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 June 30, 2023. Variance, ratio, and percentage changes in this section are based on unrounded numbers. This section reports the Company's activities through June 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 business strategy was built on three core pillars: House of Brands, Commercial & Wholesale, and Pharmaceutical. This strategy was devised to allow us optimal access to markets around the globe based on the legal standing of cannabis in each of the geographical locations in which we operate. Our approach has enabled us to develop distribution networks, build customer bases, establish operations as the regulatory framework evolves and allow for expanded access to cannabis and its derivatives.
Our brand portfolio consists of a mix of products across multiple categories, including food and beverage, nutraceuticals, cannabis accessories and technology, personal care, and wellness. Consumer brands allow Flora to move assertively into nascent markets, develop customer bases and distribution channels, and gather consumer insights which would not be possible with traditional cannabis sales alone. Through this channel we seek to build loyalty, credibility and enjoy healthy margins that help to support the rapid growth of our business.
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 sale is expected to close by August 18, 2023.
House of Brands
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 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 been fully integrated into JustCBD and now benefits from operational, logistical and sales synergies with JustCBD.
Mambe was Flora's food and beverage brand with a focus in Latin America, offering infused natural fruit juices and canned goods. The brand operated on a business-to-business model, where we sell to both distributors and retail businesses. Over the last three years, Mambe has expanded its distribution in Colombia, primarily in supermarkets, discount retailers, coffee shops, restaurants and airports. Mambe's list of clients include well-known Colombian retailers Juan Valdez, Jumbo, Sipote Burrito and Xue. Additional brands in our portfolio include: Mind Naturals (skincare), Stardog Loungewear (apparel), No Cap Hemp Co (minor cannabinoids), KaLaya (skincare) and Original Hemp (e-commerce). The Mambe, Mind Naturals, Stardog Loungewear and KaLaya brands were sold as part of the Colombian Assets.
Commercial & Wholesale
The Company's Commercial and Wholesale pillar encompasses the distribution of pharmaceutical products to international markets. This pillar is anchored by Flora's wholly owned subsidiary, Phatebo, a multi-national operator in pharmaceutical and medical cannabis distribution, with principal operations in Germany. Prior to the sale of the Colombia Assets, this pillar also included the cultivation and transformation of cannabis at Cosechemos, our 249-acre licensed cultivation facility in Girón, Colombia. To date, the Company had not exported material amounts of cannabis.
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, ADHD, 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. We intend to leverage Phatebo's existing network of approximately 1,200 pharmacies as Flora begins to move medicinal cannabis from third parties into Germany. Additionally, the Phatebo warehouse provides a logistics outpost for Flora's growing product portfolio and distribution network within the European Union.
Pharmaceutical
Flora's Pharmaceutical pillar was focused on developing pharmaceutical grade products and providing scientific-based research connected to molecules found in the cannabis plant. Through this pillar, Flora worked to provide access to medical cannabis, create awareness through education and initiate research studies for use in targeted and broad-based use cases leveraging multiple modalities. Our pharmaceutical pillar was anchored by Flora Lab 2 and Flora Lab 4, both of which are located in Bogota, Colombia. These laboratories allowed us to manufacture plant-based, medical-grade pharmaceuticals, phytotherapeutics, and dietary supplements. Flora Lab 2 and Flora Lab 4 were sold as part of the Colombia Assets sale.
Factors Impacting our Business
Challenges in realization of overhead reductions. The Company's operating expenses currently exceed its gross profit generated. Management has taken, and continues to implement, various cost-saving initiatives in an effort 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 company. 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. During the first fiscal half of 2023 the Company paid $1.0 million related to the acquisition of FGH, of which $0.7 million was related to outstanding FGH liabilities and $0.3 million was related to the Company's costs pertaining to the acquisition.
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.
Low-cost cannabis acquisition and high-margin distribution. We aim to achieve economies of scale by sourcing medical cannabis and benefiting from production in low-cost jurisdictions across the globe. We then intend to utilize our cannabis and distribution networks to sell product in countries at an accretive margin. Provided we are able to navigate the uncertain regulatory environment for our cannabis products, Flora believes it is well-positioned to act as both an exporter and importer of medicinal cannabis to our distribution network in Germany where the supply of medicinal cannabis is largely dependent on imports.
