UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to _____________
Commission file number
(Exact name of registrant as specified in its charter)
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(I.R.S. Employer Identification No.) |
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| (Address of principal executive offices) | (Zip Code) |
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
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☒ | Smaller reporting company |
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| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No
As of November 3, 2023, the registrant had
Table of Contents
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains "forward-looking statements," as that term is defined under the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements may include projections and estimates concerning our possible or assumed future results of operations, financial condition, business strategies and plans, market opportunity, competitive position, industry environment, and potential growth opportunities. In some cases, you can identify forward-looking statements by terms such as "may", "will", "should", "believe", "expect", "could", "intend", "plan", "anticipate", "estimate", "continue", "predict", "project", "potential", "target," "goal" or other words that convey the uncertainty of future events or outcomes. You can also identify forward-looking statements by discussions of strategy, plans or intentions. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, because forward-looking statements relate to matters that have not yet occurred, they are inherently subject to significant business, competitive, economic, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors, including, among others, those discussed in this Quarterly Report, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by the forward-looking statements in this Quarterly Report. Risks and uncertainties, the occurrence of which could adversely affect our business, include, but are not limited to, the following:
2
Given the foregoing risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements in this Quarterly Report. The forward-looking statements contained in this Quarterly Report are not guarantees of future performance and our actual results of operations and financial condition may differ materially from such forward-looking statements. In addition, even if our results of operations and financial condition are consistent with the forward-looking statements in this Quarterly Report, they may not be predictive of results or developments in future periods.
Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of this Quarterly Report. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements in this Quarterly Report, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report.
3
PART I
Item 1. Financial Statements
Flora Growth Corp.
Table of Contents
4
Flora Growth Corp.
Unaudited Condensed Interim Consolidated Statements of Financial Position
(in thousands of United States dollars, except share amounts which are in thousands of shares)
| As at: | September 30, 2023 | December 31, 2022 | ||||
| ASSETS | ||||||
| Current | ||||||
| Cash | $ | $ | ||||
| Restricted cash | ||||||
| Trade and amounts receivable, net of $ |
||||||
| Loans receivable and advances | ||||||
| Prepaid expenses and other current assets | ||||||
| Indemnification receivables | ||||||
| Inventory | ||||||
| Current assets held for sale | ||||||
| Total current assets | ||||||
| Non-current | ||||||
| Property, plant and equipment | ||||||
| Operating lease right of use assets | ||||||
| Intangible assets | ||||||
| Goodwill | ||||||
| Investments | ||||||
| Other assets | ||||||
| Noncurrent assets held for sale | ||||||
| Total assets | $ | $ | ||||
| LIABILITIES | ||||||
| Current | ||||||
| Trade payables | $ | $ | ||||
| Contingencies | ||||||
| Current portion of debt | ||||||
| Current portion of operating lease liability | ||||||
| Other accrued liabilities | ||||||
| Current liabilities held for sale | ||||||
| Total current liabilities | ||||||
| Non-current | ||||||
| Non-current operating lease liability | ||||||
| Deferred tax | ||||||
| Contingent purchase considerations | ||||||
| Noncurrent liabilities held for sale | ||||||
| Total liabilities | ||||||
| SHAREHOLDERS' EQUITY | ||||||
| Share capital, no par value, unlimited authorized, |
||||||
| Additional paid-in capital | ||||||
| Accumulated other comprehensive loss | ( |
) | ( |
) | ||
| Deficit | ( |
) | ( |
) | ||
| Total Flora Growth Corp. shareholders' equity | ||||||
| Non-controlling interest in subsidiaries | ( |
) | ( |
) | ||
| Total shareholders' equity | ||||||
| Total liabilities and shareholders' equity | $ | $ |
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements. Commitments and contingencies - see Note 16. Going concern - see Note 2.
5
Flora Growth Corp.
Unaudited Condensed Interim Consolidated Statements of Loss and
Comprehensive Loss
(in thousands of United States dollars, except per share amounts which
are in thousands of shares)
| For the three months ended September 30, 2023 |
For the three months ended September 30, 2022 |
For the nine months ended September 30, 2023 |
For the nine months ended September 30, 2022 |
||||||||||
| Revenue | $ | $ | $ | $ | |||||||||
| Cost of sales | |||||||||||||
| Gross profit | |||||||||||||
| Operating expenses | |||||||||||||
| Consulting and management fees | |||||||||||||
| Professional fees | |||||||||||||
| General and administrative | |||||||||||||
| Promotion and communication | |||||||||||||
| Travel expenses | |||||||||||||
| Share based compensation | |||||||||||||
| Research and development | |||||||||||||
| Operating lease expense | |||||||||||||
| Depreciation and amortization | |||||||||||||
| Bad debt expense | ( |
) | |||||||||||
| Asset impairment | |||||||||||||
| Other expenses (income), net | |||||||||||||
| Total operating expenses | |||||||||||||
| Operating loss | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Interest expense (income) | ( |
) | ( |
) | |||||||||
| Foreign exchange loss (gain) | ( |
) | |||||||||||
| Unrealized (gain) loss from changes in fair value | ( |
) | ( |
) | |||||||||
| Net income (loss) before income taxes and discontinued operations | ( |
) | ( |
) | ( |
) | |||||||
| Income tax recovery | ( |
) | ( |
) | |||||||||
| Net income (loss) from continuing operations | ( |
) | ( |
) | ( |
) | |||||||
| Income (loss) from discontinued operations, net of taxes | ( |
) | ( |
) | ( |
) | |||||||
| Net income (loss) for the period | ( |
) | ( |
) | ( |
) | |||||||
|
Net loss attributable to noncontrolling interest |
( |
) | ( |
) | ( |
) | ( |
) |
|||||
|
Net income (loss) attributable to Flora Growth Corp. |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Basic income (loss) per share from continuing operations | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Diluted income (loss) per share from continuing operations | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Basic income (loss) per share attributable to Flora Growth Corp. | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
|
Diluted income (loss) per share attributable to Flora Growth Corp. |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Weighted average number of common shares outstanding - basic | |||||||||||||
| Weighted average number of common shares outstanding - diluted | |||||||||||||
|
Other comprehensive income (loss) |
|||||||||||||
|
Net income (loss) for the period |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
|
Foreign currency translation, net of income taxes of $nil ($nil in 2022) |
( |
) | |||||||||||
|
Comprehensive income (loss) for the period |
( |
) | ( |
) | ( |
) | |||||||
|
Comprehensive income (loss) attributable to noncontrolling interests |
( |
) | ( |
) | ( |
) | ( |
) | |||||
|
Comprehensive income (loss) attributable to Flora Growth Corp. |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) |
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.
6
Flora Growth Corp.
Unaudited Condensed Interim Consolidated Statement of
Shareholders' Equity (Deficiency)
(in thousands of United States dollars, except for share
amounts which are in thousands of shares)
| Common shares | Additional paid-in capital |
Accumulated other comprehensive (loss) income |
Accumulated deficit |
Non- controlling interests in subsidiaries (deficiency) |
Shareholders' equity (deficiency) |
||||||||||||||||
| # | |||||||||||||||||||||
| For the nine months ended September 30, 2023 | |||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||||
| September unit offering | - | - | - | - | |||||||||||||||||
| September unit offering issuance costs | - | - | ( |
) | - | - | - | ( |
) | ||||||||||||
| Common shares issued for other agreements | - | - | - | - | |||||||||||||||||
| Options issued | - | - | - | - | - | ||||||||||||||||
| Options forfeited | - | - | ( |
) | - | - | ( |
) | |||||||||||||
| Restricted stock granted | - | - | - | - | |||||||||||||||||
| Restricted stock cancelled | ( |
) | - | ( |
) | - | - | - | ( |
) | |||||||||||
| Share issuance costs | - | - | ( |
) | - | - | - | ( |
) | ||||||||||||
| Derecognition of equity related to Colombia assets | - | - | - | ( |
) | - | ( |
) | ( |
) | |||||||||||
| Other comprehensive loss - exchange differences (net of income taxes of $nil) |
- | - | - | - | - | ||||||||||||||||
| Net loss | - | - | - | - | ( |
) | ( |
) | ( |
) | |||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||||
| For the three months ended September 30, 2023 | |||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||||
| September unit offering | |||||||||||||||||||||
| September unit offering issuance costs | - | - | ( |
) | - | - | - | ( |
) | ||||||||||||
| Options issued | - | - | - | - | - | ||||||||||||||||
| Options forfeited | - | - | ( |
) | - | - | ( |
) | |||||||||||||
| Restricted stock granted | - | - | - | - | - | ||||||||||||||||
| Restricted stock cancelled | ( |
) | - | ( |
) | - | - | - | ( |
) | |||||||||||
| Share issuance costs | - | - | ( |
) | - | - | - | ( |
) | ||||||||||||
| Derecognition of equity related to Colombia assets | - | - | - | ( |
) | - | ( |
) | ( |
) | |||||||||||
| Other comprehensive loss - exchange differences (net of income taxes of $nil) |
- | - | - | ( |
) | - | - | ( |
) | ||||||||||||
| Net income (loss) | - | - | - | ( |
) | ||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||||
| For the nine months ended September 30, 2022 | |||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||||
| Share repurchase | ( |
) | - | ( |
) | - | - | - | ( |
) | |||||||||||
| Common shares issued for business combinations | - | - | - | - | |||||||||||||||||
| Equity issued for other agreements | - | - | - | - | |||||||||||||||||
| Acquisition of noncontrolling interest | - | - | ( |
) | ( |
) | |||||||||||||||
| Options issued | - | - | - | - | - | ||||||||||||||||
| Options exercised | - | - | - | - | |||||||||||||||||
| Options forfeited | - | - | ( |
) | - | - | ( |
) | |||||||||||||
| Restricted units granted | - | - | - | - | |||||||||||||||||
| Warrants exercised | - | - | - | - | |||||||||||||||||
| Share issuance costs | - | - | ( |
) | - | - | - | ( |
) | ||||||||||||
| Other comprehensive loss - exchange differences (net of income taxes of $nil) |
- | - | - | ( |
) | - | - | ( |
) | ||||||||||||
| Net loss | - | - | - | - | ( |
) | ( |
) | ( |
) | |||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||||
| For the three months ended September 30, 2022 | |||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||||
| Share repurchase | ( |
) | - | ( |
) | - | - | - | ( |
) | |||||||||||
| Options issued | - | - | - | - | - | ||||||||||||||||
| Options exercised | - | - | - | - | |||||||||||||||||
| Options forfeited | - | - | ( |
) | - | - | ( |
) | |||||||||||||
| Restricted stock granted | - | - | - | - | |||||||||||||||||
| Warrants exercised | - | - | - | - | - | ||||||||||||||||
| Share issuance costs | - | - | ( |
) | - | - | - | ( |
) | ||||||||||||
| Other comprehensive loss - exchange differences (net of income taxes of $nil) |
- | - | - | ( |
) | - | - | ( |
) | ||||||||||||
| Net loss | - | - | - | - | ( |
) | ( |
) | ( |
) | |||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | |||||||||
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.
7
Flora Growth Corp.
