Adastra Holdings Ltd.
(formerly Phyto Extractions Inc.)
Condensed Interim Consolidated Financial Statements
For the nine months ended September 30, 2023 and 2022
(Unaudited - Expressed in Canadian dollars)
Notice of Disclosure of Non-Auditor Review
Pursuant to subsection 4.3(3)(a) of National Instrument 51-102 - Continuous Disclosure Obligations, issued by the Canadian Securities Administrators, if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
The accompanying unaudited condensed interim consolidated financial statements of Adastra Holdings Ltd. (the "Company") for the interim period ended September 30, 2023 and 2022, have been prepared in accordance with the International Accounting Standard 34 Interim Financial Reporting, as issued by the International Accounting Standards Board, and are the responsibility of the Company's management.
The Company's independent auditors have not performed a review of these condensed interim consolidated financial statements.
November 29, 2023
ADASTRA HOLDINGS LTD. Condensed Interim Consolidated Statements of Financial Position As at September 30, 2023 and December 31, 2022 (Unaudited - Expressed in Canadian dollars) |
| Note | September 30, 2023 | December 31, 2022 | |||||||
| $ | $ | ||||||||
| ASSETS | |||||||||
| Current assets | |||||||||
| Cash | 1,780,686 | 1,013,867 | |||||||
| Amounts receivable | 4 | 4,374,637 | 3,561,765 | ||||||
| Prepaid expenses and deposits | 5 | 463,193 | 414,212 | ||||||
| Inventory | 6 | 3,701,350 | 4,005,282 | ||||||
| 10,319,866 | 8,995,126 | ||||||||
| Long-term deposits | 5 | 512,000 | 512,000 | ||||||
| Property and equipment | 7 | 9,392,892 | 9,726,822 | ||||||
| Intangible assets | 8 | 2,827,958 | 3,133,808 | ||||||
| Goodwill | 9 | 9,436,189 | 9,436,189 | ||||||
| Total assets | 32,488,905 | 31,803,945 | |||||||
| LIABILITIES | |||||||||
| Current liabilities | |||||||||
| Accounts payable and accrued liabilities | 10,15 | 11,831,647 | 8,545,048 | ||||||
| Current portion of lease liability | 11 | 16,155 | 17,640 | ||||||
| Current portion of mortgage payable | 12 | - | 3,507,389 | ||||||
| Loan payable | 13 | 66,365 | 314,555 | ||||||
| Deferred revenue | - | 275,575 | |||||||
| 11,914,167 | 12,660,207 | ||||||||
| Deferred tax liability | 768,000 | 808,000 | |||||||
| Lease liability | 11 | 91,941 | 45,948 | ||||||
| Mortgage payable | 12 | 3,479,284 | - | ||||||
| Government loan | 60,000 | 60,000 | |||||||
| Total liabilities | 16,313,392 | 13,574,155 | |||||||
| SHAREHOLDERS' EQUITY | |||||||||
| Share capital | 14 | 29,964,446 | 29,964,446 | ||||||
| Reserves | 14 | 6,474,732 | 6,474,732 | ||||||
| Deficit | (20,263,664 | ) | (18,209,388 | ) | |||||
| Total shareholders' equity | 16,175,514 | 18,229,790 | |||||||
| Total liabilities and shareholders' equity | 32,488,905 | 31,803,945 |
Nature of operations and going concern (Note 1)
Commitments and contingencies (Note 18)
Subsequent events (Notes 12 & 13)
Approved on behalf of the Board of Directors on November 29, 2023:
"Michael Forbes" |
| "Paul Morgan" |
Director |
| Director |
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
ADASTRA HOLDINGS LTD. Condensed Interim Consolidated Statements of Loss and Comprehensive Loss For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| Note | 2023 | 2022 | 2023 | 2022 | |||||||||||
| $ | $ | $ | $ | ||||||||||||
| Revenue | 8,142,225 | 5,451,638 | 28,542,227 | 11,314,414 | |||||||||||
| Excise taxes | (3,792,096) | (1,647,851) | (11,319,734) | (2,172,352) | |||||||||||
| Net revenue | 4,350,129 | 3,803,787 | 17,222,493 | 9,142,062 | |||||||||||
| Cost of sales | 6,8 | (2,125,784 | ) | (2,168,330 | ) | (10,758,365 | ) | (5,584,825 | ) | ||||||
| Gross profit | 2,224,345 | 1,635,457 | 6,464,128 | 3,557,237 | |||||||||||
| Operating expenses | |||||||||||||||
| Advertising and promotion | 894,828 | 313,109 | 1,944,512 | 864,241 | |||||||||||
| Data program expenses | 435,558 | 462,650 | 1,007,321 | 828,370 | |||||||||||
| Depreciation and amortization | 7,8 | 140,010 | 148,112 | 399,504 | 444,420 | ||||||||||
| Insurance | 64,223 | 52,368 | 166,164 | 134,161 | |||||||||||
| Office expenses | 257,500 | 194,330 | 837,591 | 509,474 | |||||||||||
| Professional fees and consulting | 15 | 190,090 | 288,788 | 784,536 | 794,097 | ||||||||||
| Repair and maintenance expenses | 35,419 | 47,946 | 126,347 | 137,911 | |||||||||||
| Share-based payments | - | 138,713 | - | 138,713 | |||||||||||
| Travel | 49,635 | 44,019 | 107,363 | 106,370 | |||||||||||
| Wages and salaries | 15 | 539,242 | 368,979 | 1,479,035 | 1,041,554 | ||||||||||
| Total operating expenses | 2,606,505 | 2,059,014 | 6,852,373 | 4,999,311 | |||||||||||
| Income (Loss) from operations | (382,160 | ) | (423,557 | ) | (388,245 | ) | (1,442,074 | ) | |||||||