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.
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, corporate secretary 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. For the six months ended June 30, 2023, 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.
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:
- Consulting and management fees include salary and benefit expenses for employees, directors and consultants for the Company's corporate activities, other than those included in one of general and administrative, share-based compensation, and research and development.
- Professional fees include legal, audit and other expenses incurred by third-party service providers.
- General and administrative include certain public company costs, merchant fees and temporary labor and subcontractor costs for the Company's operating subsidiaries.
- Promotion and communication expenses consist primarily of services engaged in marketing and promotion of our products and costs associated with initiatives and development programs and salary and benefit expenses for certain employees.
- Travel expenses relate to flight, lodging and incidental expenses for attending conferences, events and key business meetings.
- Share-based compensation includes the cost of vesting of the Company's equity awards, including share options and restricted share awards.
- Research and development expenses primarily consist of salary and benefit expenses for employees engaged in research and development activities, as well as other general costs associated with R&D activities.
- Operating lease expense represents the cost of the Company's operating leases, primarily consisting of real estate and equipment.
- Depreciation and amortization expense is provided on a straight-line basis over the corresponding assets' estimated useful lives.
- Bad debt expense consists of changes in the provision for the Company's expected credit losses. The Company utilizes a provision matrix to estimate lifetime expected credit losses.
- Asset impairment includes the difference between the fair value and carrying amount of the asset group. An impairment loss is recognized when the sum of projected undiscounted cash flows is less than the carrying value of an asset group.
- Other expenses (income), net include miscellaneous expenses that do not fit the criteria for recognition in another category.
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.
Loss from Discontinued Operations
Loss from discontinued operations includes the net 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.
Results of Operations
The following tables provide sets forth the Company's consolidated results of operations for the three and six months ended June 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 six months ended June 30, 2023 and 2022 included elsewhere in this Quarterly Report.
| | | For the three
months ended
June 30, 2023 | | | For the three
months ended
June 30, 2022 | | | For the six
months ended
June 30, 2023 | | | For the six
months ended
June 30, 2022 | |
| Revenue | $ | 21,460 | | $ | 8,943 | | $ | 40,779 | | $ | 13,144 | |
| Cost of sales | | 17,500 | | | 5,624 | | | 31,473 | | | 7,597 | |
| Gross profit | | 3,960 | | | 3,319 | | | 9,306 | | | 5,547 | |
| Consulting and management fees | | 3,662 | | | 2,116 | | | 7,333 | | | 3,976 | |
| Professional fees | | 668 | | | 727 | | | 665 | | | 1,705 | |
| General and administrative | | 685 | | | 1,088 | | | 1,036 | | | 1,660 | |
| Promotion and communication | | 1,263 | | | 2,039 | | | 2,571 | | | 4,414 | |
| Travel expenses | | 124 | | | 291 | | | 256 | | | 492 | |
| Share based compensation | | 338 | | | 1,263 | | | 992 | | | 2,789 | |
| Research and development | | 13 | | | 111 | | | 29 | | | 233 | |
| Operating lease expense | | 308 | | | 136 | | | 624 | | | 327 | |
| Depreciation and amortization | | 874 | | | 706 | | | 1,738 | | | 1,050 | |
| Bad debt expense | | 18 | | | 254 | | | 47 | | | 255 | |
| Asset impairment | | 34,941 | | | 15,652 | | | 34,941 | | | 15,652 | |
| Other expenses, net | | 1,127 | | | 456 | | | 1,505 | | | 810 | |
| Operating loss | | (40,061 | ) | | (21,520 | ) | | (42,431 | ) | | (27,816 | ) |
| Non-operating (income) expenses | | (1,951 | ) | | 1,532 | | | (1,057 | ) | | 1,491 | |
| Net loss before taxes and discontinued operations | | (38,110 | ) | | (23,052 | ) | | (41,374 | ) | | (29,307 | ) |
| Income tax benefit | | (1,119 | ) | | - | | | (1,196 | ) | | - | |
| Net loss from continuing operations | | (36,991 | ) | | (23,052 | ) | | (40,178 | ) | | (29,307 | ) |
| Loss from discontinued operations | | (7,565 | ) | | (1,620 | ) | | (8,283 | ) | | (2,995 | ) |
| Net loss for the period | $ | (44,556 | ) | $ | (24,672 | ) | $ | (48,461 | ) | $ | (32,302 | ) |
For the Three Months Ended June 30, 2023, and 2022
Revenue
Revenue totaled $21.5 million and $8.9 million for the three months ended June 30, 2023 and 2022, respectively. The increase was primarily driven by the following:
- FGH contributed $10.8 million. If FGH was acquired on January 1, 2022, the Company's revenue would have increased by approximately $10.6 million during the three months ended June 30, 2022.