Unaudited Condensed Interim Consolidated Statement of Cash Flows
(in thousands of United States dollars)
| For the nine months ended September 30, 2023 |
For the nine months ended September 30, 2022 |
|||||
| Cash flows from operating activities: | ||||||
| Net loss | $ | ( |
) | $ | ( |
) |
| Adjustments to net loss: | ||||||
|
Depreciation and amortization |
||||||
|
Share based compensation |
||||||
|
Asset impairment |
||||||
|
Changes in fair value of investments and liabilities |
( |
) | ||||
|
Bad debt expense |
||||||
|
Loss on disposal of Colombia assets |
||||||
|
Interest expense (income) |
( |
) | ||||
|
Interest paid |
( |
) | ( |
) | ||
|
Income tax recovery |
( |
) | ||||
| ( |
) | ( |
) | |||
| Net change in non-cash working capital: | ||||||
|
Trade and other receivables |
||||||
|
Inventory |
( |
) | ( |
) | ||
|
Prepaid expenses and other assets |
( |
) | ||||
|
Trade payables and accrued liabilities |
( |
) | ( |
) | ||
| Net cash used in operating activities | ( |
) | ( |
) | ||
| Cash flows from financing activities: | ||||||
|
September units issued |
||||||
| Equity issue costs | ( |
) | ( |
) | ||
| Exercise of warrants and options | ||||||
| Common shares repurchased | ( |
) | ||||
| Loan borrowings | ||||||
| Loan repayments | ( |
) | ( |
) | ||
| Net cash provided (used) by financing activities | ( |
) | ||||
| Cash flows from investing activities: | ||||||
| Purchases of property, plant and equipment and intangible assets | ( |
) | ( |
) | ||
| Net cash on disposals | ( |
) | ||||
| Business and asset acquisitions, net of cash acquired | ( |
) | ||||
| Net cash used in investing activities | ( |
) | ( |
) | ||
| Effect of exchange rate on changes on cash | ( |
) | ||||
| Change in cash during the period | ( |
) | ( |
) | ||
| Cash and restricted cash at beginning of period | ||||||
| Cash included in assets held for sale | ( |
) | ||||
| Cash and restricted cash at end of period | $ | $ | ||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||
| Common shares issued for business combinations | $ | $ | ||||
| Assets acquired for contingent consideration | ||||||
| Common shares issued for other agreements | ||||||
| Operating lease additions to right of use assets | ||||||
| Share issuance costs |
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.
8
Flora Growth Corp.
Notes to the unaudited condensed interim consolidated financial statements
For the three and nine months ended September 30, 2023 and 2022
(In thousands of United States dollars, except shares and per share amounts)
1. NATURE OF OPERATIONS
Flora Growth Corp. (the "Company" or "Flora") was incorporated under the laws of the Province of Ontario, Canada on March 13, 2019. The Company is manufacturer, distributor and an all-outdoor cultivator of global cannabis and pharmaceutical products and brands, building a connected, design-led collective of plant-based wellness and lifestyle brands. The Company's registered office is located at 365 Bay Street, Suite 800, Toronto, Ontario, M5H 2V1, Canada and our principal place of business in the United States is located at 3406 SW 26th Terrace, Suite C-1, Fort Lauderdale, Florida 3312.
Presentation of comparative financial statements
On June 9, 2023, the Company consolidated its issued and outstanding common shares based on one new common share of the Company for every twenty existing common shares of the Company. All common shares and per share amounts have been restated to give retroactive effect to the share consolidation. See discussion in Note 13.
2. BASIS OF PRESENTATION
These unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP. The Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2022. These unaudited condensed interim consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
These unaudited condensed interim consolidated financial statements apply the same accounting policies as those used in the financial statements included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2022.
These unaudited condensed interim consolidated financial statements have been prepared on a going concern basis, meaning that the Company will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the ordinary course of operations.
Prior to January 1, 2023, Flora was a foreign private issuer reporting its financial statements under International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standard Boards. These consolidated financial statements, for all periods, are presented in accordance with U.S. GAAP.
Going concern
The accompanying unaudited condensed interim consolidated financial statements have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue one year after the date these unaudited condensed interim consolidated financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
The Company had cash of $
| 9 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
Basis of consolidation
These unaudited condensed interim consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions were eliminated on consolidation. Subsidiaries are entities the Company controls when it is exposed, or has rights, to variable returns from its involvement in the entity and can affect those returns through its power to direct the relevant activities of the entity. Subsidiaries are included in the consolidated financial results of the Company from the date of acquisition up to the date of disposition or loss of control. The Company's subsidiaries and respective ownership percentage have not changed from the year ended December 31, 2022, except as noted below.
On July 5, 2023, the Company entered into a Share Purchase Agreement with Lisan Farma Colombia LLC ("Lisan"), a Delaware limited liability company, to sell all of its shares in certain Colombian companies and other Flora assets related to its Colombian operations for a purchase price of CAD $
The Company sold all of its shares and assets related to the following Colombian companies and branches:
The applicable capital stock of the Colombian entities was transferred to Lisan at the date of closing. All assets underlying this sale were transferred to Lisan on an "as is where is" basis. The results of these subsidiaries are included in discontinued operations in the accompanying unaudited condensed interim consolidated financial statements. See discussion in Note 3.
3. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
On July 5, 2023, the Company entered into a Share Purchase Agreement with Lisan Farma Colombia LLC ("Lisan"), a Delaware limited liability company, to sell all its shares in its Colombian related subsidiaries and its Colombian assets for a purchase price of CAD $
The sale enables the Company to concentrate on its core business divisions, which are lifestyle brands in the United States and international pharmaceutical distribution. The sale was part of several strategic changes to cut costs and streamline operations.
The Company has presented the associated assets and liabilities of the Colombian subsidiaries as held for sale. The major classes of assets and liabilities classified as held for sale as of September 30, 2023 and December 31, 2022 were as follows:
| September 30, 2023 | December 31, 2022 | |||||
| Assets held for sale | ||||||
| Cash | $ | $ | ||||
| Trade and amounts receivable | ||||||
| Prepaid expenses and other current assets | ||||||
| Inventory | ||||||
| Total current assets held for sale | ||||||
| Property, plant and equipment | ||||||
| Operating lease right of use assets | ||||||
| Intangible assets | ||||||
| Other assets | ||||||
| Total noncurrent assets held for sale | ||||||
| Total assets held for sale | $ | $ | ||||
| Liabilities held for sale | ||||||
| Current portion of operating lease liability | $ | $ | ||||
| Other accrued liabilities | ||||||
| Total current liabilities held for sale | ||||||
| Non-current operating lease liability | ||||||
| Total liabilities held for sale | $ | $ |
| 10 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
The following table summarizes the major classes of line items included in income (loss) from discontinued operations, net of tax, for the three and nine months ended September 30, 2023 and 2022:
| For the three months ended September 30, 2023 |
For the three months ended September 30, 2022 |
For the nine months ended September 30, 2023 |
For the nine months ended September 30, 2022 |
|||||||||
| Revenue | $ | $ | $ | $ | ||||||||
| Cost of sales | ||||||||||||
| Gross profit from discontinued operations | ||||||||||||
| Consulting and management fees | ||||||||||||
| Professional fees | ||||||||||||
| General and administrative | ||||||||||||
| Promotion and communication | ||||||||||||
| Operating lease expense | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Bad debt expense | ||||||||||||
| Asset impairment | ||||||||||||
| Other (income) expense | ( |
) | ||||||||||
| Operating loss from discontinued operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| Interest (income) expense | ||||||||||||
| Net loss before income taxes | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| (Gain) loss on disposal of discontinued operations | ( |
) | ||||||||||
| Income tax expense | ||||||||||||
| Income (loss) from discontinued operations | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||
|
Basic income (loss) per share from discontinued operations |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||
|
Diluted income (loss) per share from discontinued operations |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) |
The following table summarizes the significant operating and investing items related to the Colombian subsidiaries for the nine months ended September 30, 2023 and 2022
| For the nine months ended September 30, 2023 |
For the nine months ended September 30, 2022 |
|||||
| Operating activities of discontinued operations | ||||||
| Depreciation and amortization | $ | $ | ||||
| Bad debt expense | ||||||
| Asset impairment | ||||||
| Investing activities of discontinued operations | ||||||
| Purchases of property, plant and equipment | $ | $ |
The subsidiaries sold included Cosechemos Ya S.A.S, which was part of the commercial and wholesale segment; Flora Lab S.A.S, Flora Med S.A.S. and Labcofarm Laboratories S.A.S, which were part of the pharmaceuticals segment; Flora Growth Corp Colombia S.A.S., and Kasa Wholefoods Company, S.A.S. and Flora Beauty LLC Sucursal Colombia which were part of the house of brands segment.
The Company applies significant judgement in determining whether a disposal meets the criteria to present as held for sale at the reporting date, and whether the disposal represents a strategic shift that has (or will have) a major effect on its operations and financial results in order to be classified as a discontinued operation. The criteria evaluated are both quantitative and qualitative in nature, to evaluate the significance of the disposal relative to the operations of the Company as a whole. The Company has determined this disposition represents a strategic shift in operations that will have a major effect on the Company's operations and financial results, and accordingly, has been presented as discontinued operations.
| 11 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
During the nine months ended September 30, 2023, the Company recorded a loss on disposal of $
4. TRADE AND AMOUNTS RECEIVABLE
The Company's trade and amounts receivable are recorded at amortized cost. The trade and other receivables balance as at September 30, 2023 and December 31, 2022 consists of trade accounts receivable, amounts recoverable from the Government of Canada for Harmonized Sales Taxes ("HST"), as well as Value Added Tax ("VAT") from various jurisdictions, and other receivables.
| September 30, 2023 | December 31, 2022 | |||||
| Trade accounts receivable | $ | $ | ||||
| Allowance for expected credit losses | ( |
) | ( |
) | ||
| HST/VAT receivable | ||||||
| Other receivables | ||||||
| Total | $ | $ |
Changes in the trade accounts receivable allowance in the three and nine months ended September 30, 2023 relate to establishing an allowance for expected credit losses and reclassification of assets held for sale. There were less than $
| September 30, 2023 | |||
| Current | $ | ||
| 1-30 Days | |||
| 31-60 Days | |||
| 61-90 Days | |||
| 91-180 Days | |||
| 180+ Days | |||
| Total trade receivables | $ |
5. INVENTORY
Inventory is comprised of the following:
| September 30, 2023 | December 31, 2022 | |||||
| Raw materials and supplies | $ | $ | ||||
| Finished goods | ||||||
| Total | $ | $ |
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
| September 30, 2023 | December 31, 2022 | |||||
| Land | $ | $ | ||||
| Machinery and office equipment | ||||||
| Vehicles | ||||||
| Total | ||||||
| Less: accumulated depreciation | ( |
) | ( |
) | ||
| Property, plant and equipment, net | $ | $ |
| 12 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
Depreciation expense for the three and nine months ended September 30, 2023 was less than $
7. INVESTMENTS
As at September 30, 2023, the Company's investments consisted of common shares and warrants in an early-stage European cannabis company.
The Company did not exercise the warrants and they expired on February 1, 2023. The Company recorded the remaining value of the warrants as a loss on changes in fair value of the investment during the nine months ended September 30, 2023.
Due to the Company's declining share price, the declining share price of comparable public companies and challenging economic factors, the Company determined that impairment indicators were present at June 30, 2023.
A schedule of the Company's investments activity is as follows:
| Investee common shares |
Warrants CAD 0.30 exercise price |
Warrants CAD 1.00 exercise price |
Total | |||||||||
| Financial asset hierarchy level | Level 3 | Level 3 | Level 3 | |||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ||||||||
| Loss on changes in fair value | ( |
) | ( |
) | ( |
) | ||||||
| Balance at September 30, 2023 | $ | $ | $ | $ |
The loss on changes in fair value appears in the unrealized (gain) loss on changes in fair value caption in the unaudited condensed interim consolidated statements of loss and comprehensive loss.
The value of the investee common shares appears in the investment line on the unaudited condensed interim consolidated statement of financial position.