| Other expense | |||||||||||||||
| Interest expense | 11,12,13 | (260,221 | ) | (57,708 | ) | (691,926 | ) | (190,492 | ) | ||||||
| Bad debt expense | 4 | (7,810 | ) | - | (482,578 | ) | - | ||||||||
| Impairment of inventory | 6 | - | - | (482,103 | ) | - | |||||||||
| Loss before income taxes | (650,191 | ) | (481,265 | ) | (2,044,852 | ) | (1,632,566 | ) | |||||||
| Deferred income tax recovery | 8,000 | 22,000 | 40,000 | 78,000 | |||||||||||
| Income tax expense | - | - | (49,424 | ) | (47,149 | ) | |||||||||
| Net loss and comprehensive loss | (642,191 | ) | (459,265 | ) | (2,054,276 | ) | (1,601,715 | ) | |||||||
| Net loss per share | |||||||||||||||
| Basic and diluted | (0.01 | ) | (0.01 | ) | (0.04 | ) | (0.03 | ) | |||||||
| Weighted average number of common shares outstanding | |||||||||||||||
| Basic and diluted | 55,970,547 | 55,970,547 | 55,970,547 | 60,308,782 | |||||||||||
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
ADASTRA HOLDINGS LTD. Condensed Interim Consolidated Statements of Cash Flows For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
| Nine months ended September 30, | ||||||
| 2023 | 2022 | |||||
| $ | $ | |||||
| Operating activities | ||||||
| Net loss and comprehensive loss for the period | (2,054,276 | ) | (1,601,715 | ) | ||
| Adjustments for non-cash items: | ||||||
| Depreciation and amortization | 399,504 | 444,420 | ||||
| Depreciation - cost of sales | 641,518 | 552,169 | ||||
| Interest expense | 393,810 | 190,492 | ||||
| Deferred income tax recovery | (40,000 | ) | (78,000 | ) | ||
| Income tax expense | 49,424 | 47,149 | ||||
| Impairment of inventory | 482,103 | - | ||||
| Share-based payments | - | 138,713 | ||||
| Bad debt expense | 482,578 | - | ||||
| Net change in non-cash working capital items: | ||||||
| Amounts receivable | (1,295,450 | ) | (2,657,498 | ) | ||
| Prepaid expenses and deposits | (48,981 | ) | (462,443 | ) | ||
| Inventory | (178,171 | ) | (6,735 | ) | ||
| Accounts payable and accrued liabilities | 3,679,034 | 3,540,236 | ||||
| Deferred revenue | (275,575 | ) | - | |||
| Cash provided by operating activities | 2,235,517 | 106,788 | ||||
| Investing activities | ||||||
| Purchases of property and equipment | (761,695 | ) | (327,379 | ) | ||
| Cash used in investing activities | (761,695 | ) | (327,379 | ) | ||
| Financing activities | ||||||
| Interest paid - mortgage | (291,273 | ) | (170,625 | ) | ||
| Interest paid - lease liability | (6,843 | ) | (2,152 | ) | ||
| Principal repaid - lease liability | (12,309 | ) | (14,392 | ) | ||
| Repayment of loans payable | (361,578 | ) | - | |||
| Mortgage renewal fee | (35,000 | ) | - | |||
| Cash used in financing activities | (707,003 | ) | (187,169 | ) | ||
| Net increase (decrease) in cash | 766,819 | (407,760 | ) | |||
| Cash, beginning of period | 1,013,867 | 744,541 | ||||
| Cash, end of period | 1,780,686 | 336,781 | ||||
Supplemental cash flow information (Note 16)
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
ADASTRA HOLDINGS LTD. Condensed Interim Consolidated Statements of Changes in Shareholder’s Equity (Unaudited - Expressed in Canadian dollars, except number of shares) |
| Common shares | Share capital | Shares to be cancelled | Reserves | Deficit | Total | |||||||||||||
| # | $ | $ | $ | $ | $ | |||||||||||||
| Balance, December 31, 2021 | 65,970,547 | 41,964,446 | (12,000,000 | ) | 6,336,019 | (13,927,749 | ) | 22,372,716 | ||||||||||
| Share returned to treasury | (10,000,000 | ) | (12,000,000 | ) | 12,000,000 | - | - | - | ||||||||||
| Loss for the period | - | - | - | - | (908,091 | ) | (908,091 | ) | ||||||||||
| Balance, September 30, 2022 | 55,970,547 | 29,964,446 | - | 6,336,019 | (14,835,840 | ) | 21,464,625 | |||||||||||
| Balance, December 31, 2022 | 55,970,547 | 29,964,446 | - | 6,474,732 | (18,209,388 | ) | 18,229,790 | |||||||||||
| Loss for the period | - | - | - | - | (2,054,276 | ) | (2,054,276 | ) | ||||||||||
| Balance, September 30, 2023 | 55,970,547 | 29,964,446 | - | 6,474,732 | (20,263,664 | ) | 16,175,514 |
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 1 - NATURE OF OPERATIONS AND GOING CONCERN
Adastra Holdings Ltd. (the "Company") was incorporated under the laws of the province of British Columbia on October 14, 1987. The Company extracts and processes cannabis for sale to the recreational and medical markets in Canada. The Company is listed on the Canadian Securities Exchange ("CSE") under the symbol "XTRX". The Company's head office is located at 5451 275th Street, Langley City, British Columbia, V4W 3X8 and its registered and records office is located at 2200-885 West Georgia Street, Vancouver, British Columbia, V6C 3E8.
