 2023 increased by $1,618,783 as compared to Q4 2022. The 39% increase in sales from the previous quarter was due to the Company continuing to focus on reducing the amount of time of packaging and shipping products to increase the amount of inventory turnover in the facility.
The Company's revenue in Q4 2022 increased by $349,229 as compared to Q3 2022. The 9% increase in sales from the previous quarter was due to the Company increasing the flowthrough of shipments being delivered out of the facility. The Company expects revenues to continue to increase in future quarters and the Company pushes to increase inventory turnover and production rates. The comprehensive loss increased $2,220,659 from Q3 2022 due to the loss on the termination of the Phyto license agreement and the impairment of the PerceiveMD goodwill. This was offset by increased sales and gross profits as compared to Q3 2022.
The Company's revenue and net loss and comprehensive loss in Q3 2022 were $3,803,787 and $459,265, respectively. The increase of revenues and movement in net loss and comprehensive loss are driven by factors noted in Results of Operations.
The Company's revenue and net loss and comprehensive loss in Q2 2022 were $3,051,554 and $478,136, respectively. The increase of revenues was driven by significant revenue from a range of provincial distributors which were not present in Q1 2022. The decrease in net loss was caused by the higher revenue and thus higher gross profit which more than offset any rise in operating expenses form the growth.
During Q1 2022, the increase of revenues to $2,286,721 was driven primarily by the licensing revenue in Phyto BrandCo and increased processing services of cannabis biomass for third-party licenced producers. The decrease in operating expenses was due to a reduction in share-based compensation as a significant number options and warrants were issued during Q4 2021 and share-based compensation related to these equity instruments was fully recognized during that period.
The Company's net loss and comprehensive loss for Q4 2021, was $1,668,673. The increase of revenues to $1,989,604 was driven primarily 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 vested immediately.
The Company's net loss and comprehensive loss for Q3 2021, was $207,864. The increase of revenues to $1,808,111 were driven by the expansion of operations at the Langley Facility resulting in increased production and sales.
The Company's net loss and comprehensive loss for Q2 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.
LIQUIDITY AND CAPITAL RESOURCES
Capital resource management
The Company's capital structure consists of all components of shareholders' equity. The Company's objective when managing capital is to maintain adequate levels of funding to support the current operations including corporate and administrative functions and to support operations. The Company obtains funding primarily through issuing common stock and through its mortgage payable. Future financings are dependent on market conditions and there can be no assurance the Company will be able to raise funds in the future.
There were no changes in the Company's approach to capital management during the three months ended March 31, 2023. The Company is not subject to externally imposed capital requirements.
Cash and working capital
As at March 31, 2023, the Company had a working capital deficit of $3,691,214 (December 31, 2022 - $3,665,081).
As at March 31, 2023, the Company had a current mortgage payable liability of $3,512,176 (December 31, 2022 - $3,507,389). The fifth mortgage has a maturity date of November 1, 2023 and is secured by the mortgage property and building improvements. The mortgage bears interest at the greater of 9.75% or the prime rate plus 4.30% per annum, calculated monthly. The Company expects to renew the mortgage on more favourable terms. If the Company is able to secure a long-term mortgage, the working capital of the Company will significantly improve. Also, the Company is considering applying for a line of credit to assist with the Company's growth and ensure the Company has enough liquidity in the purchasing of inputs of production.
As at March 31, 2023, the Company has no working capital requirements.
Cash flow activity
| Q1 2023 | Q1 2022 | |||||
| $ | $ | |||||
| Cash provided by operating activities | 1,500,068 | 103,722 | ||||
| Cash used in investing activities | (476,650 | ) | (16,649 | ) | ||
| Cash used in financing activities | (101,605 | ) | (41,273 | ) | ||
| Net increase in cash | 921,813 | 45,800 | ||||
| Cash, beginning of period | 1,013,867 | 744,541 | ||||
| Cash, end of period | 1,935,680 | 790,341 |
Cash provided by operating activities of $1,500,068 during the three months ended March 31, 2023 (2022 - $103,722) was the result of operating losses as noted in Results of Operations which were more than offset by working capital movements such as the increase in accounts payable and accrued liabilities as the Company expands. During Q1 2023, the cash provided by operating activities was the result of account payable increasing, offset by increased accounts receivable, inventory, prepaids.