8. ASSET ACQUISITIONS AND BUSINESS COMBINATIONS
Original Hemp asset acquisition
On March 1, 2023, the Company completed its acquisition of all the assets operating under the brand "Original Hemp". The Company analyzed the acquisition under ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, determining Original Hemp did not meet the definition of a business as it did not have inputs, processes, and outputs in place that constituted a business under Topic 805. As a result, the transaction has been accounted for as an asset acquisition whereby all of the assets acquired and liabilities assumed are assigned a carrying amount based on relative fair values. Total purchase consideration was $
As consideration for the purchased assets of Original Hemp, the Company will pay an amount equal to
| 13 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
The purchase is accounted for as an asset acquisition with amounts allocated as at the acquisition date to each major class of assets as follows:
| Inventory | $ | ||
| Intangible asset | |||
| Total net assets acquired | $ |
Franchise Global Health Inc. ("FGH") business combination
On December 23, 2022, the Company completed its acquisition of all the issued and outstanding common shares (the "Franchise Common Shares") of FGH., a corporation existing under the laws of the Province of British Columbia, by way of a statutory plan of arrangement (the "Arrangement") under the Business Corporations Act (British Columbia). FGH, through its wholly owned subsidiaries, is a multi-national operator in the medical cannabis and pharmaceutical industry with principal operations in Germany. The Company acquired FGH to expand its product offerings, accelerate its revenue growth, expand its customer and distribution capabilities in Germany and to improve synergies and cost savings.
The purchase consideration was comprised of
The purchase is accounted for as a business combination with amounts recognized as at the acquisition date for each major class of assets acquired and liabilities assumed are as follows:
| Current assets | |||
| Cash | $ | ||
| Trade receivables | |||
| Inventory | |||
| Indemnity receivables | |||
| Prepaid assets | |||
| Non-current assets | |||
| Property, plant, and equipment | |||
| Right of use assets | |||
| Intangible asset | |||
| Goodwill | |||
| Total assets | $ | ||
| Current liabilities | |||
| Trade payables and accrued liabilities | $ | ( |
) |
| Current lease liabilities | ( |
) | |
| Current portion of debt | ( |
) | |
| Long term lease liability | ( |
) | |
| Deferred tax | ( |
) | |
| Total liabilities | $ | ( |
) |
| Total net assets acquired | $ |
The amounts shown are provisional. The Company has a measurement period of one year following the acquisition date on December 23, 2022 to adjust the provisional amounts recognized for any new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of additional assets or liabilities, or affected the measurement of the amounts recognized as of that date.
As part of the acquisition terms, Clifford Starke, the Company's current Chief Executive Officer and a Director and the former Chief Executive Officer of FGH, together with certain affiliated entities under his control, entered into an agreement pursuant to which they agreed to indemnify the Company for certain potential liabilities of FGH and its subsidiaries, up to a maximum of $
| 14 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
1. any losses that are related to the ownership or the operation of FGH and its Canadian subsidiaries, in each case prior to the closing of the Arrangement, that are unknown to the Company and that: (i) have not been disclosed or accounted for in FGH filings; or (ii) have not been disclosed in the FGH Disclosure Letter, in each case as at the date of the Arrangement Agreement;
2. any losses that may arise from amounts owed or that may become owed to certain persons or in respect of certain matters identified in the indemnity agreement, as amended; and
3. any fraud, intentional misrepresentation, willful breach, or willful misconduct on the part of FGH or any other entity identified in the indemnity agreement of any of the foregoing in connection with the indemnity agreement or the Arrangement Agreement
The intangible assets of $
Just Brands LLC and High Roller Private Label LLC (collectively "JustCBD") business combination
On February 24, 2022, Flora Growth U.S. Holdings Corp., a wholly owned subsidiary of the Company, completed the acquisition of
The purchase consideration was comprised of (i) $
The fair value of the contingent purchase consideration at February 24, 2022 was determined using a Monte Carlo simulation incorporating Brownian motion with
The fair value of the contingent purchase consideration at September 30, 2023 was determined using a Monte Carlo simulation incorporating Brownian motion with
| 15 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
The purchase is accounted for as a business combination with amounts recognized as at the acquisition date for each major class of assets acquired and liabilities assumed are as follows:
| Current assets | |||
| Cash | $ | ||
| Trade receivables | |||
| Inventory | |||
| Other current assets | |||
| Non-current assets | |||
| Property, plant, and equipment | |||
| Right of use assets | |||
| Other non-current assets | |||
| Intangible asset | |||
| Goodwill | |||
| Total assets | $ | ||
| Current liabilities | |||
| Trade payables and accrued liabilities | $ | ( |
) |
| Current lease liabilities | ( |
) | |
| Provision for sales tax | ( |
) | |
| Deferred tax | ( |
) | |
| Other current liabilities | ( |
) | |
| Total liabilities | $ | ( |
) |
| Total net assets acquired | $ |
The fair value of the trade receivables reflects a $
The intangible assets of $
No Cap Hemp Co. ("No Cap") business combination
On July 20, 2022, Just Brands LLC., a wholly owned subsidiary of the Company, acquired certain assets, assumed certain liabilities, retained certain employees and processes (together the "purchased assets") of No Cap for total purchase consideration of $0.9 million. No Cap is a manufacturer and distributor of high quality and affordable CBD products. No Cap is based in Florida in the United States and was formed in 2017. Just Brands LLC acquired No Cap to expand its product offerings and accelerate its revenue growth.
As consideration for the purchased assets of No Cap, Just Brands LLC will pay an amount equal to
The Company determined that the balance of this contingent consideration at September 30, 2023 was $
The purchase is accounted for as a business combination with amounts recognized as at the acquisition date for each major class of assets acquired and liabilities assumed are as follows:
| Current assets | |||
| Trade receivables | $ | ||
| Inventory | |||
| Non-current assets | |||
| Goodwill | |||
| Total assets | $ | ||
| Current liabilities | |||
| Trade payables and accrued liabilities | ( |
) | |
| Total liabilities | $ | ( |
) |
| Total net assets acquired | $ |
| 16 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
The fair value of the trade receivables reflects a $
The Company expects the goodwill to be deductible for United States income tax purposes. The goodwill is assigned to the house of brands segment.
9. INTANGIBLE ASSETS AND GOODWILL
A continuity of intangible assets for the nine months ended September 30, 2023 is as follows:
| License | Customer/Supplier Relationships |
Trademarks and Brands |
Patents | Non- Compete Agreements |
Goodwill | Total | |||||||||||||||
| Cost | |||||||||||||||||||||
| At December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Additions | |||||||||||||||||||||
| Impairment | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | |||||||
| At September 30, 2023 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Accumulated Amortization | |||||||||||||||||||||
| At December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Additions | |||||||||||||||||||||
| At September 30, 2023 | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||
| Foreign currency translation | ( |
) | ( |
) | |||||||||||||||||
| Net book value at September 30, 2023 | $ | $ | $ | $ | $ | $ | $ |
Amortization expense for the three and nine months ended September 30, 2023 was $
At September 30, 2023, the weighted average amortization period remaining for intangible assets was
At September 30, 2023, the estimated future amortization expense related to intangible assets is as follows:
| 2023 | $ | ||
| 2024 | |||
| 2025 | |||
| 2026 | |||
| 2027 | |||
| Thereafter | |||
| Total | $ |
The Company's goodwill is assigned to the following reporting units:
| Vessel | JustCBD | Franchise | Total | |||||||||
| Gross goodwill recorded prior to December 31, 2022 | $ | $ | $ | $ | ||||||||
| Impairment recorded prior to December 31, 2022 | ( |
) | ( |
) | ( |
) | ||||||
| Net book value as at December 31, 2022 | ||||||||||||
| Impairment recorded | ( |
) | ( |
) | ( |
) | ||||||
| Net book value as at September 30, 2023 | $ | $ | $ | $ |
| 17 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
10. IMPAIRMENT OF ASSETS
Goodwill
The Company tests its goodwill for impairment as part of its annual fourth quarter impairment test, and at interim periods when impairment indicators exist. The Company's goodwill is assigned to the reporting units associated with the original acquisition of those operations. The Company determined that there were no impairment indicators present as of September 30, 2023. At June 30, 2023, the Company determined that indicators were present for its JustCBD and FGH reporting units due to the Company's declining share price, the declining share price of comparable public companies and challenging economic factors making it difficult to access capital.
As such, the Company tested the JustCBD reporting unit for impairment as at June 30, 2023 and determined that the carrying value of the reporting unit's assets exceeded the recoverable amount, resulting in goodwill impairment of $
Likewise, the Company tested the FGH reporting unit for impairment as at June 30, 2023 and determined that the carrying value of the reporting unit's assets exceeded the recoverable amount, resulting in goodwill impairment of $
Long-lived assets
The Company determined that there were no impairment indicators present as of September 30, 2023. For asset groups that had indicators of impairment as of June 30, 2023, the Company performed a quantitative analysis to determine if impairment existed by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over their remaining lives. This analysis indicated that certain asset values may not be recoverable. The Company then calculated the fair value of these assets using an income approach. As a result, the Company recorded an impairment of property, plant and equipment, operating lease right of use assets, customer relationships, trademarks, patents and non-compete agreements within its Vessel asset group within the house of brands segment totaling $
11. DEBT
Euro credit facility
The Company, through FGH, has a credit facility for
JustCBD insurance premium loan
The Company, through JustCBD, entered into a loan agreement for $
| 18 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
12. LEASES
The Company's leases primarily consist of administrative real estate leases in Germany and the United States. Management has determined all the Company's leases are operating leases through September 30, 2023. Information regarding the Company's leases is as follows:
| Three months ended September 30, 2023 |
Three months ended September 30, 2022 |
Nine months ended September 30, 2023 |
Nine months ended September 30, 2022 |
|||||||||
| Components of lease expense | ||||||||||||
| Operating lease expense | $ | $ | $ | $ | ||||||||
| Short-term lease expense | ||||||||||||
| Sublease income | ( |
) | ( |
) | ||||||||
| Total lease expense | $ | $ | $ | $ | ||||||||
| Other Information | ||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | $ | ||||||||
| ROU assets obtained in exchange for new operating lease liabilities | ||||||||||||
| Weighted-average remaining lease term in years for operating leases |
|
|
||||||||||
| Weighted-average discount rate for operating leases |
Maturities of operating lease liabilities as of September 30, 2023 are as follows:
| Thousands of United States dollars | Operating Leases | ||
| 2023 | $ | ||
| 2024 | |||
| 2025 | |||
| 2026 | |||
| 2027 | |||
| Total future lease payments | |||
| Less: imputed interest | ( |
) | |
| Total lease liabilities | |||
| Less: current lease liabilities | ( |
) | |
| Total non-current lease liabilities | $ |
Most of the Company's leases contain renewal options to continue the leases for another term equivalent to the original term, which are generally up to two years. The lease liabilities above include renewal terms that management has executed or is reasonably certain of renewing, which only included leases that would have expired in 2023.
The Company began subleasing retail space in Miami, Florida to a third party during the third quarter of 2023. The sublease agreement is effective through November 30, 2026 and contains one option to renew for five more years.
13. SHARE CAPITAL
Authorized and issued
The Company is authorized to issue an unlimited number of common shares, no par value.
The Company had the following significant common share transactions:
Nine months ended September 30, 2023
SEPTEMBER 2023 UNIT OFFERING
| 19 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
On September 21, 2023, the Company closed a registered direct offering of
REVERSE STOCK SPLIT
Upon the effectiveness of the Reverse Stock Split, every twenty shares of the issued and outstanding common shares were automatically combined and reclassified into one issued and outstanding common share. The Reverse Stock Split did not affect any shareholder's ownership percentage of the common shares, alter the par value of the common shares or modify any voting rights or other terms of the common shares. The number of authorized shares of common shares under the Company's Articles remained unchanged. No fractional shares were issued in connection with the Reverse Stock Split. Any fractional interest as a result of the Reverse Stock Split was rounded down to the nearest whole common share.