On August 10, 2021, the Company completed the acquisition of all of the issued and outstanding shares of 1225140 B.C. Ltd., doing business as PerceiveMD ("PerceiveMD") from the shareholders of PerceiveMD, pursuant to the terms of a share purchase agreement dated August 10, 2021.
On September 15, 2021, the Company completed the acquisition of privately held 1204581 B.C. Ltd., doing business as Phyto Extractions ("Phyto BrandCo"), the owner of the intellectual property rights for the Phyto Extractions brand.
These condensed interim consolidated financial statements are prepared on the basis that the Company will continue as a going concern, which assumes that the Company will be able to continue its operations for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of operations. These condensed interim consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue in existence. The Company's ability to continue as a going concern is dependent on its ability to generate positive cash flows from operations, complete additional financings, and/or extend or modify its mortgage payable (Note 12).
As at September 30, 2023, the Company had a working capital deficiency of $1,594,300 (December 31, 2022 - $3,665,081). During the nine months ended September 30, 2023, the Company incurred a net loss and comprehensive loss of $2,054,276 (2022 - $1,142,450). These events and conditions indicate a material uncertainty exists that may cast significant doubt on the Company's ability to continue as a going concern. If the going concern assumption were not appropriate for these condensed interim financial statements, it could be necessary to restate the Company's assets and liabilities on a liquidation basis.
NOTE 2 - BASIS OF PRESENTATION
(a) Statement of compliance
These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34 - Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and interpretations of the International Financial Reporting Interpretations Committee ("IFRIC"). As such, these condensed interim consolidated financial statements do not contain all the disclosures required by IFRS for annual financial statements and should be read in conjunction with the Company's audited annual consolidated financial statements for the years ended December 31, 2022, 2021, and 2020.
These condensed interim consolidated financial statements were approved by the Board of Directors and authorized for issue on November 29, 2023.
(b) Basis of measurement
These condensed interim consolidated financial statements have been prepared on a historical cost basis except for those financial instruments which have been classified at fair value through profit or loss. In addition, except for cash flow information, these condensed interim consolidated financial statements have been prepared using the accrual method of accounting.
All amounts in these condensed interim consolidated financial statements are presented in Canadian dollars which is the functional currency of the Company and its subsidiaries.
ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 2 - BASIS OF PRESENTATION (continued)
(c) Principles of consolidation
These condensed interim consolidated financial statements include the financial information of the Company and entities controlled by the Company. Control exists where the parent entity has power over the investee and is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are included in the condensed interim consolidated financial statements from the date control commences until the date control ceases. All intercompany transactions and balances are eliminated on consolidation. The accounting policies of subsidiaries are changed where necessary to align them with the policies adopted by the Company. These condensed interim consolidated financial statements incorporate the accounts of the Company and the following subsidiaries:
| Functional currency | Ownership percentage | |||||
| Adastra Labs Holdings (2019) Ltd. (formerly Adastra Labs Holdings Ltd.) | CAD | 100% | ||||
| Adastra Labs Inc. | CAD | 100% | ||||
| 1178562 B.C. Ltd. | CAD | 100% | ||||
| Adastra Brands Inc. | CAD | 100% | ||||
| Chemia Analytics Inc. ("Chemia") | CAD | 100% | ||||
| 1225140 B.C. Ltd ("PerceiveMD") | CAD | 100% | ||||
| 1204581 B.C. Ltd. ("Phyto BrandCo") | CAD | 100% |
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
The accounting policies applied in the preparation of these condensed interim consolidated financial statements are consistent with those applied and disclosed in note 3 of the consolidated financial statements for the years ended December 31, 2022, 2021 and 2020.
The preparation of the condensed interim consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, revenues and expenses. Management continually evaluates these judgments, estimates and assumptions based on experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates and judgments which may cause a material adjustment to the carrying amounts of assets and liabilities. The Company's interim results are not necessarily indicative of its results for a full year. The critical judgements and estimates applied in the preparation of these interim financial statements are consistent with those applied and disclosed in Note 3 to the consolidated financial statements for the years ended December 31, 2022, 2021 and 2020.
(a) Standards issued but not yet effective
Certain pronouncements have been issued by the IASB or IFRIC that are effective for accounting periods beginning on or after October 1, 2023. The Company has reviewed these updates and determined that many of these updates are not applicable or consequential to the Company and have been excluded from discussion within these significant accounting policies.
Amendments to IAS 1 - Presentation of Financial Statements
In October 2022, the IASB issued amendments to IAS 1, Presentation of Financial Statements titled Non-current liabilities with covenants. These amendments sought to improve the information that an entity provides when its right to defer settlement of a liability is subject to compliance with covenants within 12 months after the reporting period. These amendments to IAS 1 override but incorporate the previous amendments, Classification of liabilities as current or non-current, issued in January 2020, which clarified that liabilities are classified as either current or non-current, depending on the rights that exist at the end of the reporting period. Liabilities should be classified as non-current if a company has a substantive right to defer settlement for at least 12 months at the end of the reporting period. The amendments are effective January 1, 2024, with early adoption permitted. Retrospective application is required on adoption. We do not expect these amendments to have a material effect on our financial statements.
ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 4 - AMOUNTS RECEIVABLE
As at September 30, 2023 and December 31, 2022, amounts receivables consisted of the following:
| September 30, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Trade receivables, net of expected credit losses | 4,374,637 | 3,561,765 | ||||
| 4,374,637 | 3,561,765 |
During the nine months ended September 30, 2023, the Company recorded a bad debt expense of $482,578 (2022 - $nil) related to a provision for expected credit losses against trade receivables.
NOTE 5 - PREPAID EXPENSES AND DEPOSITS
As at September 30, 2023 and December 31, 2022, prepaid expenses and deposits consisted of the following:
| September 30, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Prepaid expenses | 150,731 | 379,456 | ||||
| Deposits | 312,462 | 34,756 | ||||
| 463,193 | 414,212 |
As at September 30, 2023, deposits of $312,462 (December 31, 2022 - $34,756), consist of security deposits, deposits for inventory ordered and deposits for equipment that has been ordered.
Long-term deposits of $512,000 (December 31, 2022 - $512,000) consist of deposits held in trust for excise bond and other deposits.
NOTE 6 - INVENTORY
As at September 30, 2023 and December 31, 2022, inventory consisted of the following:
| September 30, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Dried cannabis, terpenes and solvents | 331,737 | 262,517 | ||||
| Packaging | 1,000,963 | 446,994 | ||||
| Production work in process | 1,547,908 | 1,616,623 | ||||
| Finished goods | 820,742 | 1,679,148 | ||||
| 3,701,350 | 4,005,282 |
Inventory expensed to cost of sales during the nine months ended September 30, 2023 was $9,119,784 (2022 - $5,032,656).
During the nine months ended September 30, 2023, the Company recognized $482,103 (2022 - $nil) in relation to the write down of slow-moving inventory.
ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 7 - PROPERTY AND EQUIPMENT
The following table summarizes the continuity of property and equipment as at September 30, 2023 and December 31, 2022:
| Land | Building | Furniture and equipment | Computer software | Laboratory equipment | Extraction equipment | Building improvements | Right-of- use asset | Total | |||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Cost | |||||||||||||||||||||||||||
| Balance, December 31, 2021 | 1,592,232 | 1,999,328 | 157,784 | 12,105 | 469,215 | 3,253,988 | 3,928,281 | 40,376 | 11,453,309 | ||||||||||||||||||
| Additions | - | - | 21,361 | - | 772,956 | 45,652 | 30,127 | 49,968 | 920,064 | ||||||||||||||||||
| Balance, December 31, 2022 | 1,592,232 | 1,999,328 | 179,145 | 12,105 | 1,242,171 | 3,299,640 | 3,958,408 | 90,344 | 12,373,373 | ||||||||||||||||||
| Additions | - | - | 154,545 | - | 89,481 | 74,811 | - | 82,333 | 401,170 | ||||||||||||||||||
| Disposal | - | - | - | - | - | - | - | (40,376 | ) | (40,376 | ) | ||||||||||||||||
| Balance, September 30, 2023 | 1,592,232 | 1,999,328 | 333,690 | 12,105 | 1,331,652 | 3,374,451 | 3,958,408 | 132,301 | 12,734,167 | ||||||||||||||||||
| Accumulated depreciation | |||||||||||||||||||||||||||
| Balance, December 31, 2021 | - | 316,479 | 40,024 | 3,872 | 98,189 | 873,897 | 342,517 | 3,365 | 1,678,343 | ||||||||||||||||||
| Depreciation | - | 99,967 | 27,326 | 1,649 | 144,721 | 480,881 | 197,539 | 16,125 | 968,208 | ||||||||||||||||||
| Balance, December 31, 2022 | - | 416,446 | 67,350 | 5,521 | 242,910 | 1,354,778 | 540,056 | 19,490 | 2,646,551 | ||||||||||||||||||
| Depreciation | - | 74,973 | 32,739 | 987 | 147,389 | 296,267 | 148,443 | 17,479 | 718,277 | ||||||||||||||||||
| Disposal | - | - | - | - | - | - | - | (23,553 | ) | (23,553 | ) | ||||||||||||||||
| Balance, September 30, 2023 | - | 491,419 | 100,089 | 6,508 | 390,299 | 1,651,045 | 688,499 | 13,416 | 3,341,275 | ||||||||||||||||||
| Carrying value | |||||||||||||||||||||||||||
| Balance, December 31, 2022 | 1,592,232 | 1,582,882 | 111,795 | 6,584 | 999,261 | 1,944,862 | 3,418,352 | 70,854 | 9,726,822 | ||||||||||||||||||
| Balance, September 30, 2023 | 1,592,232 | 1,507,909 | 233,601 | 5,927 | 941,353 | 1,723,406 | 3,269,909 | 118,885 | 9,392,892 |
During the nine months ended September 30, 2023, the Company allocated $641,518 (2022 - $552,169) of depreciation to the production of inventory and $93,654 (2022 - $138,570) to operating expenses.
ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 8 - INTANGIBLE ASSETS
The following table summarizes the continuity of intangible assets as at September 30, 2023 and December 31, 2022:
| Trademarks | Patient relationships | Total | |||||||
| $ | $ | $ | |||||||
| Cost | |||||||||
| Balance, December 31, 2022 and 2021 | 3,250,000 | 414,000 | 3,664,000 | ||||||
| Additions | - | - | - | ||||||
| Balance, September 30, 2023 | 3,250,000 | 414,000 | 3,664,000 | ||||||
| Accumulated depreciation | |||||||||
| Balance, December 31, 2021 | 94,792 | 27,600 | 122,392 | ||||||
| Amortization | 325,000 | 82,800 | 407,800 | ||||||
| Balance, December 31, 2022 | 419,792 | 110,400 | 530,192 | ||||||
| Amortization | 243,750 | 62,100 | 305,850 | ||||||
| Balance, September 30, 2023 | 663,542 | 172,500 | 836,042 | ||||||
| Carrying value | |||||||||
| Balance, December 31, 2022 | 2,830,208 | 303,600 | 3,133,808 | ||||||
| Balance, September 30, 2023 | 2,586,458 | 241,500 | 2,827,958 |
Trademarks
During the year ended December 31, 2021, the Company acquired a total of $3,250,000 in Trademarks. These Trademarks have a useful life of 10 years and are measured at cost less accumulated amortization and impairment losses. These Trademarks are amortized on a straight-line basis over their estimated useful lives. Useful lives, residual values, and amortization methods for intangible assets with finite useful lives are reviewed at least annually.
On October 3, 2022, the Company terminated the license agreement with the previous Trademark licensee who had sole use of the Trademarks acquired pursuant to the Phyto BrandCo acquisition. As a result, the Company now retains all rights to the Trademarks and will begin selling the related cannabis consumer packaged goods directly to provincial distributors and retailers. During the year ended December 31, 2022, the Company recorded a $1,542,492 loss on the termination of the license agreement.
Patient Relationships
During the year ended December 31, 2021, the Company acquired a total of $414,000 in Patient Relationships. These relationships have a useful life of 5 years and are measured at cost less accumulated amortization and impairment losses. These relationships are amortized on a straight-line basis over their estimated useful lives. Useful lives, residual values, and amortization methods for intangible assets with finite useful lives are reviewed at least annually.
NOTE 9 - GOODWILL
The following table summarizes the continuity of goodwill for the nine months ended September 30, 2023 and the year ended December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Opening balance | 9,436,189 | 11,108,422 | ||||
| Impairment - PerceiveMD | - | (1,672,233 | ) | |||
| Closing balance | 9,436,189 | 9,436,189 |
ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As at September 30, 2023 and December 31, 2022, accounts payable and accrued liabilities consisted of the following:
| September 30, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Accounts payable | 2,055,928 | 2,992,928 | ||||
| Accrued liabilities | 279,751 | 549,747 | ||||
| Excise tax payable | 8,934,120 | 4,153,096 | ||||
| Income tax payable | 139,082 | 89,658 | ||||
| Sales tax payable | 489,130 | 759,619 | ||||
| 11,898,011 | 8,545,048 |
NOTE 11 - LEASE LIABILITY
A summary of the Company's lease liabilities for the nine months ended September 30, 2023 and the year ended December 31, 2022 is as follows:
| September 30, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Opening balance | 63,588 | 32,155 | ||||
| Additions - equipment | 82,333 | 49,968 | ||||
| Disposal | (25,516 | ) | - | |||
| Interest | 6,843 | 3,810 | ||||
| Repayments | (19,152 | ) | (22,345 | ) | ||
| Closing balance | 108,096 | 63,588 | ||||
| Less: current portion | (16,155 | ) | (17,640 | ) | ||
| Long-term portion | 91,941 | 45,948 |
On October 15, 2020, prior to being acquired by the Company, Phyto BrandCo entered into a four-year lease agreement for a promotional vehicle. The base monthly payment is $1,119 with an initial payment of $9,732. The incremental borrowing rate used to discount the lease liability was 10%. During the nine months ended September 30, 2023, the vehicle was traded in for another promotional vehicle and the remaining lease liability of $25,516 was removed.
On August 15, 2022, the Company entered into a five-year lease agreement for a forklift. The base monthly payment is $815 with an initial payment of $6,477. The incremental borrowing rate used to discount the lease liability was 10%.
On June 15, 2023, the Company entered into a four-year lease for a promotional vehicle. The base monthly payment is $1,188 with an initial payment of $9,806. The incremental borrowing rate used to discount the lease liability was 16%.