- JustCBD contributed $11.1 million in the three months ended June 30, 2023 compared to $9.0 million in the three months ended June 30, 2022.
Revenues generated for the three months ended June 30, 2023 by the House of Brands segment were $13.0 million compared to revenues generated for the three months ended June 30, 2022 of $10.8 million. The increase is primarily related to increased sales at JustCBD.
Revenues generated for the three months ended June 30, 2023 by the commercial and wholesale segment were $10.8 million compared to revenues generated for the three months ended June 30, 2022 of $nil. The increase was driven by the acquisition of FGH in December 2022, which contributed $10.8 million.
Revenues generated for the three months ended June 30, 2023 by the Company`s Colombian entities are included separately within Loss from Discontinued Operations.
Gross Profit
Gross profit totaled $4.0 million and $3.3 million for the three months ended June 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 June 30, 2023 compared to $nil in the three months ended June 30, 2022. The increase was also driven by increased sales at JustCBD, which contributed $3.0 million in the three months ended June 30, 2023 compared to $2.8 million in the three months ended June 30, 2022. The remaining fluctuations are not significant. As a percentage of net sales, or gross margin, the Company reported 18% and 37% for the three months ended June 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 $44.0 million and $24.8 million for the three months ended June 30, 2023 and June 30, 2022, respectively. The increase was primarily driven by increased asset impairments.
Consulting and Management Fees
Consulting and management fees were $3.7 million for the three months ended June 30, 2023 compared to $2.1 million for the three months ended June 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 $0.7 million, as well as a severance payment made to the former Chief Executive Officer.
Professional Fees
Professional fees totaled $0.7 million for the three months ended June 30, 2023 compared to $0.7 million for the three months ended June 30, 2022. These expenses are associated with legal, accounting and audit services.
General and Administrative Expenses
General and administrative expenses totaled $0.7 million for the three months ended June 30, 2023 compared to $1.1 million for the three months ended June 30, 2022. The decrease is primarily due to the Company's efforts to reduce general and administrative expenses.
Promotion and Communication Expenses
Promotion and communication expenses totaled $1.3 million for the three months ended June 30, 2023 compared to $2.0 million for the three months ended June 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 June 30, 2023 compared to $0.3 million for the three months ended June 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 $0.3 million for the three months ended June 30, 2023 compared to $1.3 million for the three months ended June 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 second quarter of fiscal 2023.
Research and Development Expenses
Research and development expenses totaled less than $0.1 million for the three months ended June 30, 2023 compared to $0.1 million for the three months ended June 30, 2022. Research and development expenses have been minimized in the period ended June 30, 2023 whereas in the period ended June 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 $0.3 million for the three months ended June 30, 2023 compared to $0.1 million for three months ended June 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 $0.9 million for the three months ended June 30, 2023 compared to $0.7 million for the three months ended June 30, 2022. The increase in the depreciation and amortization 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 three months ended June 30, 2023 compared to $0.3 million for the three months ended June 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 three months ended June 30, 2023 compared to $15.7 million for the three months ended June 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 $1.1 million for the three months ended June 30, 2023 compared to $0.5 million for the three months ended June 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 $2.0 million in non-operating income for the three months ended June 30, 2023 compared to non-operating expense of $1.5 million for the three months ended June 30, 2022. These (incomes) expenses consist of unrealized losses from changes in fair value, interest (income) expense and foreign exchange loss. The increase in income is primarily due to a $2.0 million gain on the value of the contingent consideration related to the JustCBD acquisition during the three months ended June 30, 2023 compared to a $1.3 million loss during the three months ended June 30, 2022.