All common shares and per share amounts have been restated to give retroactive effect to the share consolidation.
OTHER ISSUANCES
On January 31, 2023, the Company entered into a settlement agreement with a third party pursuant to which the Company issued
On April 12, 2023, Luis Merchan tendered his resignation as both Chairman of the Board of Directors of the Company and as its Chief Executive Officer. On this date, the Company entered into a separation agreement with Mr. Merchan, pursuant to which the Company issued
14. SHARE BASED COMPENSATION
The Company's 2022 Incentive Compensation Plan (the "2022 Plan") and its previous "'rolling" stock option plan (the "Prior Plan") are described in the Company's 2022 Form 10-K.
OPTIONS
Stock options granted under the Prior Plan are non-transferable and non-assignable and may be granted for a term not exceeding five years. Under the 2022 Plan, stock options may be granted with a term of up to ten years and in the case of all stock options, the exercise price may not be less than 100% of the fair market value of a Common Share on the date the award is granted. Stock option vesting terms are subject to the discretion of the Compensation Committee of the Company's Board of Directors. Common shares are newly issued from available authorized shares upon exercise of awards. The Company no longer makes new grants of stock options under the Prior Plan.
Information relating to share options outstanding and exercisable as at September 30, 2023 and December 31, 2021 is as follows:
| Options Outstanding | ||||||||||||
| Number of options (in thousands) |
Weighted average exercise price |
Weighted average remaining life (years) |
Aggregate intrinsic value |
|||||||||
| Outstanding balance, December 31, 2022 | $ |
|
$ | |||||||||
| Granted | $ |
|
- | |||||||||
|
Forfeited |
( |
) | $ |
|
- | |||||||
| Outstanding balance, September 30, 2023 | $ |
|
$ | |||||||||
| Exercisable balance, September 30, 2023 | $ |
|
$ | |||||||||
| 20 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
The total benefit related to the options granted in the three and nine months ended September 30, 2023 was less than ($
At September 30, 2023 the total remaining stock option cost for nonvested awards is expected to be less than $
See Note 20 for subsequent forfeiture of options.
RESTRICTED STOCK AWARDS
Information relating to restricted stock awards outstanding as at September 30, 2023 and December 31, 2022:
| Number of restricted stock awards |
Weighted average grant date fair value |
|||||
| Thousands | ||||||
| Balance, December 31, 2022 | $ | |||||
| Granted | ||||||
| Vested | ( |
) | ( |
) | ||
| Cancelled | ( |
) | ( |
) | ||
| Balance, September 30, 2023 | $ |
The total expense related to the restricted stock awards in the three and nine months ended September 30, 2023 was less than $
The outstanding restricted stock awards vest over the next three years provided the award holder is still employed or engaged by the Company. As of September 30, 2023, the Company had $
See Note 20 for subsequent forfeiture of restricted share awards.
15. WARRANTS
The following summarizes the number of warrants outstanding as of September 30, 2023:
| Number of warrants | Weighted average exercise price |
|||||
| Thousands | ||||||
| Balance, December 31, 2022 | $ | |||||
| Exercised | ( |
) | ||||
|
Cancelled |
( |
) | ||||
| Issued | ||||||
| Balance, September 30, 2023 | $ |
| Date of expiry | Warrants outstanding |
Exercise price |
Grant date fair value |
Remaining life in years |
||||||
| Thousands | ||||||||||
|
|
$ | $ |
|
|||||||
|
|
|
|||||||||
|
|
|
|||||||||
|
|
|
|||||||||
|
|
|
|||||||||
|
|
|
|||||||||
|
|
|
|||||||||
| $ | $ |
|
| 21 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
16. COMMITMENTS AND CONTINGENCIES
Provisions
The Company's current known provisions and contingent liabilities consist of the following as of September 30, 2023:
| Termination benefits |
Legal disputes | Sales tax | Total | |||||||||
| Balance as at December 31, 2022 | $ | $ | $ | $ | ||||||||
| Payments/Settlements | ( |
) | ( |
) | ( |
) | ||||||
| Additional provisions | ||||||||||||
| Foreign currency translation | ||||||||||||
| Balance as at September 30, 2023 | $ | $ | $ | $ |
The legal disputes balance as of September 30, 2023 involves a former shareholder of ACA Muller, an entity that was part of the Company's acquisition of FGH in December 2022, who filed a statement of claim against a wholly owned subsidiary of the Company in the Constance Regional Court in Germany. While the Company believes that this claim is without merit, at this time the Company believes it is probable that a liability has been incurred and the Company is able to reasonably estimate the loss of $
The Sales tax relates to estimated amounts owed to certain jurisdictions in the Unites States for sales from the Company's JustCBD operations. The ending balance is recorded within contingencies on the unaudited condensed interim consolidated statement of financial position, and additions to the provision as a reduction of revenue on the unaudited condensed interim consolidated statements of loss and comprehensive loss.
Legal proceedings
The Company records liabilities for legal proceedings in those instances where it can reasonably estimate the amount of the loss and where liability is probable. The Company is engaged from time-to-time in various legal proceedings and claims that have arisen in the ordinary course of business. The outcome of all the proceedings and claims against the Company is subject to future resolution, including the uncertainties of litigation. Based on information currently known to the Company and after consultation with outside legal counsel, management believes that the probable ultimate resolution of any such proceedings and claims, individually or in the aggregate, will not have a material adverse effect on the financial condition of the Company, taken as a whole as at September 30, 2023.
On May 31, 2023, Maria Beatriz Fernandez Otero and Sara Cristina Jacome De Torres brought an action against the Company claiming that the Company is obligated to issue
On May 31, 2023, Ramon Ricardo Castellanos Saenz and Miriam Ortiz brought an action against the Company claiming that the Company is obligated to issue
On June 21, 2022, an action was brought against the Company in the Ontario Superior Court of Justice by Gerardo Andres Garcia Mendez claiming that the Company is obligated to issue
| 22 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
In connection with the Company's acquisition of FGH, the former Chief Executive Officer of FGH, together with certain affiliated entities under his control, entered into an agreement pursuant to which they agreed to indemnify the Company for certain potential liabilities of FGH and its subsidiaries, up to a maximum of $
On February 3, 2023, an action was brought in the Ontario Superior Court of Justice by Nathan Shantz and Liberacion e Inversiones S.A. against various parties including Clifford Starke, FGH's former Chief Executive Officer, and FGH. The statement of claim alleges that, prior to the closing of the Arrangement,
The total amount claimed against the former entities of FGH currently exceeds the maximum $
17. INCOME (LOSS) PER SHARE
The Company calculates basic earnings per share based upon the weighted average number of common shares outstanding during the period, while the calculation of diluted earnings per share includes the dilutive effect of potential common shares outstanding during the period. The calculation of diluted earnings per share excludes all potential common shares if their inclusion would have an anti-dilutive effect. Restricted stock award recipients under the 2022 Plan have a non-forfeitable right to receive dividends declared by the Company, and are therefore included in computing earnings per share.
| Three months ended |
Three months ended |
Nine months ended |
Nine months ended |
|||||||||
| September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
|||||||||
| Stock options | ||||||||||||
| Warrants | ||||||||||||
| Restricted stock awards | ||||||||||||
| JustCBD potential additional shares to settle contingent consideration | ||||||||||||
| Total anti-dilutive |
18. FINANCIAL INSTRUMENTS
Fair value
The Company's financial instruments measured at amortized cost as at September 30, 2023 and December 31, 2022 consist of cash, trade and amounts receivable, loans receivable, trade payables, contingencies, accrued liabilities, lease liabilities, and debt and loans payable. The amounts reflected in the unaudited condensed interim consolidated statements of financial position approximate fair value due to the short-term maturity of these instruments.
Financial instruments recorded at the reporting date at fair value are classified into one of three levels based upon the fair value hierarchy. Items are categorized based on inputs used to derive fair value based on:
Level 1 - quoted prices that are unadjusted in active markets for identical assets or liabilities
Level 2 - inputs other than quoted prices included in level 1 that are observable for the asset/liability either directly or indirectly; and
Level 3 - inputs for the instruments are not based on any observable market data.
The Company's long-term investments require significant unobservable inputs and as discussed in Note 7, are measured at FVPL and as a Level 3 fair value financial instrument within the fair value hierarchy as at September 30, 2023. As discussed in Note 8, the Company's contingent purchase considerations consist of the estimated fair value of contingent purchase consideration from the acquisitions of JustCBD in February 2022, NoCap in July 2022 and Original Hemp in March 2023. The amount is measured at FVPL as a Level 2 fair value financial instrument within the fair value hierarchy as at September 30, 2023. As valuations of investments for which market quotations are not readily available are inherently uncertain, may fluctuate within short periods of time and are based on estimates, determination of fair value may differ materially from the values that would have resulted if a ready market existed for the investments. Such changes may have a significant impact on the Company's financial condition or operating results.
| 23 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
The following tables present information about the Company's financial instruments and their classifications as at September 30, 2023 and December 31, 2022 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value.
| Fair value measurements at September 30, 2023 using: | ||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||
| Financial assets: | ||||||||||||
| Investments (Note 7) | $ | $ | $ | $ | ||||||||
| Financial liabilities: | ||||||||||||
| Contingent purchase consideration from asset acquisitions and business combinations (Note 8) | $ | $ | $ | $ |
| Fair value measurements at December 31, 2022 using: | ||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||
| Financial assets: | ||||||||||||
| Investments (Note 7) | $ | $ | $ | $ | ||||||||
| Financial liabilities: | ||||||||||||
| Contingent purchase consideration from business combinations (Note 8) | $ | $ | $ | $ |
19. SEGMENTED INFORMATION
The Company reports its financial results for the following
The Company's operates its manufacturing and distribution business in its United States, Germany, and Colombia subsidiaries. The Company also was engaged in the growth, cultivation, and development of medicinal cannabis and medicinal cannabis derivative products through its Colombia Cosechemos subsidiary. Management has defined the reportable segments of the Company based on this internal business unit reporting, which is by major product line, and aggregates similar businesses into the house of brands segment below. The Corporate segment reflects balances and expenses that do not directly influence business unit operations.