Cash used in investing activities of $476,650 during the three months ended March 31, 2023 (2022 - $16,649) was the result of cash payments for the purchase of property and equipment which was included in additions during Q1 2023 but also additions that were included in accounts payable at December 31, 2022 and were paid for during Q1 2023.
Cash used in financing activities of $101,605 during the three months ended March 31, 2023 (2022 - $41,273) was the result of interest paid on the mortgage payable and payments on the lease liability.
Commitments and contingencies
A summary of undiscounted liabilities and future operating commitments as at March 31, 2023, are as follows:
|
|
Total |
Within 1 year |
2 - 5 years |
|
Maturity analysis of financial liabilities |
$ |
$ |
$ |
|
Accounts payable and accrued liabilities |
10,852,423 |
10,852,423 |
- |
|
Loan payable |
314,555 |
314,555 |
- |
|
Lease liability |
72,507 |
23,205 |
49,302 |
|
Mortgage payable |
3,709,632 |
3,709,632 |
- |
|
Government loan |
60,000 |
- |
60,000 |
|
|
15,009,117 |
14,899,815 |
109,302 |
Contingencies
On March 15, 2023, the Company was served with a civil claim filed in the Supreme Court of British Columbia pursuant to the Class Proceedings Act, R.S.B.C. 1996, c. 50 alleging that the Company's press release of February 22, 2023 misstated certain material facts which mislead the plaintiff in the claim. The suit also names the Company's subsidiary ALI. and the Company's Chief Executive Officer. The Company denies the allegations in the claim and specifically that the press release was misleading. No specific amount of damages is claimed.
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no off-balance sheet arrangements that are not disclosed above as at March 31, 2023, and as at the date of this MD&A.
TRANSACTIONS BETWEEN RELATED PARTIES
Key management personnel are those who have 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 at March 31, 2023 and December 31, 2022.
During the three months ended March 31, 2023, no options were granted to Officers and Directors (2022 - nil).
The following related parties transacted with the Company or Company-controlled entities during the three months ended March 31, 2023 and the year ended December 31, 2022:
(i) George Routhier was a Director. He is the owner of Pipedreemz Inc., which provides advisory services to the Company. He resigned on June 23, 2022.
(ii) 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.
(iii) Donald Dinsmore was a Director and the Company's COO. He was appointed on April 29, 2021 and left the Company on March 24, 2022.
(iv) Oliver Foeste was the Company's CFO until January 1, 2023. He is the Managing Partner of Invictus Accounting Group LLP which provides the Company with CFO, accounting and tax services.
(v) Paul Morgan is a Director of the Company. He was appointed on July 14, 2021.
(vi) Smoke Wallin is a Director of the Company. He was appointed on May 16, 2022.
(vii) Lachlan McLeod was appointed CFO of the Company on January 1, 2023 and is an employee of Fehr & Associates CPA, which provides accounting services to the Company.
The aggregate value of transactions, excluding share-based payments, with key management personnel and directors and entities over which they have control or significant influence during the three months ended March 31, 2023 and 2022 were as follows:
| Three months ended March 31 | 2023 | 2022 | ||||
| $ | $ | |||||
| Donald Dinsmore | - | 104,863 | ||||
| Fehr & Associates | 40,231 | - | ||||
| Invictus Accounting Group LLP | 21,033 | 85,075 | ||||
| MDC Forbes Inc. | 30,000 | 25,000 | ||||
| Pipedreemz Inc. | - | 3,001 | ||||
| 91,264 | 217,939 |
As at March 31, 2023 and December 31, 2022, the Company had an outstanding accounts payable balance with related parties as follows:
| March 31, 2023 |
December 31, 2022 |
|||||
| $ | $ | |||||
| Fehr & Associates | 25,000 | - | ||||
| Invictus Accounting Group LLP | 969 | 13,884 | ||||
| MDC Forbes Inc. | 91,838 | 62,427 | ||||
| Michael Forbes | - | 20,000 | ||||
| Pipedreemz Inc. | - | 3,350 | ||||
| 117,807 | 99,661 |
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 and professional fees
Includes CEO services by Michael Forbes, charged to the Company via MDC Forbes Inc., accounting services of the Company's former CFO, Oliver Foeste, charged to the Company via Invictus Accounting Group LLP, and accounting services of the Company's CFO, Lachlan McLeod, charged to the Company via Fehr & Associates.