Income Tax Benefit
We recognized $1.1 million and $nil in income tax benefit for the three months ended June 30, 2023 and 2022, respectively. Our effective tax rate during the periods ended June 30, 2023 and 2022 was 2.9% 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 June 30, 2023 and 2022. The income tax benefit in the three months ended June 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 $7.6 million in the three months ended June 30, 2023 compared to $1.6 million in the three months ended June 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 $44.6 million and $24.7 million for the three months ended June 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 $6.0 million in relation to the loss from discontinued operations for the Company`s Colombian operations.
For the Six Months Ended June 30, 2023, and 2022
Revenue
Revenue totaled $40.8 million and $13.1 million for the six months ended June 30, 2023 and 2022, respectively. The increase was primarily driven by the following acquisitions:
- JustCBD contributed $23.2 million in the six months ended June 30, 2023 compared to $12.5 million in the six months ended June 30, 2022. If JustCBD was acquired on January 1, 2022, the Company's revenue would have increased by approximately $5.2 million during the six months ended June 30, 2022.
- Vessel contributed $3.5 million compared to $3.3 million in the six months ended June 30, 2022.
- FGH contributed $18.8 million. If FGH was acquired on January 1, 2022, the Company's revenue would have increased by approximately $23.6 million during the six months ended June 30, 2022.
- The remaining change in revenue is related to increased intercompany eliminations pertaining to sales between Company subsidiaries that reduce revenue.
Revenues generated for the six months ended June 30, 2023 by the House of Brands segment were $26.8 million compared to revenues generated for the six months ended June 30, 2022 of $15.8 million. The increase is primarily related to the acquisition of JustCBD in February 2022, which contributed $23.2 million and $12.5 million for the six months ended June 30, 2023 and June 30, 2022, respectively.
Revenues generated for the six months ended June 30, 2023 by the commercial and wholesale segment were $18.8 million compared to revenues generated for the six months ended June 30, 2022 of $nil. The increase was driven by the acquisition of FGH in December 2022, which contributed $18.8 million.
Revenues generated for the six months ended June 30, 2023 by the Company`s Colombian entities are included separately within Loss from Discontinued Operations.
Gross Profit
Gross profit totaled $9.3 million and $5.5 million for the six months ended June 30, 2023 and 2022, respectively. The increase was primarily driven by the acquisitions of FGH and JustCBD, which contributed $1.3 million and $7.0 million, respectively, in the six months ended June 30, 2023. In the comparative period, JustCBD contributed $4.5 million and FGH did not contribute as it was acquired in December 2022. The remaining fluctuations are largely related to Vessel, which contributed $1.3 million in the six months ended June 30, 2023 compared to $1.0 million in the six months ended June 30, 2022. As a percentage of net sales, or gross margin, the Company reported 23% and 42% for the six months ended June 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 $51.7 million and $33.4 million for the six months ended June 30, 2023 and June 30, 2022, respectively. The increase was primarily driven by increased asset impairments in the six months ended June 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 $7.3 million for the six months ended June 30, 2023 compared to $4.0 million for the six months ended June 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 $1.2 million, as well as increased staffing to support expanded operations and a severance payment made to the former Chief Executive Officer.
Professional Fees
Professional fees totaled $0.7 million for the six months ended June 30, 2023 compared to $1.7 million for the six months ended June 30, 2022. These expenses are associated with legal, accounting and audit services. In the period ended June 30, 2023, the Company made a concerted effort to reduce professional fees and receive credit notes from certain service providers. In the period ended June 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 $1.0 million for the six months ended June 30, 2023 compared to $1.7 million for the six months ended June 30, 2022. The decrease is primarily due to the Company's efforts to reduce general and administrative expenses.