Information regarding the Company's segments is summarized as follows:
| For the three months ended |
For the three months ended |
For the nine months ended |
For the nine months ended |
|||||||||
| September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
|||||||||
| Net Sales | ||||||||||||
| Commercial & Wholesale | $ | $ | $ | $ | ||||||||
| House of Brands | ||||||||||||
| Pharmaceuticals | ||||||||||||
| Eliminations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| $ | $ | $ | $ | |||||||||
| Net Income (Loss) | ||||||||||||
| Commercial & Wholesale | $ | ( |
) | $ | $ | ( |
) | $ | ||||
| House of Brands | ( |
) | ( |
) | ( |
) | ||||||
| Pharmaceuticals | ( |
) | ||||||||||
| Corp & Eliminations | ( |
) | ( |
) | ( |
) | ( |
) | ||||
| $ | $ | ( |
) | $ | ( |
) | $ | ( |
) |
| 24 |
| Flora Growth Corp. Notes to the unaudited condensed interim consolidated financial statements For the three and nine months ended September 30, 2023 and 2022 (In thousands of United States dollars, except shares and per share amounts) |
| As at | September 30, 2023 | December 31, 2022 | ||||
| Assets | ||||||
| Commercial & Wholesale | $ | $ | ||||
| House of Brands | ||||||
| Pharmaceuticals | ||||||
| Corp & Eliminations | ||||||
| $ | $ |
Disaggregation of net sales by geographic area:
| For the three months ended |
For the three months ended |
For the nine months ended |
For the nine months ended |
|||||||||
| September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
|||||||||
| Net Sales | ||||||||||||
| United States | $ | $ | $ | $ | ||||||||
| Germany | ||||||||||||
| United Kingdom | ||||||||||||
| $ | $ | $ | $ |
20. SUBSEQUENT EVENTS
ACQUISTION OF AUSTRALIAN VAPORIZORS PTY LIMITED ("AUSTRALIAN VAPORIZERS")
On September 17, 2023, the Company entered into a definitive purchase agreement (the "Purchase Agreement") with Lifeist Wellness Inc. ("Lifeist") to acquire Australian Vaporizers, which is one of the largest online retailers of vaporizers, hardware, and accessories in Australia. The Company will acquire all of the issued and outstanding shares of Australian Vaporizers in exchange for
On October 20, 2023, Lifeist delivered a notice to the Company purporting to terminate the Purchase Agreement (the "Notice") as a result of a purported inability to satisfy the condition precedent to closing set forth in Section 6.5.1 of the Purchase Agreement due to threats by shareholders of Lifeist to take legal or regulatory action to prohibit the completion of the transaction. The Company believes that the reasons stated in the Notice do not provide a valid basis for terminating the Purchase Agreement. The Company intends to contest the purported termination vigorously.
Due to the timing of the closing of this transaction, purchase accounting is incomplete. The Company is evaluating the potential effects of this acquisition on the financial statements. The acquisition will be accounted for in accordance with Accounting Standards Codification ("ASC") Topic 805, "Business Combinations".
COMPLETION OF THE SALE OF COLOMIBA ASSETS
On November 1, 2023, the Company completed the previously announced Share Purchase Agreement with Lisan to sell all its shares in certain Colombian entities and other Flora assets related to its Colombian operations. The applicable capital stock of the Colombian entities was transferred to Lisan at the dates of closing. All assets underlying this sale were transferred to Lisan on an "as is where is" basis. See discussion in Note 3.
OTHER
Subsequent to September 30, 2023, a total of
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our results of operations, financial condition, liquidity and cash flows for the periods presented. This discussion should be read in conjunction with (a) our unaudited condensed consolidated financial statements and related notes contained elsewhere in Part I, Item 1, "Financial Statements" of this Quarterly Report, and (b) Part I, Item 1A "Risk Factors", Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes in our 2022 Annual Report. As discussed in the section above titled "Cautionary Statement Regarding Forward-Looking Statements," the following discussion contains forward-looking statements that are based upon our current expectations, including with respect to our future revenues and operating results. Our actual results may differ materially from those anticipated in such forward-looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included under Part II, Item 1A below and included under Part I, Item 1A in our 2022 Annual Report.
Amounts are expressed in United States dollars ("$" or "USD") unless otherwise stated to be in Canadian dollars ("CAD"), Euro ("€" or "EUR"), or Colombia pesos ("COP"). Amounts stated in foreign currencies include approximate USD amounts based on exchange rates on September 30, 2023. Variance, ratio, and percentage changes in this section are based on unrounded numbers. This section reports the Company's activities through September 30, 2023, unless otherwise indicated.
Overview of our Business
We are a multi-national cannabis company that manufactures and distributes consumer packaged goods and distributes medicinal cannabis and pharmaceutical products. Flora exists to create a world where the benefits of cannabis are accessible to everyone. Our primary businesses include JustCBD, Vessel and Phatebo.
JustCBD
JustCBD is Flora's leading consumer packaged goods brand. JustCBD was launched in 2017 with a mission to bring high-quality, trustworthy and budget-friendly CBD products to market. The JustCBD offering currently consists of over 350 products across 15 categories, including CBD gummies, topicals, tinctures, and vape products and ships to over 11,500 independent retailers worldwide. JustCBD also sells direct to consumers with a customer base of approximately 350,000 people. JustCBD products are available for purchase in smoke and vape shops, clinics, spas and pet stores, as well as other independent non-traditional retail channels. JustCBD's products are both internally and third-party lab-tested to ensure quality.
Vessel
Vessel is Flora's cannabis accessory and technology brand currently servicing the United States and Canada through direct-to-consumer and retail sales. Vessel's products include cannabis consumption accessories, personal storage and travel accessories for the vape and dry herb categories, which are sold to consumers, dispensaries, smoke shops and cannabis brands. Vessel has positioned itself as a lifestyle brand, developing products for consumers interested in "elevating" the consumption experience, focusing primarily on the direct-to-consumer business and have garnered a customer base of approximately 150,000 people. Since our acquisition of Vessel in November 2021, Vessel has been fully integrated into JustCBD and now benefits from operational, logistical and sales synergies with JustCBD.
Phatebo
Based in Germany, Phatebo is a wholesale pharmaceutical distribution company with import and export capabilities of a wide range of pharmaceutical goods and medical cannabis products to treat a variety of health indications, including drugs related to cancer therapies, multiple sclerosis and anti-depressants, among others. Phatebo holds a License for the Trade in Narcotic Drugs (including the cannabis sales license amendment) and a Wholesale Trading License, both of which are issued by BfArM (the largest drug approval authority in Europe). Phatebo is focused on distributing pharmaceutical products within 28 countries globally, primarily in Europe, but also with sales to Asia, Latin America, and North America. In November 2018, Phatebo also received a medical cannabis import and distribution license. The Phatebo warehouse provides a logistics outpost for Flora's growing product portfolio and distribution network within the European Union.
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On July 5, 2023, the Company entered into a Share Purchase Agreement with Lisan Farma Colombia LLC, a Delaware limited liability company, to sell all its shares in its Colombian related subsidiaries and its Colombian assets for a purchase price of CAD $0.8 million (USD $0.6 million). The sale relates to all of Flora's operations in Colombia, including its interest in (i) its 361-acre Cosechemos farm located in Giron, Colombia and its related processing facilities and inventory and (ii) all other assets relating to Flora Lab 2, Flora Lab 4 and Flora's Colombian food and beverage and consumer products business (together "Colombia Assets"). The sale enables the Company to concentrate on its core business divisions, which are lifestyle brands in the United States and international pharmaceutical distribution. The sale was part of several strategic changes to cut costs and streamline operations. The Company received proceeds of CAD $0.5 million during the quarter ended September 30, 2023. The Company and Lisan completed the sale of Cosechemos Ya S.A.S on November 1, 2023.
Factors Impacting our Business
Challenges in realization of overhead reductions. Management has taken, and continues to implement, various cost-saving initiatives to lower overhead costs. However, the Company has not yet reached the critical balance in reducing overhead to meet both the existing and potential market demand in aggregate. The Company strives to attain sufficient growth to cover its overhead to reach profitability. If the Company fails to grow its business or reduce its operating expenses further in the long term, it will continue to face significant cash flow deficiencies in the future and continue to be reliant on debt and/or equity financing to fund operations.
Acquisition strategy disadvantages include significant transaction costs and liabilities of our acquirees. The Company has historically been opportunistic and pursues acquisitions from time to time that management believes will be complementary to or synergistic to the Company's existing business. However, any such acquisitions require the Company to incur heightened upfront transaction costs and require the Company to assume certain liabilities from the acquired companies. In addition, while the Company believes such acquisitions will provide enhanced value in the long term, it is possible that the anticipated synergies from the acquisition may never be realized. For example, the Company acquired JustCBD in February 2022 and Franchise Global Health Inc. ("FGH") in December 2022. In connection with the acquisition of JustCBD, the Company incurred $0.6 million in transaction costs in the first quarter of 2022, which included legal and consulting fees incurred by the Company. In addition, we assumed $4.0 million in liabilities, which included $0.6 million of lease liabilities and other ordinary course operating liabilities. In connection with the acquisition of FGH, the Company incurred $0.5 million in transaction costs in the fourth quarter of 2022, which included legal and consulting fees incurred by the Company. In addition, we assumed $9.1 million in liabilities, which included $1.3 million of outstanding legal fees of FGH prior to the acquisition, $1.1 million of debt, $3.4 million of indemnified liabilities and other ordinary course operating liabilities.
Diversification of cashflows. Our sources of cash are diversified across geographic and product lines. Revenues are concentrated primarily in Germany and the United States, spanning pharmaceuticals, hemp and non-hemp consumer products and medicinal cannabis.
International cannabis developments. Flora's growth is embedded in the expansion, regulation and legalization of medicinal and recreational cannabis and cannabis derivative products across the world. While medicinal cannabis has been regulated at the federal level in multiple countries, the Company is focused on the most robust markets in Germany and the European Union. We remain tuned to international developments as potentially lucrative medicinal cannabis markets open.
Product evolution and brand acceptance. As the cannabis industry continues to change, divergent regulations and the corresponding resources required to introduce high-quality products are expected to impact our market share. Gaining access to continuously evolving and superior products remains a critical success factor. Our ultimate ability to produce and acquire products meeting stringent quality control standards drives the extent of consumer acceptance. Furthermore, the intrinsic value within our brands, including JustCBD and Vessel, is subject to evolving consumer sentiment.
Regulatory proficiency and adoption. The markets in which Flora operates are highly regulated and require extensive experience in navigating the associated complexities. We have assembled a team with deep knowledge of the regulatory and governance environments in which the Company operates. Fundamental expertise entails compliance with product approvals, import permits, export permits, distribution licenses and other pertinent licenses.
Integration of acquired companies. Our growth has been fueled substantially by the acquisition of JustCBD, Vessel and FGH. Our continued ability to extract incremental synergies from a group of diversified entities is a key determinant of our ability to expand organically.
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Public Company Costs
Following the consummation of our initial public offering, we became a public company, which has required the hiring of additional staff and implementation of processes and procedures to address public company regulatory requirements and customary practices. We expect to continue to incur substantial additional annual expenses for, among other things, directors' and officers' liability insurance, director fees and additional internal and external costs for investor relations, accounting, audit, legal, and other functions.
Minimum Bid Price Requirement
On July 8, 2022, the Company was notified by the Nasdaq Stock Market, LLC ("Nasdaq") that it was not in compliance with the minimum bid price requirement of $1.00 per share for 30 consecutive business days as set forth in Rule 5550(a)(2) of the Nasdaq Listing Rules (the "Minimum Bid Price Requirement"). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), Nasdaq provided a 180-calendar day period following the date of the notice to regain compliance. To regain compliance with the Minimum Bid Price Requirement, the Company was required to maintain a minimum closing bid price of $1.00 or more for at least 10 consecutive trading days. From June 9, 2023 through June 23, 2023, a period of 10 consecutive trading days, the closing bid price of the Company's Common Shares was greater than $1.00 per share. Accordingly, on June 26, 2023, the Company received formal notice from Nasdaq that it had regained compliance with the Minimum Bid Price Requirement and that the matter has been closed. Flora is now in compliance with all applicable continued listing standards and its Common Shares continue to be listed and traded on Nasdaq.
Key Components of Results of Operations
Revenue
The Company primarily generates revenue as a distributor of pharmaceutical goods, and a manufacturer and reseller of a range of cannabis-based and complementary products. The Company has three major revenue groups, which are also its reportable segments:
(1) House of Brands;
(2) Commercial and Wholesale; and
(3) Pharmaceuticals.
These segments reflect how the Company's operations are managed, how the Company's Chief Executive Officer, who is the chief operating decision maker, allocates resources and evaluates performance, and how the Company's internal management financial reporting is structured.