(b) Wages and salaries
Includes services provided by Donald Dinsmore as former COO.
PROPOSED TRANSACTIONS
As at March 31, 2023, the Company had no proposed transactions.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the condensed interim consolidated 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
The condensed interim 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 was not appropriate for the consolidated financial statements, adjustments to the carrying value of assets and liabilities, the reported expenses and the condensed interim consolidated statement of financial position would be necessary. Such adjustments would be material.
Impairment of property and equipment
Property and equipment are reviewed for indicators of 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.
The information about significant areas of estimation uncertainty considered by management in preparing the condensed interim consolidated 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 the condensed interim consolidated 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, government regulations, and economic trends.
The weighted average costing method uses estimates in the allocation of direct and indirect inputs in the production of multiple product categories. These estimated allocations could be impacted by variations in manufacturing yields in production.
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 and intangible asset impairment
Management uses estimates in determining the recoverable amount of intangible assets and goodwill. The determination of the recoverable amount for the purpose of impairment testing requires the use of significant estimates, such as:
- future cash flows;
- terminal growth rates; and
- discount rates.
Management regularly evaluates these estimates and assumptions. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
Judgment is also applied in choosing methods of amortizing intangible assets that management believes most accurately represent the consumption of those assets and are most representative of the economic substance of the intended use of the underlying assets. A change in the estimate would result in a change in the amount of amortization and, as a result, a charge to net loss recorded in the period in which the change occurs, with a similar change in the carrying value of the asset in the condensed interim consolidated statement of financial position.
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.
Valuation of share-based payments
The Company uses the Black-Scholes option pricing model for valuation of share-based payments. 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 expenses and reserves.
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 April 1, 2023. 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.
Amendments to IAS 1 - Presentation of Financial Statements
In October 2022, the IASB issued amendments to IAS 1, Presentation of Financial Statements titled Non-current liabilities with covenants. These amendments sought to improve the information that an entity provides when its right to defer settlement of a liability is subject to compliance with covenants within 12 months after the reporting period. These amendments to IAS 1 override but incorporate the previous amendments, Classification of liabilities as current or non-current, issued in January 2020, which clarified that liabilities are classified as either current or non-current, depending on the rights that exist at the end of the reporting period. Liabilities should be classified as non-current if a company has a substantive right to defer settlement for at least 12 months at the end of the reporting period. The amendments are effective January 1, 2024, with early adoption permitted. Retrospective application is required on adoption. We do not expect these amendments to have a material effect on our financial statements.
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, loan payable and government loan, all of which are classified as and measured at amortized cost.
As at March 31, 2023, the carrying values of cash, trade receivables, deposits and accounts payable and accrued liabilities approximate their fair value because of the short-term nature of these instruments.
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
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to fulfill its contractual obligations.
The Company is exposed to credit risk through its cash balances held in financial institutions and trade receivables. The maximum exposure to credit risk is equal to the carrying value of such financial assets.
The objective of managing credit risk is to minimize potential losses on financial assets. The Company assesses the quality of its counterparties, taking into account their credit worthiness and reputation, past performance and other factors. The Company has recognized a provision for expected credit losses on its trade receivables.
Cash is only deposited with or held by institutions of high credit worthiness.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities. The Company manages its liquidity risk by reviewing on an ongoing basis its cash position and if required raises funding through additional share capital issuances or debt financing.