Promotion and Communication Expenses
Promotion and communication expenses totaled $2.6 million for the six months ended June 30, 2023 compared to $4.4 million for the six months ended June 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 six months ended June 30, 2023 compared to $0.5 million for the six months ended June 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 six months ended June 30, 2023 compared to $2.8 million for the six months ended June 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 six months of 2023.
Research and Development Expenses
Research and development expenses totaled less than $0.1 million for the six months ended June 30, 2023 compared to $0.2 million for the six months ended June 30, 2022. Research and development expenses have been minimized in the period ended June 30, 2023 whereas in the period ended June 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 $0.6 million for the six months ended June 30, 2023 compared to $0.3 million for six months ended June 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 $1.7 million for the six months ended June 30, 2023 compared to $1.1 million for the six months ended June 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 six months ended June 30, 2023 compared to $0.3 million for the six months ended June 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 six months ended June 30, 2023 compared to $15.7 million for the six months ended June 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 $1.5 million for the six months ended June 30, 2023 compared to $0.8 million for the six months ended June 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 six months ended June 30, 2023 compared to non-operating expense of $1.5 million for the six months ended June 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 $1.1 million gain on the value of the contingent consideration related to the JustCBD acquisition during the six months ended June 30, 2023 compared to a $1.3 million loss during the six months ended June 30, 2022.
Income Tax Benefit
We recognized $1.2 million and $nil in income tax benefit for the six months ended June 30, 2023 and 2022, respectively. Our effective tax rate during the periods ended June 30, 2023 and 2022 was 2.9% and 0.0%, respectively. The income tax benefit in the six months ended June 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 $8.3 million in the six months ended June 30, 2023 compared to $3.0 million in the six months ended June 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 $48.5 million and $32.3 million for the six months ended June 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 $5.3 million in relation to the loss from discontinued operations for the Company`s Colombian operations.
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 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 $1.8 million and $8.9 million as of June 30, 2023 and December 31, 2022, respectively. As of June 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 through the remainder of 2023 and beyond 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 six months ended
June 30, 2023 | | | For the six months ended
June 30, 2022 | |
| Cash used in operating activities | $ | (7,783 | ) | $ | (10,988 | ) |
| Cash from (used in) financing activities | | 112 | | | (27 | ) |
| Cash used in investing activities | | (195 | ) | | (16,180 | ) |
| Effect of exchange rate change | | 584 | | | (152 | ) |
| Change in cash during the period | | (7,282 | ) | | (27,347 | ) |
| Cash, beginning of period | | 9,537 | | | 37,616 | |
| Cash included in assets held for sale | | (448 | ) | | (381 | ) |
| Cash, end of period | $ | 1,807 | | $ | 9,888 | |
Cash used in Operating Activities
Net cash used in operating activities for the six months ended June 30, 2023 and 2022 totaled $7.8 million and $11.0 million, respectively. Cash flows used in operating activities for the periods ended June 30, 2023 and 2022 were due primarily to operating expenses exceeding the gross profit for the periods.
Cash provided by (used in) Financing Activities
Net cash provided by (used in) financing activities for the year six months ended June 30, 2023 and 2022 totaled $0.1 million and less than ($0.1) million, respectively. Cash flows provided from financing activities for the period ended June 30, 2023 were primarily related to loan borrowings. Cash flows used in financing activities for the period ended June 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 six months ended June 30, 2023 and 2022 totaled $0.2 million and $16.2 million, respectively. Cash flows used in investing activities for the period ended June 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 June 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 June 30, 2023, we had working capital of $4.4 million. The Company's primary cash flow needs are for the development of its cannabis and pharmaceutical 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. There were no equity offerings in the periods ended June 30, 2023 and 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 June 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 June 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.
Contractual Obligations
At June 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) | $ | 2,968 | | $ | 2,968 | | $ | - | | $ | - | |
| Sales tax (1) | | 2,220 | | | 2,220 | | | - | | | - | |
| Contingent purchase consideration (2) | | 2,354 | | | 1,633 | | | 266 | | | 455 | |
| Operating lease obligations (3) | | 2,424 | | | 1,234 | | | 821 | | | 369 | |
| Debt (4) | | 1,200 | | | 1,200 | | | - | | | - | |
| Total | $ | 11,166 | | $ | 9,255 | | $ | 1,087 | | $ | 824 | |
(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 June 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.