The Company's operates its manufacturing and distribution business through its subsidiaries in the United States and Germany. Until the sale of the Colombia Assets, the Company also was engaged in the growth, cultivation, and development of medicinal cannabis and medicinal cannabis derivative products in Colombia.
The Company uses the following five-step contract-based analysis of transactions to determine if, when and how much revenue can be recognized:
1. Identify the contract with a customer;
2. Identify the performance obligations in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to the performance obligations in the contract; and
5. Recognize revenue when or as the Company satisfies the performance obligations.
Revenue is recognized at the transaction price, which is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods to a customer. Gross revenue excludes duties and taxes collected on behalf of third parties. Revenue is presented net of expected price discounts, sales returns, customer rebates and other incentives. The Company's cannabis consumption accessory products include a six-month warranty, which the Company accrues for the estimated liability based on historical and expected claim costs.
The Company's contracts with customers for the sales of products consist of one performance obligation. Revenue from product sales is recognized at the point in time when control is transferred to the customer, which is on shipment or delivery, depending on the contract terms. The Company's payment terms generally range from 0 to 30 days from the transfer of control, and sometimes up to six months.
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Cost of sales
The Company includes the cost of raw materials and supplies, purchased finished goods and changes in inventory reserves in cost of sales for each of its three reportable segments. Raw materials include the purchase cost of the materials, freight-in and duty. Finished goods include the cost of direct materials and labor and a proportion of manufacturing overhead allocated based on normal production capacity. Inventory reserves for excess and obsolete inventory are based upon quantities on hand, projected volumes from demand forecasts and net realizable value. The primary factors that can impact cost of goods sold on a period-to-period basis include the volume of products sold, the mix of products sold, third-party quality costs, transportation, overhead allocations and changes in inventory provisions.
Operating Expenses
The Company's operating expenses are apportioned based on the following categories:
Non-Operating (Income) Expenses
Non-operating (income) expenses include interest income and expenses, foreign exchange losses and unrealized (gains) losses from changes in fair value. Interest is primarily related to the Company's operating lines of credit. Foreign exchange is largely related to the revaluation of balances denominated in foreign currencies to U.S. dollars. Unrealized (gains) losses from changes in fair value pertain to fluctuations in the fair values of the Company's investments and liabilities.
Income Tax
Income tax consists primarily of income taxes related to U.S. federal and state income taxes and income taxes in foreign jurisdictions in which we conduct business.
Income (Loss) from Discontinued Operations
Income (loss) from discontinued operations includes the net income (loss), net of tax, of the Colombian subsidiaries sold on July 5, 2023. It also includes an expected loss on the disposal as the carrying value of the assets being sold exceeded the expected sale price.
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Results of Operations
The following tables provide sets forth the Company's consolidated results of operations for the three and nine months ended September 30, 2023 and 2022 (in thousands). The period-to-period comparisons of the Company's historical results are not necessarily indicative of the results that may be expected in the future. The results of operations data have been derived from our unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2023 and 2022 included elsewhere in this Quarterly Report.
| For the three months ended September 30, 2023 |
For the three months ended September 30, 2022 |
For the nine months ended September 30, 2023 |
For the nine months ended September 30, 2022 |
|||||||||
| Revenue | $ | 17,317 | $ | 9,707 | $ | 58,096 | $ | 22,851 | ||||
| Cost of sales | 12,375 | 5,024 | 43,848 | 12,621 | ||||||||
| Gross profit | 4,942 | 4,683 | 14,248 | 10,230 | ||||||||
| Consulting and management fees | 2,346 | 2,778 | 9,679 | 6,754 | ||||||||
| Professional fees | 415 | 742 | 1,080 | 2,447 | ||||||||
| General and administrative | 340 | 956 | 1,376 | 2,615 | ||||||||
| Promotion and communication | 1,142 | 2,145 | 3,713 | 6,559 | ||||||||
| Travel expenses | 77 | 277 | 333 | 769 | ||||||||
| Share based compensation | 4 | 162 | 996 | 2,951 | ||||||||
| Research and development | 8 | 79 | 37 | 313 | ||||||||
| Operating lease expense | 286 | 332 | 910 | 659 | ||||||||
| Depreciation and amortization | 305 | 562 | 2,043 | 1,612 | ||||||||
| Bad debt expense | (14 | ) | 631 | 33 | 886 | |||||||
| Asset impairment | - | - | 34,941 | 15,652 | ||||||||
| Other expenses, net |
573 |
393 |
2,078 |
1,203 | ||||||||
| Operating loss | (540 | ) | (4,374 | ) | (42,971 | ) | (32,190 | ) | ||||
| Non-operating (income) expenses | (1,119 | ) | 2,300 | (2,176 | ) | 3,791 | ||||||
| Net income (loss) before taxes and discontinued operations |
579 |
(6,674 | ) | (40,795 | ) | (35,981 | ) | |||||
| Income tax benefit | (51 | ) | - | (1,247 | ) | - | ||||||
| Net income (loss) from continuing operations |
630 |
(6,674 | ) | (39,548 | ) | (35,981 | ) | |||||
| Income (loss) from discontinued operations |
492 |
(737 | ) | (7,791 | ) | (3,732 | ) | |||||
| Net income (loss) for the period | $ |
1,122 |
$ | (7,411 | ) | $ | (47,339 | ) | $ | (39,713 | ) |
For the Three Months Ended September 30, 2023, and 2022
Revenue
Revenue totaled $17.3 million and $9.7 million for the three months ended September 30, 2023 and 2022, respectively. The increase was primarily driven by the following:
Gross Profit
Gross profit totaled $4.9 million and $4.7 million for the three months ended September 30, 2023 and 2022, respectively. The increase was primarily driven by the acquisition of FGH, which contributed $0.6 million in the three months ended September 30, 2023 compared to $nil in the three months ended September 30, 2022. This increase was partially offset by reduced gross margins at JustCBD, which contributed $3.0 million in the three months ended September 30, 2023 compared to $3.9 million in the three months ended September 30, 2022. The remaining fluctuation is due to improved gross margins at Vessel with $1.0 million in the three months ended September 30, 2023 compared to $0.5 million in the three months ended September 30, 2022. As a percentage of net sales, or gross margin, the Company reported 29% and 48% for the three months ended September 30, 2023 and 2022, respectively. The decrease is primarily due to the acquisition of FGH, which distributes relatively lower margin pharmaceuticals.
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Operating Expenses
Operating expenses totaled $5.5 million and $9.1 million for the three months ended September 30, 2023 and September 30, 2022, respectively. The decrease is seen across multiple expense categories and it is due to management's cost-cutting initiatives implemented at the start of the third quarter of 2023.
Consulting and Management Fees
Consulting and management fees were $2.3 million for the three months ended September 30, 2023 compared to $2.8 million for the three months ended September 30, 2022. These fees are related to employment and consulting contracts with most of the Company's management, as well as directors. The decrease is primarily due a substantial reduction in the Company's corporate office headcount that resulted in $1.2 million lower expenses in the quarter, partially offset by the acquisition of FGH, which contributed $0.7 million.
Professional Fees
Professional fees totaled $0.4 million for the three months ended September 30, 2023 compared to $0.7 million for the three months ended September 30, 2022. These expenses are associated with legal, accounting and audit services. The decrease of $0.3 million is due to management's cost-cutting initiatives.
General and Administrative Expenses
General and administrative expenses totaled $0.3 million for the three months ended September 30, 2023 compared to $1.0 million for the three months ended September 30, 2022. The decrease is primarily due to the Company's efforts to reduce general and administrative expenses.
Promotion and Communication Expenses Income Tax Benefit
Promotion and communication expenses totaled $1.1 million for the three months ended September 30, 2023 compared to $2.1 million for the three months ended September 30, 2022. The decrease is primarily due to cost-cutting initiatives by the Company aimed at the minimization of corporate overhead. Promotion expenses incurred in the period largely relate to the nature of JustCBD's business model, which is centered around promoting its products as a method for stimulating revenue growth.
Travel Expenses
Travel expenses totaled $0.1 million for the three months ended September 30, 2023 compared to $0.3 million for the three months ended September 30, 2022. These expenses were for various trips related to the subsidiaries and the Company's promotional activities.
Share-based Compensation Expenses
Share based compensation expenses totaled less than $0.1 million for the three months ended September 30, 2023 compared to $0.2 million for the three months ended September 30, 2022. These expenses represent the amortization of the fair value of share-based payments. The decrease is primarily due to the cancellation of restricted stock awards, a result of employee terminations during the third quarter of fiscal 2023.
Research and Development Expenses
Research and development expenses totaled less than $0.1 million for the three months ended September 30, 2023 compared to $0.1 million for the three months ended September 30, 2022. Research and development expenses have been minimized in the period ended September 30, 2023 whereas in the period ended September 30, 2022 they consisted primarily of contract research fees, manufacturing, consultant fees, and costs related to the launch of new brands for the Vessel business.
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Operating Lease Expenses
Operating lease expenses totaled $0.3 million for the three months ended September 30, 2023 compared to $0.3 million for three months ended September 30, 2022.
Depreciation and Amortization Expense
Depreciation and amortization expenses totaled $0.3 million for the three months ended September 30, 2023 compared to $0.6 million for the three months ended September 30, 2022. The decrease is primarily due to the disposition of the Company's Colombian operations.
Bad Debt Expense
Bad debt expense totaled less than $0.1 million for the three months ended September 30, 2023 compared to $0.6 million for the three months ended September 30, 2022. The amounts reflect the Company's estimate of lifetime expected losses related to outstanding trade receivables.
Other Expenses
Other expenses totaled $0.6 million for the three months ended September 30, 2023 compared to $0.4 million for the three months ended September 30, 2022. For both periods, these expenses consist mainly of insurance, repairs and maintenance and royalties partially offset by miscellaneous incomes.
Non-operating (Income) Expenses
Flora realized $1.1 million in non-operating income for the three months ended September 30, 2023 compared to non-operating expense of $2.3 million for the three months ended September 30, 2022. These (incomes) expenses consist of unrealized (gains) losses from changes in fair value, interest (income) expense and foreign exchange loss. The increase in income is primarily due to a $0.8 million gain on the value of the contingent consideration related to the JustCBD acquisition during the three months ended September 30, 2023 compared to a $2.2 million loss during the three months ended September 30, 2022.
Income Tax Benefit
We recognized $0.1 million and $nil in income tax benefit for the three months ended September 30, 2023 and 2022, respectively. Our effective tax rate during the periods ended September 30, 2023 and 2022 was 8.8% and 0.0%, respectively. We maintain valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is required, we consider such factors as prior earnings history, expected future earnings, carry-back and carry-forward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. We continue to believe our deferred tax assets are not more-likely-than-not to be realized and a full valuation allowance remains recorded against net deferred taxes as of September 30, 2023 and 2022. The income tax benefit in the three months ended September 30, 2023 is primarily related to the tax effect of the impairment charge on the intangible assets at FGH.
Income (Loss) from Discontinued Operations
Income from discontinued operations totaled $0.5 million in the three months ended September 30, 2023 compared to loss from discontinued operations of $0.7 million in the three months ended September 30, 2022. The increase in income is primarily due to the derecognition of equity components related to the Colombian entities which the Company sold during the quarter.
Net Income
We earned net income of $1.1 million for the three months ended September 30, 2023 compared to a net loss of $7.4 million for the three months ended September 30, 2022. This significant improvement is due to a change in management, which implemented substantial cost reductions in the quarter, sold the Company's Colombian operations and refocused the business towards higher-margin products.