As at March 31, 2023, the Company had a cash balance of $1,935,680 and current liabilities of $14,696,794 (December 31, 2022 - $1,013,867 and $12,660,207 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 liabilities carry fixed interest rates and as such, the Company is not exposed to interest rate 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 three months ended March 31, 2023, three customers represented approximately 82% of the Company's revenue (2022 - two customers representing 93%).
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 March 31, 2023 and the date of this MD&A:
| March 31, 2023 |
Date of this MD&A |
|||||
| # | # | |||||
| Common shares | 55,970,547 | 55,970,547 | ||||
| Stock options | 3,665,000 | 3,665,000 | ||||
| Warrants | 122,727 | 122,727 | ||||
| Fully diluted securities | 59,758,274 | 59,758,274 |
During the year ended December 31, 2022, the Company had the following share transactions:
a) On April 29, 2022, 10,000,000 common shares related to the amended agreement between the Company and former owners of Phyto BrandCo were returned to treasury and cancelled for no consideration.
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 industry in which the Company operates requires compliance with federal, provincial, and local laws and regulations, which could include, among others, laws and regulations relating to cannabis, controlled substances, personally identifiable information, wage and hour restrictions, health and safety matters, consumer protection and environmental matters. The Company's business objectives are contingent upon, in part, compliance with regulatory requirements enacted by these governmental authorities and regulatory bodies and obtaining all regulatory approvals, where necessary, for the delivery of its services and the services delivered by those regulated professionals within its network. The Company cannot predict the time required to secure all appropriate regulatory approvals for such services. Compliance with such laws and regulations may be costly and a failure to comply with such laws and regulations could result in fines, penalties, litigation and other liability that could materially adversely affect the Company.
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 Company's ability to conduct its business, including the development of new or existing markets and products. The Company has little or no control over potential changes to laws or regulations that may affect its business. Changes in applicable laws and regulations are unpredictable and could have a material adverse effect on the business, results of operations and financial condition of the Company.
Additionally, governmental regulations affect taxes and levies, healthcare costs, energy usage and labor issues, all of which may have a direct or indirect effect on the Company's business and its clients or suppliers. Changes in these laws or regulations, or the introduction of new laws or regulations, could increase the costs of doing business for the Company, or its customers or suppliers, or restrict the Company' actions, causing the Company to be materially adversely affected.
Laws, regulations and guidelines relating to controlled substances
The Company is not currently undertaking any activities involving controlled substances, nor does it intend to undertake any activities regarding controlled substances at this time. However, as a holder of a Controlled Substance Dealer's Licence issued by Health Canada, the Company is subject to regulatory and statutory obligations relating to controlled substances. The Controlled Drugs and Substances Act is Canada's federal drug control statute. Controlled substances are categorized into eight Schedules based upon their perceived danger. Schedule 1 substances, including cocaine and coca leaves, are deemed to have the highest potential for abuse and carry the most severe penalties for violations - the severity of the penalties decreases for subsequent scheduled substances. Most psychedelics are Schedule 3 substances, including psilocybin. The CDSA generally prohibits all uses of controlled substances unless an exemption is granted under Section 56 of the CDSA or the regulations allow otherwise, including through a clinical trial. The Canadian Minister of Health can grant exemptions under Section 56 of the CDSA to use controlled substances if it is deemed to be necessary for a medical or scientific purpose or is otherwise in the public interest.
Despite the general prohibition on controlled substances, the Food and Drug Regulations and Narcotics Control Regulations allows authorized persons to obtain a dealer's licence to possess, produce, sell, import/export, and transport certain controlled substances. These regulations contain strict requirements as to the handling of controlled substances, including where the controlled substance is stored and processed, who has access to the controlled substance, who may purchase or receive the controlled substance, and the types of activities that may be performed using the controlled substance. These regulations provide a framework for expanding and monitoring the legal use of controlled substances in Canada as well as, importantly, issuing licences to dealers such as the Company's Dealer's Licence. However, amendments to current laws and regulations governing the importation, distribution, transportation and/or production of controlled substances, or more stringent implementation thereof could have a substantial adverse impact on the Company. Local, provincial, and federal laws and enforcement policies concerning controlled substances are changing rapidly and will continue to do so for the foreseeable future.