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 June 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 not effective primarily due to the outstanding material weakness discussed in Part II, Item 9A, "Controls and Procedures" in our 2022 Annual Report.
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 June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
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
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| | | | | Incorporated by Reference |
Exhibit
Number | | Description | | Form | | Exhibit | | Filing Date |
| 3.1 | | Articles of Incorporation of Flora Growth Corp. | | 1-A | | 2.1 | | 10/10/2019 |
| 3.2 | | Articles of Amendment of Flora Growth Corp. effective April 30, 2021 | | F-1 | | 3.3 | | 11/16/2021 |
| 3.3 | | Articles of Amendment of Flora Growth Corp. effective June 9, 2023 | | 8-K | | 3.1 | | 07/07/2023 |
| 3.4 | | Bylaw No. 1-A of Flora Growth Corp. | | 6-K | | 99.3 | | 07/06/2022 |
| 10.1# | | Separation Agreement and Release, dated April 12, 2023, by and among Flora Growth Corp., Flora Growth Management Corp. and Luis Merchan | | 8-K | | 10.1 | | 04/18/2023 |
| 10.2# | | Amendment No. 1 to Separation Agreement and Release, dated May 14, 2023, by and among, Flora Growth Corp., Flora Growth Management Corp. and Luis Merchan | | 8-K | | 10.1 | | 05/18/2023 |
| 10.3# | | Executive Employment Agreement, dated April 16, 2023, by and between Flora Growth Management Corp. and Hussein Rakine | | 8-K | | 10.2 | | 04/18/2023 |
| 10.4# | | Separation Agreement and Release, dated June 25, 2023, by and among, Flora Growth Corp., Flora Growth Management Corp. and Hussein Rakine | | 8-K | | 10.1 | | 06/27/2023 |
| 10.5# | | Separation Agreement and Release, dated June 25, 2023, by and among, Flora Growth Corp., Flora Growth Management Corp. and Elshad Garayev | | 8-K | | 10.2 | | 06/27/2023 |
| 10.6# | | Separation Agreement and Release, dated June 25, 2023, by and among, Flora Growth Corp., Flora Growth Management Corp. and Jessie Casner | | 8-K | | 10.3 | | 06/27/2023 |
| 10.7# | | Separation Agreement and Release, dated June 25, 2023, by and among, Flora Growth Corp., Flora Growth Management Corp. and Jason Warnock | | 8-K | | 10.4 | | 06/27/2023 |
| 10.8 | | Share Purchase Agreement, dated July 5, 2023, by and among Flora Growth Corp. and Lisan Farma Colombia LLC. | | 8-K | | 10.1 | | 07/11/2023 |
| 10.9 | | Amendment No. 1 to Share Purchase Agreement, effective July 7, 2023, by and between Flora Growth Corp. and Lisan Farma Colombia LLC. | | 8-K | | 10.2 | | 07/11/2023 |
| 10.10* | | Amendment No. 2 to Share Purchase Agreement, effective July 13, 2023, by and between Flora Growth Corp. and Lisan Farma Colombia LLC. | | | | | | |
| 10.11* | | Amendment No. 3 to Share Purchase Agreement, effective July 19, 2023, by and between Flora Growth Corp. and Lisan Farma Colombia LLC. | | | | | | |
| 31.1* | | Certification of Principal Executive Officer of Flora Growth Corp. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | |
# 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: August 10, 2023 | | Flora Growth Corp. |
| | | |
| | By: | /s/ Clifford Starke |
| | | Clifford Starke |
| | | Chief Executive Officer (Principal Executive Officer) |
| | | |
| Dated: August 10, 2023 | | |
| | | |
| | By: | /s/ Dany Vaiman |
| | | Dany Vaiman |
| | | Chief Financial Officer (Principal Financial and Accounting Officer) |