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For the Nine Months Ended September 30, 2023, and 2022
Revenue
Revenue totaled $58.1 million and $22.9 million for the nine months ended September 30, 2023 and 2022, respectively. The increase was primarily driven by the following acquisitions:
Revenues generated for the nine months ended September 30, 2023 by the Company`s Colombian entities are included separately within Loss from Discontinued Operations.
Gross Profit
Gross profit totaled $14.2 million and $10.2 million for the nine months ended September 30, 2023 and 2022, respectively. The increase was primarily driven by the acquisitions of FGH and JustCBD, which contributed $1.8 million and $10.2 million, respectively, in the nine months ended September 30, 2023. In the comparative period, JustCBD contributed $8.7 million and FGH did not contribute as it was acquired in December 2022. The remaining fluctuations are largely related to Vessel, which contributed $2.2 million in the nine months ended September 30, 2023 compared to $1.5 million in the nine months ended September 30, 2022. As a percentage of net sales, or gross margin, the Company reported 25% and 45% for the nine months ended September 30, 2023 and 2022, respectively. The decrease is primarily due to the acquisition of FGH, which distributes relatively lower margin pharmaceuticals.
Operating Expenses
Operating expenses totaled $57.2 million and $42.4 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. The increase was primarily driven by increased asset impairments in the nine months ended September 30, 2023, partially offset by reduced promotion and communication, professional fees and share based compensation expenses.
Consulting and Management Fees
Consulting and management fees were $9.7 million for the nine months ended September 30, 2023 compared to $6.8 million for the nine months ended September 30, 2022. These fees are related to employment and consulting contracts with most of the Company's management, as well as directors. The increase is primarily related to the acquisition of FGH, which contributed $1.9 million, and a severance payment made to the former Chief Executive Officer. These increases were partially offset by significant corporate office headcount reductions, the impact of which was only reflected in the last three months of the 2023 period.
Professional Fees
Professional fees totaled $1.1 million for the nine months ended September 30, 2023 compared to $2.4 million for the nine months ended September 30, 2022. These expenses are associated with legal, accounting and audit services. In the period ended September 30, 2023, the Company made a concerted effort to reduce professional fees and receive credit notes from certain service providers. In the period ended September 30, 2022, professional fees included one-time acquisition and transaction related costs relating to the Company's acquisition of JustCBD.
General and Administrative Expenses
General and administrative expenses totaled $1.4 million for the nine months ended September 30, 2023 compared to $2.6 million for the nine months ended September 30, 2022. The decrease is primarily due to the Company's efforts to reduce general and administrative expenses.
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Promotion and Communication Expenses
Promotion and communication expenses totaled $3.7 million for the nine months ended September 30, 2023 compared to $6.6 million for the nine months ended September 30, 2022. The decrease is primarily due to cost-cutting initiatives by the Company aimed at the minimization of corporate overhead. Promotion expenses incurred in the period largely relate to the nature of JustCBD's business model, which is centered around promoting its products as a method for stimulating revenue growth.
Travel Expenses
Travel expenses totaled $0.3 million for the nine months ended September 30, 2023 compared to $0.8 million for the nine months ended September 30, 2022. These expenses were for various trips related to the subsidiaries and the Company's promotional activities.
Share-based Compensation Expenses
Share based compensation expenses totaled $1.0 million for the nine months ended September 30, 2023 compared to $3.0 million for the nine months ended September 30, 2022. These expenses represent the amortization of the fair value of share-based payments. The decrease is primarily due to the cancellation of restricted stock awards, a result of employee terminations during the first nine months of 2023.
Research and Development Expenses
Research and development expenses totaled less than $0.1 million for the nine months ended September 30, 2023 compared to $0.3 million for the nine months ended September 30, 2022. Research and development expenses have been minimized in the period ended September 30, 2023 whereas in the period ended September 30, 2022 they consisted primarily of contract research fees, manufacturing, consultant fees, and costs related to the launch of new brands for the Vessel business.
Operating Lease Expenses
Operating lease expenses totaled $0.9 million for the nine months ended September 30, 2023 compared to $0.7 million for nine months ended September 30, 2022. The increase is primarily due to the acquisition of FGH and its accompanying facility and vehicle leases.
Depreciation and Amortization Expense
Depreciation and amortization expenses totaled $2.0 million for the nine months ended September 30, 2023 compared to $1.6 million for the nine months ended September 30, 2022. The increase is primarily due to the acquisition of FGH, and the corresponding amortization of the intangible assets acquired.
Bad Debt Expense
Bad debt expense totaled less than $0.1 million for the nine months ended September 30, 2023 compared to $0.9 million for the nine months ended September 30, 2022. The amounts reflect the Company's estimate of lifetime expected losses related to outstanding trade receivables.
Asset Impairment
Asset impairment totaled $34.9 million for the nine months ended September 30, 2023 compared to $15.7 million for the nine months ended September 30, 2022. The amount in 2023 represents impairment of the goodwill at JustCBD and FGH and the long-lived assets at Vessel, JustCBD and FGH. The amount in 2022 represents impairment of the goodwill at Vessel.
Other Expenses
Other expenses totaled $2.1 million for the nine months ended September 30, 2023 compared to $1.2 million for the nine months ended September 30, 2022. For both periods, these expenses consist mainly of insurance, repairs and maintenance and royalties partially offset by miscellaneous incomes.
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Non-operating (Income) Expenses
Flora realized $2.2 million in non-operating income for the nine months ended September 30, 2023 compared to non-operating expense of $3.8 million for the nine months ended September 30, 2022. This (income) expense consists of unrealized (gains) losses from changes in fair value, interest (income) expense and foreign exchange loss. The increase in income is primarily due to a $1.9 million gain on the value of the contingent consideration related to the JustCBD acquisition during the nine months ended September 30, 2023 compared to a $3.5 million loss during the nine months ended September 30, 2022.
Income Tax Benefit
We recognized $1.2 million and $nil in income tax benefit for the nine months ended September 30, 2023 and 2022, respectively. Our effective tax rate during the periods ended September 30, 2023 and 2022 was 3.1% and 0.0%, respectively. The income tax benefit in the nine months ended September 30, 2023 is primarily related to the tax effect of the impairment charge on the intangible assets at FGH.
Loss from Discontinued Operations
Loss from discontinued operations totaled $7.8 million in the nine months ended September 30, 2023 compared to $3.7 million in the nine months ended September 30, 2022. The increase is primarily due to impairment charges and losses on disposal in relation to the Company`s Colombian operations.
Net loss
We incurred a net loss of $47.3 million and $39.7 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in net loss is primarily driven by increased asset impairments of $19.3 million and an increase of $4.1 million in relation to the loss from discontinued operations for the Company`s Colombian operations.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are non-U.S. GAAP financial measures that do not have any standardized meaning prescribed by U.S. GAAP and may not be comparable to similar measures presented by other companies. We calculate EBITDA as total net income (loss) from continuing operations, plus (minus) income taxes (recovery), plus (minus) interest expense (income), plus depreciation and amortization. We calculate Adjusted EBITDA as EBITDA plus (minus) non-operating expense (income), plus share based compensation expense, plus asset impairment charges, plus (minus) unrealized loss (gain) from changes in fair value, plus charges related to the flow-through of inventory step-up on business combinations, plus other acquisition and transaction costs. Management believes that EBITDA and Adjusted EBITDA provide meaningful and useful financial information as these measures demonstrate the operating performance of the business.
The reconciliation of the Company's EBITDA and Adjusted EBITDA, non-U.S. GAAP financial measures, to net income (loss) from continuing operations, the most directly comparable U.S. GAAP financial measure, for the nine months ended September 30, 2023 is presented in the table below:
| (In thousands of United States dollars) | JustCBD | Vessel | Phatebo | Corporate & Other |
Consolidated | ||||||||||
| Net (loss) income from continuing operations | $ | (19,194 | ) | $ | (8,440 | ) | $ | 55 | $ | (11,969 | ) | $ | (39,548 | ) | |
| Income tax expense (recovery) | - | - | 16 | (1,263 | ) | (1,247 | ) | ||||||||
| Interest expense (income) | 7 | 2 | 61 | (3 | ) | 67 | |||||||||
| Depreciation and amortization | 578 | 720 | 21 | 724 | 2,043 | ||||||||||
| EBITDA | (18,609 | ) | (7,718 | ) | 153 | (12,511 | ) | (38,685 | ) | ||||||
| Non-operating loss (income) (1) | 3 | 2 | - | (83 | ) | (78 | ) | ||||||||
| Share based compensation | - | - | - | 996 | 996 | ||||||||||
| Asset impairment | 20,073 | 7,402 | - | 7,466 | 34,941 | ||||||||||
| Unrealized gain from changes in fair value (2) | (820 | ) | - | - | (1,345 | ) | (2,165 | ) | |||||||
| Charges related to the flow-through of inventory step-up on business combinations | - | - | - | 45 | 45 | ||||||||||
| Adjusted EBITDA | $ | 647 | $ | (314 | ) | $ | 153 | $ | (5,432 | ) | $ | (4,946 | ) |
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The reconciliation of the Company's Adjusted EBITDA, a non-U.S. GAAP financial measure, to net income (loss) from continuing operations, the most directly comparable U.S. GAAP financial measure, for the nine months ended September 30, 2022 is presented in the table below:
| (In thousands of United States dollars) | JustCBD | Vessel | Corporate & Other |
Consolidated | ||||||||
| Net loss from continuing operations | $ | (639 | ) | $ | (18,137 | ) | $ | (17,205 | ) | $ | (35,981 | ) |
| Interest expense (income) | 59 | 24 | (130 | ) | (47 | ) | ||||||
| Depreciation and amortization | 452 | 1,079 | 81 | 1,612 | ||||||||
| EBITDA | (128 | ) | (17,034 | ) | (17,254 | ) | (34,416 | ) | ||||
| Non-operating loss (1) | 4 | 2 | 322 | 328 | ||||||||
| Share based compensation | - | - | 2,951 | 2,951 | ||||||||
| Asset impairment | - | 15,652 | - | 15,652 | ||||||||
| Unrealized loss from changes in fair value (2) | - | - | 3,510 | 3,510 | ||||||||
| Charges related to the flow-through of inventory step-up on business combinations | 1,631 | - | - | 1,631 | ||||||||
| Other acquisition and transaction costs (3) | 614 | 81 | 28 | 723 | ||||||||
| Adjusted EBITDA | $ | 2,121 | $ | (1,299 | ) | $ | (10,443 | ) | $ | (9,621 | ) |
The reconciliation of the Company's Adjusted EBITDA, a non-U.S. GAAP financial measure, to net income (loss) from continuing operations, the most directly comparable U.S. GAAP financial measure, for the three months ended September 30, 2023 is presented in the table below:
| (In thousands of United States dollars) | JustCBD | Vessel | Phatebo | Corporate & Other |
Consolidated | ||||||||||
| Net income (loss) from continuing operations | $ | 563 | $ | 653 | $ | (43 | ) | $ | (543 | ) | $ | 630 | |||
| Income tax recovery | - | - | (23 | ) | (28 | ) | (51 | ) | |||||||
| Interest (income) expense | (1 | ) | 1 | 16 | - | 16 | |||||||||
| Depreciation and amortization | 177 | 16 | 7 | 105 | 305 | ||||||||||
| EBITDA | 739 | 670 | (43 | ) | (466 | ) | 900 | ||||||||
| Non-operating loss (1) | 1 | 2 | - | 95 | 98 | ||||||||||
| Share based compensation | - | - | - | 4 | 4 | ||||||||||
| Unrealized gain from changes in fair value (2) | (463 | ) | - | - | (770 | ) | (1,233 | ) | |||||||
| Adjusted EBITDA | $ | 277 | $ | 672 | $ | (43 | ) | $ | (1,137 | ) | $ | (231 | ) |
The reconciliation of the Company's Adjusted EBITDA, a non-U.S. GAAP financial measure, to net income (loss) from continuing operations, the most directly comparable U.S. GAAP financial measure, for the three months ended September 30, 2022 is presented in the table below:
| (In thousands of United States dollars) | JustCBD | Vessel | Corporate & Other |
Consolidated | ||||||||
| Net income (loss) from continuing operations | $ | 35 | $ | (998 | ) | $ | (5,711 | ) | $ | (6,674 | ) | |
| Interest expense (income) | 32 | 24 | (61 | ) | (5 | ) | ||||||
| Depreciation and amortization | 182 | 350 | 30 | 562 | ||||||||
| EBITDA | 249 | (624 | ) | (5,742 | ) | (6,117 | ) | |||||
| Non-operating (income) loss (1) | (28 | ) | 2 | 154 | 128 | |||||||
| Share based compensation | - | - | 162 | 162 | ||||||||
| Unrealized loss from changes in fair value (2) | - | - | 2,177 | 2,177 | ||||||||
| Other acquisition and transaction costs (3) | 5 | 18 | 13 | 36 | ||||||||
| Adjusted EBITDA | $ | 226 | $ | (604 | ) | $ | (3,236 | ) | $ | (3,614 | ) |
(1) Non-operating expenses include foreign exchange losses.