Should the Company choose to engage in permitted activities as authorized by its Dealer's Licence at a later date, the Company's operations will be required to be conducted in strict compliance with the laws and regulations regarding its activities with controlled substances. The Company does not have any direct or indirect involvement with the illegal selling, production or distribution of any substances in the jurisdictions in which it operates and does not intend to have any such involvement at this time. However, a violation of any applicable laws and regulations, such as the CDSA, could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings initiated by the government entities in the jurisdictions in which the Company operates, private citizens or criminal charges. Any such violations could have a material adverse effect on the business, results of operations and financial condition of the Company.
Reliance on licences
The Company's ability to produce and sell cannabis products in Canada is dependent on maintaining its licences with Health Canada. All of the Company's licences are, or will be, subject to ongoing compliance and reporting requirements. Failure to comply with the requirements of the licences, to maintain its licences, and to renew the licences after their expiry dates would have a material adverse impact on the business, financial condition and operating results of the Company.
If the Company opts to pursue commercialization strategies involving the permitted activities pursuant to its Dealer's Licence, the Company's ability to engage in such permitted activities will depend on maintaining its Dealer's Licence with Health Canada. Failure to comply with the requirements of the licence, to maintain its licence, and to renew the licence after its expiry date may have a material adverse impact on the business, financial condition and operating results of the Company.
Should Health Canada not extend or renew existing licences, renew existing licences on different terms, or refuse applications for new licences, the business, financial condition and operating results of the Company would be materially adversely affected.
Fluctuating Prices of Raw Materials
The Company's revenues are largely derived from the production, sale and distribution of agricultural products or products related to the growth of such agricultural products. The price of production, sale and distribution of these products will fluctuate widely and is affected by numerous factors beyond the Company's control, including international, economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates, global or regional consumptive patterns, speculative activities and increased production due to new production and distribution developments and improved production and distribution methods. The effect of these factors on the price of the Company's products and, therefore, the economic viability of any of the Company's business, cannot accurately be predicted.
In addition, the current economic environment may result in significant inflationary pressures for the price of the Company's inputs and labour, which could have a material effect on the Company's business, financial condition or results of operations. The Company may not be able to fully offset such higher costs through price increases. The Company's inability or failure to do so could harm its business, financial condition and results of operations.
Industry volatility
The cannabis industry and businesses ancillary to and directly involved with cannabis businesses are undergoing rapid growth and substantial change, which has resulted in an increase in competitors, consolidation and formation of strategic relationships. Acquisitions or other consolidating transactions could harm the Company in a number of ways, including by losing strategic partners if they are acquired by or enter into relationships with a competitor, losing customers, revenue and market share, or forcing the Company to expend greater resources to meet new or additional competitive threats, all of which could harm the Company's operating results. As competitors enter the market and become increasingly sophisticated, competition in the Company's industry may intensify and place downward pressure on retail prices for its products and services, which could negatively impact its profitability.
Although the Company currently has no intention of pursuing any activities under its Dealer's License, should the Company choose to engage in permitted activities as authorized by its Dealer's Licence in the future, the Company may face challenges related to the relatively new and rapidly evolving commercial environment relating to controlled substances, including managing a complex and highly regulated supply chain, developing and scaling operations, attracting and retaining talent necessary to perform the permitted activities under the conditions imposed by the Dealer's Licence and other regulatory restrictions, and the public perception of controlled substances. Since the industry for controlled substances is still in a very early stage in Canada, there are significant risks that any expenditures in developing a business that relies in part on commercialization of its Dealer's Licence will not result in profitable operations.
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.
Ongoing costs and obligations
The Company's efforts to grow its business may be costlier than the Company expects, and the Company may not be able to increase its revenue enough to offset its higher operating expenses. The Company may incur significant losses in the future for a number of reasons and unforeseen expenses, difficulties, complications and delays, and other unknown events. If the Company is unable to achieve and sustain profitability, the market price of the common shares may significantly decrease.