NOTE 12 - MORTGAGE PAYABLE
| Fourth Mortgage | Fifth Mortgage | Sixth Mortgage | Total | |||||||||
| $ | $ | $ | $ | |||||||||
| Balance, December 31, 2021 | 3,501,554 | - | - | 3,501,554 | ||||||||
| New mortgage (refinancing) | (3,500,000 | ) | 3,500,000 | - | - | |||||||
| Transaction costs | - | (35,000 | ) | - | (35,000 | ) | ||||||
| Finance expense | 131,154 | 174,884 | - | 306,038 | ||||||||
| Repayments | (132,708 | ) | (132,495 | ) | - | (265,203 | ) | |||||
| Balance, December 31, 2022 | - | 3,507,389 | - | 3,507,389 | ||||||||
| New mortgage (refinancing) | - | (3,500,000 | ) | 3,500,000 | - | |||||||
| Transaction costs | - | - | (35,000 | ) | (35,000 | ) | ||||||
| Finance expense | - | 216,859 | 81,309 | 298,168 | ||||||||
| Repayments | - | (224,248 | ) | (67,025 | ) | (291,273 | ) | |||||
| Balance, September 30, 2023 | - | - | 3,479,284 | 3,479,284 |
ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 12 - MORTGAGE PAYABLE (continued)
a) On July 9, 2021, the Company refinanced the third mortgage and increased the facility to $3,500,000 (the "Fourth Mortgage") which bears interest at the rate of 6.5% per annum, calculated monthly, for one year. The Forth Mortgage has a maturity date of July 1, 2022 and is secured by the mortgage property and building improvements.
The Fourth Mortgage payable was recorded at amortized cost (principal value less $42,778 transaction costs). The Company maintained minimum interest-only payments of $18,959 per month. On September 28, 2022, the Forth Mortgage was refinanced.
b) On September 28, 2022, the Company refinanced the Fourth Mortgage (the "Fifth Mortgage") which bears interest at the greater of 9.75% or the prime rate plus 4.30% per annum, calculated monthly, for one year. The Fifth Mortgage had a maturity date of November 1, 2023 and was secured by the mortgage property and building improvements.
The Fifth Mortgage payable was recorded at amortized cost (principal value less $35,000 transaction costs). The Company maintained minimum interest-only payments of $28,438 per month. On July 26, 2023, the Fourth Mortgage was refinanced.
c) On July 26, 2023, the Company refinanced the Fifth Mortgage (the "Sixth Mortgage") which bears interest at the greater of 11.49% or the prime rate plus 4.29% per annum, calculated monthly, for one year. The interest rate will increase to 15.99% or the prime rate plus 8.79% for the remainder of the term. The Sixth Mortgage has a maturity date of November 1, 2024 and is secured by the mortgage property and building improvements. The Sixth Mortgage payable was recorded at amortized cost (principal value less $35,000 transaction costs). At September 30, 2023, the carrying value of the Sixth Mortgage was $3,479,284 (December 31, 2022 - $nil).
At September 30, 2023, the Company maintained minimum interest-only payments of $33,513 per month. As at September 30, 2023, the total non-discounted remaining scheduled payments related to the mortgage including interest payments totaled $3,975,037 (December 31, 2022 - $3,822,505). Total interest expense during the nine months ended September 30, 2023 was $298,168 (2022 - $188,030).
NOTE 13 - LOAN PAYABLE
During the year ended December 31, 2022, the Company received a short-term loan of $300,000 with an interest rate of 1.5% per month. The loan is unsecured and is due on demand. Total interest expense related to the loan during the nine months ended September 30, 2023 was $47,023 (2022 - $nil). During the nine months ended September 30, 2023, the Company fully repaid the loan balance and accrued interest.
NOTE 14 - SHARE CAPITAL
(a) Authorized
Unlimited number of voting common shares without par value.
(b) Issued share capital
As at September 30, 2023, 55,970,547 common shares were issued and outstanding.
(c) Share issuances
During the nine months ended September 30, 2023, the Company had no share issuances.
During the year ended December 31, 2022, the Company had the following share transactions:
- On April 29, 2022, 10,000,000 common shares related to the amended agreement between the Company and former owners of Phyto BrandCo were returned to treasury and cancelled for no consideration.
ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 14 - SHARE CAPITAL (continued)
(d) Escrow shares
The Company entered into an Escrow Agreement in connection with closing the Reverse takeover ("RTO") on December 20, 2019, in relation to certain of its common shares which were placed in escrow. Pursuant to the Escrow Agreement the escrowed common shares are subject to a timed-release schedule whereby a 10% portion of the escrow shares will be released beginning on listing date, and 15% every six months thereafter until January 6, 2023. As at September 30, 2023, no common shares were held in escrow (December 31, 2022 - 1,300,000).
(e) Stock options
The Company has an incentive stock option plan (the "Plan") which provides for the granting of options. Under the Plan the maximum number of stock options issued cannot exceed 10% of the Company's currently issued and outstanding common shares. Options granted under the Plan may have a maximum term of ten years. A participant, who is not a consultant conducting investor relations activities, who is granted an option that is exercisable at the market price at the date of grant, will have their options vest immediately, unless otherwise determined by the Board of Directors. Options granted at below market prices will vest one-sixth every three months.
Options belonging to a participant who is a consultant conducting investor relations activities who is granted an option under the Plan will become vested with the right to exercise one-quarter of the option upon conclusion of every three months subsequent to the grant date. All options are to be settled by physical delivery of shares.
During the nine months ended September 30, 2023, the Company had no stock option grants.
During the year ended December 31, 2022, the Company had the following stock option grants:
- On August 19, 2022, the Company granted 300,000 stock options to a certain director for the purchase of up to 300,000 common shares at a price of $0.75 per share. Each stock option is exercisable for a period of five years. The fair value of these options was $138,713 ($0.46 per option) and was recognized as a share-based payment expense.