(2) Unrealized loss from changes in fair value includes changes in the value of the Company's contingent consideration associated with its acquisition of JustCBD.
(3) Other acquisition and transaction costs are one-time legal and due-diligence fees related to business combinations.
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Liquidity and Capital Resources
Since the Company’s inception, we have funded our operations and capital spending through cash flows from product sales and proceeds from the sale of our capital stock. The Company is generating cash from sales and is deploying its capital reserves to acquire and develop assets capable of producing additional revenues and earnings over both the immediate and near term to support our business growth and expansion. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and unaudited condensed interim consolidated statements of cash flows. We expect to continue to incur operating losses and negative cash flows in the foreseeable future. Our current principal sources of liquidity are cash and cash equivalents provided by our operations and prior equity offerings. Cash and cash equivalents consist primarily of cash on deposit with banks. Cash and cash equivalents were $4.8 million and $8.9 million as of September 30, 2023, and December 31, 2022, respectively. As of September 30, 2023, the Company’s current working capital, anticipated operating expenses and net losses, and the uncertainties surrounding its ability to raise additional capital as needed, raise substantial doubt as to whether existing cash and cash equivalents will be sufficient to meet its obligations as they come due within twelve months from the date the unaudited condensed interim consolidated financial statements were issued. The unaudited condensed interim consolidated financial statements do not include any adjustments for the recovery and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company's ability to execute its operating plans depends on its ability to obtain additional funding through equity offerings, debt financing, or other forms of financing to meet planned growth requirements and to fund future operations, which may not be available on acceptable terms, or at all. If we are unable to raise the requisite funds, we will need to curtail or cease operations. See Note 2 to the Company's unaudited condensed interim consolidated financial statements included elsewhere in this Quarterly Report and to the Company's audited consolidated financial statements for the years ended December 31, 2022, and 2021, included in the 2022 Annual Report, for more information, and "Part I., Item IA Risk Factors - Management has performed an analysis of our ability to continue as a going concern, and has determined that, based on our current financial position, there is a substantial doubt about our ability to continue as a going concern" in the Company's 2022 Annual Report. We have based our estimates as to how long we expect we will be able to fund our operations on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. In the long term, we will be required to obtain additional financing to fund our current planned operations, which may consist of incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. There can be no assurance that the Company will be able to obtain additional funds on terms acceptable to it, on a timely basis or at all. The failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the results of operations, and financial condition. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing shareholders will be diluted. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends.
The Company's primary uses of cash are for working capital requirements and capital expenditures. Additionally, from time to time, it may use capital for acquisitions and other investing and financing activities. Working capital is used principally for the Company's personnel as well as costs related to the manufacture and production of its products. The Company's capital expenditures consist primarily of additional facilities, improvements in existing facilities and product development.
Cash Flows
The following table sets forth the major components of the Company's unaudited condensed interim consolidated statements of cash flows for the periods presented.
| (In thousands of United States dollars) | For the three months ended September 30, 2023 |
For the three months ended September 30, 2022 |
For the nine months ended September 30, 2023 |
For the nine months ended September 30, 2022 |
||||||||
| Cash from (used in) operating activities | $ | 518 | $ | (3,984 | ) |
$ |
(7,265 | ) |
$ |
(14,972 | ) | |
| Cash from (used in) financing activities | 2,334 | (71 | ) | 2,446 | (98 | ) | ||||||
| Cash used in investing activities | (231 | ) | (7 | ) | (272 | ) | (16,187 | ) | ||||
| Effect of exchange rate change | 370 | (307 | ) | 954 | (459 | ) | ||||||
| Change in cash during the period | 2,991 | (4,369 | ) | (4,137 | ) | (31,716 | ) | |||||
| Cash, beginning of period | 1,807 | 10,269 | 8,935 | 37,616 | ||||||||
| Cash included in assets held for sale | - | (408 | ) | - | (408 | ) | ||||||
| Cash, end of period | $ | 4,798 | $ | 5,492 | $ | 4,798 | $ | 5,492 |
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Cash provided by (used in) Operating Activities
Net cash generated from operating activities in the three months ended September 30, 2023 was $0.5 million compared to net cash used in operating activities of $4.0 million for the three months ended September 30, 2022. Net cash used in operating activities for the nine months ended September 30, 2023 and 2022 totaled $7.3 million and $15.0 million, respectively. Positive cash flows from operating activities in the three months ended September 30, 2023 marks the first quarter in the Company's history whereby gross profits exceeded operating expenditures, primarily due to concerted management efforts to reduce costs and optimize product mix. Cash flows used in operating activities for the remaining periods shown were due primarily to operating expenses exceeding the gross profit for the periods.
Cash provided by (used in) Financing Activities
Net cash provided by and used in financing activities for the three months ended September 30, 2023 and 2022 totaled $2.3 million and $0.1 million, respectively. Net cash provided by and used in financing activities for the nine months ended September 30, 2023 and 2022 totaled $2.4 million and $0.1 million, respectively. Cash flows provided from financing activities were primarily due to sales of equity securities. Cash flows used in financing activities for the period ended September 30, 2022 were primarily related to the Company's share repurchase program, equity issuance costs and loan repayments, partially offset by proceeds received from warrant and stock option exercises.
Cash used in Investing Activities
Net cash used in investing activities for the three months ended September 30, 2023 and 2022 totaled $0.2 million and less than $0.1 million, respectively. Net cash used in investing activities for the nine months ended September 30, 2023 and 2022 totaled $0.3 million and $16.2 million, respectively. Cash flows used in investing activities for the period ended September 30, 2023 were primarily related to the purchases of property, plant and equipment, and intangible assets. Cash flows used in investing activities for the period ended September 30, 2022 were primarily related to the cash portion of the consideration paid with respect to the acquisition of JustCBD in February 2022.
Working Capital
As of September 30, 2023, we had working capital of $7.3 million, including $4.8 million of cash. The Company's primary cash flow needs are for the development of its operating activities, administrative expenses and for general working capital to support growing sales with related receivables and payables.
Funding Requirements
Our continued existence is dependent on our ability to generate positive cash flows through synergies within our operations, expanding our production capacity and geographic footprint, exploring strategic partnerships, and pursuing accretive acquisitions to supplement our organic growth. We are committed to attaining a level of sustained growth that will effectively offset our overhead costs, thereby paving the path to achieving profitability. We will be required in the future to raise additional capital through either equity or debt financings. To date, we have raised capital through multiple equity offerings. On September 21, 2023, the Company closed a registered direct offering of 1,369,000 units of the Company at a price of $2.00 per unit for gross proceeds of $2.7 million. Each unit is comprised of one Common Share and one Common Share purchase warrant (1,369,000 total warrants) to purchase one additional Common Share at an exercise price of $2.50 per warrant share through March 21, 2029. There were no equity offerings in the period ended September 30, 2022.
Debt
In addition to equity offerings, the Company also has access to a credit facility through its acquisition of FGH. The credit facility is in the amount of 1.0 million Euros with Hypoverinsbank, secured by the trade and other receivables of Phatebo GmbH - one of the subsidiaries of FGH. On September 30, 2023, the outstanding amount was 1.0 million Euros ($1.1 million USD). The credit facility has an interest rate of Euribor plus 2.95% per year and does not have a set maturity date. The interest rate is reset every two months.
Off-Balance Sheet Arrangements
As of September 30, 2023, the Company did not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on its results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.
38
Contractual Obligations
At September 30, 2023, the Company had the following contractual obligations to make future payments, representing contracts and other commitments that are known and committed:
| (In thousands of United States dollars) | Total | Less than 1 Year |
1 - 3 Years | More than 3 Years |
||||||||
| Legal disputes (1) | $ | 2,994 | $ | 2,994 | $ | - | $ | - | ||||
| Sales tax (1) | 2,404 | 2,404 | - | - | ||||||||
| Contingent purchase consideration (2) | 1,121 | 797 | 135 | 189 | ||||||||
| Operating lease obligations (3) | 2,220 | 1,215 | 813 | 192 | ||||||||
| Debt (4) | 1,115 | 1,115 | - | - | ||||||||
| Total | $ | 9,854 | $ | 8,525 | $ | 948 | $ | 381 |
(1) See Note 16 of the Company's unaudited condensed interim consolidated financial statements, included elsewhere in this Quarterly Report.
(2) See Note 8 of the Company's unaudited condensed interim consolidated financial statements, included elsewhere in this Quarterly Report.
(3) See Note 12 of the Company's unaudited condensed interim consolidated financial statements, included elsewhere in this Quarterly Report.
(4) See Note 11 of the Company's unaudited condensed interim consolidated financial statements, included elsewhere in this Quarterly Report.
Critical Accounting Estimates
For information regarding our critical accounting policies and estimates, see "Critical Accounting Estimates" included in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Annual Report.
Recently Adopted Accounting Principles
There were no new accounting standards issued during the three months ended September 30, 2023 that impacted the Company. See Note 3, Significant Accounting Policies, of the notes to the consolidated financial statements for the year ended December 31, 2022 for a discussion of recently issued accounting standards.
39
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act and the regulations promulgated thereunder) as of September 30, 2023 (the "Evaluation Date"). Based on such evaluation, those officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Item 1. Legal Proceedings
There have been no material changes to the legal proceedings described in Item 3 of our 2022 Annual Report, other than as disclosed in Note 16 of the Company's unaudited condensed interim consolidated financial statements, included in Item 1 of Part I of this Quarterly Report.
Item 1A. Risk Factors
There have been no material changes to the risk factors described in the 2022 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Except as otherwise disclosed in the Company's Current Reports on Form 8-K filed with the SEC on September 18, 2023, and September 21, 2023, there were no unregistered securities issued and sold during the nine months ended September 30, 2023.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
42
| 32.1* | Certification of Principal Executive Officer of Flora Growth Corp. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||
| 32.2* | Certification of Principal Financial Officer of Flora Growth Corp. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||
| 101.INS | Inline XBRL Instance Document–the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
# Indicates management contract or compensatory plan or arrangement.
* Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Dated: November 8, 2023 | Flora Growth Corp. | |
| By: | /s/ Clifford Starke | |
| Clifford Starke | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| Dated: November 8, 2023 | ||
| By: | /s/ Dany Vaiman | |
| Dany Vaiman | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) |
43