Competition
The cannabis 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 cannabis products 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.
Proprietary and intellectual property rights
The Company's ability to compete may depend on the superiority, uniqueness and value of any intellectual property and technology that it may develop. To the extent the Company is able to do so, to protect any proprietary rights of the Company, the Company intends to rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with its employees and third parties, and protective contractual provisions. Despite these efforts, any of the following occurrences may reduce the value of any of the Company's intellectual property:
- Patents in the cannabis industry involve complex legal and scientific questions, and patent protection may not be available for some or any products; the Company's applications for trademarks and copyrights relating to its business may not be granted, and, if granted, may be challenged or invalidated;
- Issued patents, trademarks and registered copyrights may not provide the Company with competitive advantages; the Company's efforts to protect its intellectual property rights may not be effective in preventing misappropriation of any of its products or intellectual property;
- The Company's efforts may not prevent the development and design by others of products or marketing strategies similar to or competitive with or superior to those the Company develops;
- Another party may assert a blocking patent and the Company would need to either obtain a licence or design around the patent in order to continue to offer the contested feature or service in its products; or
- The expiration of patent or other intellectual property protections for any assets owned by the Company could result in significant competition, potentially at any time and without notice, resulting in a significant reduction in sales. The effect of the loss of these protections on the Company and its financial results will depend, among other things, upon the nature of the market and the position of the Company's products in the market from time to time, the growth of the market, the complexities and economics of manufacturing a competitive product, and regulatory approval requirements, but the impact could be material and adverse
Key personnel
If the Company is unable to attract and retain key personnel, it may not be able to compete effectively in the market. The Company's success has depended and continues to depend upon its ability to attract and retain key management, including the Company's CEO, CFO and technical experts. The Company will attempt to enhance its management and technical expertise by continuing to recruit qualified individuals who possess desired skills and experience in certain targeted areas. The Company's inability to retain employees and attract and retain sufficient additional employees or engineering and technical support resources could have a material adverse effect on the Company's business, results of operations, sales, cash flow or financial condition. Shortages in qualified personnel or the loss of key personnel could adversely affect the financial condition of the Company, results of operations of the business, and could limit the Company's ability to develop and market its products. The loss of any of the Company's senior management or key employees could materially adversely affect the Company's ability to execute the Company's business plan and strategy, and the Company may not be able to find adequate replacements on a timely basis, or at all. The Company does not maintain key person life insurance policies on any of the Company's employees.
Product liability
As a processor and distributor of products designed to be ingested by humans, the Company faces an inherent risk of exposure to product liability claims, regulatory action, and litigation if its products are alleged to have caused significant loss or injury. Previously unknown adverse reactions resulting from human consumption of cannabis or other products alone or in combination with other medications or substances could occur. As a processor and distributor and of such products or in its role as an investor in or service provider to an entity that is a manufacturer, distributor and/or retailer of adult-use of such products, the Company may be subject to various product liability claims, including, among others, that the product caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.
A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect the Company's reputation with its clients and consumers generally, and could have a material adverse effect on the business, results of operations, financial condition or prospects of the Company. There can be no assurances that the Company will be able to maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of the Company's potential products or otherwise have a material adverse effect on the business, results of operations, financial condition or prospects of the Company.
Reputational risk and negative public opinion
Damage to the Company's reputation can result from the actual or perceived occurrence of any number of events, including any negative publicity, whether true or not. As a distributor of cannabis, which was previously a controlled substance in Canada, and as a holder of a Dealer's Licence permitting certain activities relating to substances currently classified as controlled substances, there is a risk that the Company's business may attract negative publicity due to association of such products or substances with violence and criminal activities. There is also a risk that the actions of other licence holders, permitted retailers or other companies and service providers in the cannabis industry or entities authorized to deal with controlled substances, including those in the cannabis industry with whom the Company has or will enter into agreements with, may negatively affect the reputation of the industry as a whole and thereby negatively impact the Company's reputation.