A summary of the changes in the Company's stock options outstanding and exercisable is as follows:
| Stock options outstanding and exercisable | Weight average exercise price | |||||
| # | $ | |||||
| As at December 31, 2021 | 3,715,001 | 1.45 | ||||
| Granted | 300,000 | 0.75 | ||||
| Cancelled | (283,334 | ) | 1.51 | |||
| Expired | (66,667 | ) | 1.35 | |||
| As at December 31, 2022 | 3,665,000 | 1.40 | ||||
| Forfeited | (795,000 | ) | 1.47 | |||
| As at September 30, 2023 | 2,870,000 | 1.38 |
As at September 30, 2023, the Company had stock options outstanding and exercisable as follows:
| Expiry date | Options outstanding and exercisable | Weighted average exercise price | Weighted average remaining life | ||||||
| # | $ | Years | |||||||
| January 30, 2025 | 1,333,334 | 1.35 | 1.34 | ||||||
| August 5, 2025 | 483,333 | 2.34 | 1.85 | ||||||
| August 5, 2026 | 33,333 | 1.35 | 2.85 | ||||||
| October 25, 2026 | 600,000 | 1.06 | 3.07 | ||||||
| October 28, 2026 | 120,000 | 0.95 | 3.08 | ||||||
| August 19, 2027 | 300,000 | 0.75 | 3.89 | ||||||
| 2,870,000 | 1.38 | 2.14 |
ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 14 - SHARE CAPITAL (continued)
(f) Warrants
As an incentive to complete a private placement the Company may issue units which include common shares and common share purchase warrants. Finders' warrants may be issued as a private placement share issue cost and are valued using the Black-Scholes option pricing model.
A summary of the changes in the Company's warrants outstanding and exercisable is as follows:
| Warrants outstanding and exercisable | Weight average exercise price | |||||
| # | $ | |||||
| As at December 31, 2021 | 8,458,719 | 1.80 | ||||
| Expired | (8,335,992 | ) | 1.80 | |||
| As at December 31, 2022 and September 30, 2023 | 122,727 | 1.75 |
As at September 30, 2023, the Company had warrants outstanding and exercisable as follows:
| Expiry date | Warrants outstanding and exercisable | Weighted average exercise price | Weighted average remaining life | ||||||
| # | $ | Years | |||||||
| October 18, 2023(1) | 122,727 | 1.75 | 0.05 | ||||||
| 122,727 | 1.75 | 0.05 |
(1) Subsequent to September 30, 2023, 122,727 warrants expired unexercised.
NOTE 15 - RELATED PARTY TRANSACTIONS
Key management personnel are those having the authority and responsibility for planning, directing, and controlling the Company. There were no loans to key management personnel or directors, or entities over which they have control or significant influence at September 30, 2023 and December 31, 2022.
During the nine months ended September 30, 2023, no options were granted to Officers and Directors (2022 - nil).
The following related parties transacted with the Company or Company-controlled entities during the nine months ended September 30, 2023 and the year ended December 31, 2022:
- George Routhier was a former Director. He is the owner of Pipedreemz Inc., which provided advisory services to the Company. He resigned on June 23, 2022.
- Michael Forbes is a Director and the Company's President and CEO. He was appointed on April 29, 2021 and is the owner of MDC Forbes, which provides CEO services to the Company.
- Donald Dinsmore is a former Director and former COO of the Company. He was appointed on April 29, 2021 and left the Company on March 24, 2022.
- Oliver Foeste was the Company's CFO until January 1, 2023. He is the Managing Partner of Invictus Accounting Group LLP which provided the Company with CFO, accounting, and tax services.
- Paul Morgan is a Director of the Company. He was appointed on July 14, 2021.
- Smoke Wallin is a Director of the Company. He was appointed on May 16, 2022.
- Lachlan McLeod was appointed CFO of the Company on January 1, 2023 and was an employee of Fehr & Associates CPA ("F&A"), which provided accounting services to the Company. On June 2, 2023, the Company hired Mr. McLeod as an employee and the F&A agreement was subsequently terminated.
ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 15 - RELATED PARTY TRANSACTIONS (continued)
The aggregate value of transactions, excluding share-based payments, with key management personnel and directors and entities over which they have control or significant influence during the nine months ended September 30, 2023 and 2022 were as follows:
| Nine months ended September 30 | 2023 | 2022 | ||||
| $ | $ | |||||
| Donald Dinsmore | - | 104,863 | ||||
| Fehr & Associates | 106,949 | - | ||||
| Invictus Accounting Group LLP | - | 239,491 | ||||
| Lachlan McLeod | 36,695 | - | ||||
| MDC Forbes Inc. | 75,750 | 92,750 | ||||
| Pipedreemz Inc. | - | 3,001 | ||||
| 219,394 | 440,105 |
As at September 30, 2023 and December 31, 2022, the Company had an outstanding accounts payable balance with related parties as follows:
| September 30, 2023 | December 31, 2022 | |||||
| $ | $ | |||||
| Fehr & Associates | 10,080 | - | ||||
| Invictus Accounting Group LLP | 12,915 | 13,884 | ||||
| MDC Forbes Inc. | 26,088 | 62,427 | ||||
| Michael Forbes | - | 20,000 | ||||
| Pipedreemz Inc. | - | 3,350 | ||||
| 49,083 | 99,661 |
All related party balances are unsecured and are due on demand without interest and incurred in the normal course of business.