The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share negative opinions and views in regard to the Company's activities and the industry in general, whether true or not. The Company does not ultimately have direct control over how the Company, the cannabis industry, or the controlled substance licensing regime is perceived by others. Reputational issues may result in decreased investor confidence, increased challenges in developing and maintaining community relations and present an impediment to the Company's overall ability to advance its business strategy and realize on its growth prospects, which could have a material adverse effect on the Company's business, financial condition or results of operations.
Litigation
The Company may become subject to litigation, including for possible product liability claims, which may have a material adverse effect on the Company's reputation, business, results from operations and financial condition. The Company may be named as a defendant in a lawsuit or regulatory action. The Company may also incur uninsured losses for liabilities, which arise in the ordinary course of business, or which are unforeseen, including, but not limited to, employment liability and business loss claims. Any such losses could have a material adverse effect on the Company's business, results of operations, sales, cash flow or financial condition.
COVID-19 pandemic
The COVID-19 outbreak, and related government restrictions, continues to cause business disruptions across the entire global economy and society including impacts on certain supply chains, and cost of supplies and labour. 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 required. 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 longer-term adverse effects that the pandemic may have on the Company's business or ability to raise funds. As of the date of this MD&A, 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.
Form 52-109FV2
Certification of Interim Filings
Venture Issuer Basic Certificate
I, Michael Forbes, Chief Executive Officer of Adastra Holdings Ltd., certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of Adastra Holdings Ltd. (the "issuer") for the interim period ended March 31, 2023.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
Date: May 30, 2023
"Michael Forbes"
Michael Forbes
Chief Executive Officer
NOTE TO READER
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
i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim 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
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.
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 interim and annual filings and other reports provided under securities legislation.
Form 52-109FV2
Certification of Interim Filings
Venture Issuer Basic Certificate
I, Lachlan McLeod, Chief Financial Officer of Adastra Holdings Ltd., certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the "interim filings") of Adastra Holdings Ltd. (the "issuer") for the interim period ended March 31, 2023.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
Date: May 30, 2023
"Lachlan McLeod"
Lachlan McLeod
Chief Financial Officer
NOTE TO READER
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
i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim 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
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.
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 interim and annual filings and other reports provided under securities legislation.
ADASTRA HOLDINGS REPORTS FIRST QUARTER RESULTS; DEMONSTRATING RECORD
QUARTERLY GROSS REVENUES OF $9.5M
- Record Q1 2023 gross revenues of $9.5M, increase of 315% from Q1 2022
- Record Q1 2023 cash provided by operations of $1.5M, compared to $104K in Q1 2022
- Q1 2023 gross profit of $1.7M, increase of 102% from Q1 2022
LANGLEY, BC / ACCESSWIRE / May 30, 2023/ Adastra Holdings Ltd. (CSE: XTRX) (FRA: D2EP) ("Adastra" or the "Company"), a leading cannabis processor and producer of two top Canadian concentrates brands, with a focus on product innovation and commercialization for adult-use and medical markets, is pleased to report financial results for the three months ended March 31, 2023.
"Our triple-digit revenue growth from Q1 2022 as compared to Q1 2023 is a testament to the robust market demand for our exceptional products and our strong presence across Canada," said Michael Forbes, Chief Executive Officer. "Our ownership of both the legendary legacy brand, Phyto Extractions, and the dynamic in-house brand, Endgame Extracts, has solidified our position in the Canadian concentrate market with numerous top-selling products."
"I am immensely proud of our team's innovative mindset and unwavering dedication, which have been instrumental in our accomplishments. Their hard work and creativity have been the driving force behind our remarkable results," added Forbes. "Together, we are poised to continue pushing boundaries and fueling future growth, all with the ultimate goal of creating long-term value for our customers, partners, and shareholders."
Key Q1 2023 Financial Highlights
● Gross revenues of $9.5M in Q1 2023, compared to $2.3M in Q1 2022, representing an increase of 315%, demonstrating strong demand for Adastra's cannabis concentrate brands and products.
● Gross revenues experienced a 39% increase from Q4 2022 to Q1 2023.
● Operating expenses as a percentage of gross revenues decreased from 74% in Q1 2022 to 20% in Q1 2023.
● Q1 2023 cash position increased to $1.9M from operations, an increase of $922K from Q4 2022.
● Inventory levels increased to $4.3M at March 31, 2023, due to the recent buyback of Phyto Extractions inventory. These elevated inventory levels are expected to translate to revenue in future periods.
● Operating expenses increased only 11% from $1.7M during Q1 2022 to $1.9M during Q1 2023 which reflects the Company's ability to maintain consistent operation costs while experiencing triple digit revenue growth.
Key Q1 2023 Corporate and Business Highlights
● In-house brand, Endgame Extracts ranks 3rd, 4th & 5th of the best-selling concentrates in British Columbia, according to Headset1.
● In-house brand, Endgame Extracts ranks 2nd, 3rd, 4th, & 5th of the best-selling concentrates in Alberta, according to Headset1.
● In Q1 2023, new SKUs for in-house brands were accepted for listing in: Ontario - 19; Alberta - 20; Nova Scotia - 1; and Newfoundland - 1.
"With another quarter of record gross revenues, we are more excited than ever with what our team is capable of," said Lachlan McLeod, Chief Financial Officer. "During the quarter, we incurred higher costs to fuel the record gross revenues and we will continue to work on streamlining the growth as we drive Adastra to future profitability."
Financial Statements & Management's Discussion and Analysis
This news release should be read in conjunction with Adastra's interim financial statements and corresponding MD&A for the three months ended March 31, 2023, which can be found on Adastra's issuer profile on SEDAR at www.sedar.com.
1 Source: Headset Data, May 30, 2023
About Adastra Holdings Ltd.
Adastra has become one of Canada's leaders in the supply and manufacturing of ethnobotanical and cannabis products for lawful adult-use. It serves medical markets and engages in forward-looking therapeutic applications. With cannabis concentrate products sold through retailers at more than 1,600 locations across Canada, Adastra's Phyto Extractions and Endgame Extracts brands are now well established with a solid distribution presence. As a Health Canada licensed facility, it specializes in extraction, distillation and manufacturing of a range of cannabis-derived products. Adastra partners with healthcare professionals and practitioners within the regulated environment to create products suitable for the medical cannabis market, with the ultimate aim of addressing the needs of patients. For more information, visit: www.adastraholdings.ca.
Contacts
Michael Forbes, CEO, Corporate Secretary & Director
(778) 715-5011
michael@adastraholdings.ca
Investor Relations
ir@adastraholdings.ca
Forward-Looking Information
This news release contains forward-looking information within the meaning of Canadian securities legislation concerning the business of the Company. Forward-looking information is based on certain key expectations and assumptions made by the management of the Company. Although the Company believes that the expectations and assumptions on which such forward looking information is based are reasonable, undue reliance should not be placed on the forward-looking information because the Company can give no assurance that they will prove to be correct. Forward looking information in this news release includes statements regarding, but not limited to the expectation for future growth, the anticipation of creating long-term value for customers, partners and shareholders, the expectation that increased inventory levels will translate into revenue in future periods and the intention to work on streamlining growth as the Company drives toward future profitability. There are numerous risks and uncertainties that could cause actual results and the Company's plans and objectives to differ materially from those expressed in the forward-looking information. Important factors that could cause actual results to differ materially from those expressed in the forward-looking information include: the availability of a qualified workforce; changes in regulations or licensing affecting the Company's business; reduced demand for cannabis and cannabis related products; reductions in the Company's retail space and store locations; changes in consumer brand preferences; and other factors beyond the control of the Company. These and all subsequent written and oral forward-looking information are based on estimates and opinions of management on the dates they are made and are expressly qualified in their entirety by this notice. Except as required by law, the Company does not intend to update these forward-looking statements.
SOURCE: Adastra Holdings Ltd.