The transactions with the key management personnel and directors are included in operating expenses as follows:
(a) Consulting fees and professional fees
Included CEO services by Michael Forbes, charged to the Company via MDC Forbes Inc., accounting services of the Company's former CFO, Oliver Foeste, charged to the Company via Invictus Accounting Group LLP, and accounting services of the Company's CFO, Lachlan McLeod, charged to the Company via F&A. During the nine months ended September 30, 2023, the Company incurred a placement fee of $52,500 to employ Lachlan McLeod directly and terminate the F&A agreement.
(b) Wages and salaries
Included services provided by Lachlan McLeod as CFO and Donald Dinsmore as former COO.
(c) Share-based payments
During the nine months ended September 30, 2023, stock options with a fair value of $138,713 were granted to Smoke Wallin.
ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION
| Nine months ended September 30 | 2023 | 2022 | ||||
| $ | $ | |||||
| Non-cash financing activities | ||||||
| Shares returned to treasury | - | 12,000,000 | ||||
| Non-cash investing activities | ||||||
| Equipment additions included in accounts payable and accrued liabilities | - | (387,000 | ) | |||
| Equipment acquired through a lease agreement | (82,333 | ) | (49,968 | ) | ||
| Equipment disposed through lease cancellation | 25,516 | - |
Total income tax paid in the nine months ended September 30, 2023 was $3,240 (2022 - $12,000).
NOTE 17 - FINANCIAL RISK MANAGEMENT
(a) Capital management
The Company's capital structure consists of all components of shareholders' equity. The Company's objective when managing capital is to maintain adequate levels of funding to support the current operations including corporate and administrative functions and to support operations. The Company obtains funding primarily through issuing common stock and through its mortgage payable. Future financing is dependent on market conditions and there can be no assurance the Company will be able to raise funds in the future.
There were no changes in the Company's approach to capital management during the nine months ended September 30, 2023. The Company is not subject to externally imposed capital requirements.
(b) Financial instruments - fair value
The Company's financial instruments consist of cash, trade receivables, deposits, accounts payable, mortgage payable, loan payable and government loan, all of which are classified as and measured at amortized cost.
As at September 30, 2023, the carrying values of cash, trade receivables, deposits, loans payable and accounts payable approximate their fair value because of the short-term nature of these instruments.
(c) Financial instruments - risk
The Company's financial instruments are exposed to certain financial risks, including credit risk, liquidity risk and interest rate risk.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to fulfill its contractual obligations.
The Company is exposed to credit risk through its cash balances held in financial institutions and trade receivables. The maximum exposure to credit risk is equal to the carrying value of such financial assets.
The objective of managing credit risk is to minimize potential losses on financial assets. The Company assesses the quality of its counterparties, taking into account their credit worthiness and reputation, past performance and other factors. The Company has recognized a provision for expected credit losses on its trade receivables.
Cash is only deposited with or held by institutions of high credit worthiness.
ADASTRA HOLDINGS LTD. Notes to the Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2023 and 2022 (Unaudited - Expressed in Canadian dollars, except number of shares) |
NOTE 17 - FINANCIAL RISK MANAGEMENT (continued)
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities. The Company manages its liquidity risk by reviewing on an ongoing basis its cash position and if required raises funding through additional share capital issuances or debt financing.
As at September 30, 2023, the Company had a cash balance of $1,780,686 and current liabilities of $11,914,166 (December 31, 2022 - $1,013,867 and $12,660,207 respectively).
Interest rate risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company's mortgage payable and lease liabilities carry fixed interest rates and as such, the Company is not exposed to interest rate risk.
(d) Economic dependence
Economic dependence risk is the risk of reliance upon a select number of customers which significantly impact the financial performance of the Company. During the nine months ended September 30, 2023, three customers represented approximately 82% of the Company's revenue (2022 - 83%). These significant customers represent certain provincial distributors.
NOTE 18 - COMMITMENTS AND CONTINGENCIES
A summary of undiscounted liabilities and future operating commitments as at September 30, 2023, are as follows:
| Total | Within 1 year | 2 - 5 years | |||||||
| Maturity analysis of financial liabilities | $ | $ | $ | ||||||
| Accounts payable and accrued liabilities | 11,898,011 | 11,898,011 | - | ||||||
| Lease liability | 147,641 | 30,197 | 117,444 | ||||||
| Mortgage payable | 3,975,038 | 428,400 | 3,546,638 | ||||||
| Government loan | 60,000 | - | 60,000 | ||||||
| 16,080,690 | 12,356,608 | 3,724,082 |
Contingencies
On March 15, 2023, the Company was served with a civil claim filed in the Supreme Court of British Columbia pursuant to the Class Proceedings Act, R.S.B.C. 1996, c. 50 alleging that the Company's press release of February 22, 2023 misstated certain material facts which mislead the plaintiff in the claim. The suit also names the Company's subsidiary ALI. and the Company's Chief Executive Officer. The Company denies the allegations in the claim and specifically that the press release was misleading. No specific amount of damages is claimed.
NOTE 19 - SEGMENTED INFORMATION
Reportable segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources, and in assessing performance.
The Company's chief operating decision makers are the Chief Executive Officer and the Chief Financial Officer. They review the operating performance of the Company by two segments comprised of manufacturing and non-manufacuring operations. The manufacturing operations includes the manufacturing, sale and distribution of cannabis related products. The non-manufacturing operations include PerceiveMD. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The chief operating decision makers utilize gross profit as a key measure in making operating decisions and assessing performance. The non-manufacturing segment is immaterial and, accordingly, segmented figures are not presented.