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Fiore Cannabis Ltd. — Management Reports 2021
Apr 30, 2021
47184_rns_2021-04-30_2d3cda9f-a212-4bae-9c52-b3d040a8e1d0.pdf
Management Reports
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FIORE CANNABIS LTD.
(Formerly Citation Growth Corp. and Liht Cannabis Corp.)
MANAGEMENT DISCUSSION & ANALYSIS For the fiscal period ended December 31, 2020
Management's Discussion and Analysis
The following management’s discussion and analysis (“MD&A”) of the financial condition and results of the operations of Fiore Cannabis Ltd., formerly Citation Growth Corp. and Liht Cannabis Corp. and its subsidiaries (collectively, the "Company" or “Fiore”) constitutes management’s review of the factors that affected the Company’s financial and operating performance for the fiscal period ended December 31, 2020. The MD&A should be read in conjunction with the Company’s the annual audited consolidated financial statements for the for the fiscal period ended December 31, 2020 and fiscal year ended March 31, 2020, along with the notes related thereto (the “Annual Financial Statements”). A copy of the Annual Financial Statements is posted on the SEDAR website, www.sedar.com.
The Annual Financial Statements were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). All information in this MD&A is current as of April 29, 2021, unless otherwise indicated. All dollar figures are expressed in thousands of Canadian dollars, except for share data, or unless otherwise noted.
Management is responsible for the information contained in this MD&A and its consistency with information presented to the Audit Committee and Board of Directors. The Annual Financial Statements and MD&A have been reviewed by the Company’s Audit Committee and approved by the Board of Directors on April 29, 2021.
This MD&A may contain forward-looking statements and should be read in conjunction with the cautionary statement on forward-looking statements at the end of this MD&A. These forward-looking statements are based on assumptions and judgments of management regarding events or results that may prove to be inaccurate resulting from risk factors beyond its control. Actual results may differ materially from the expected results.
Change of Fiscal Year End
On November 20, 2020, the Company’s Board of Directors approved a resolution to change the Company’s year end from March 31[st] to December 31[st] . The Company’s transition year is the nine months ended December 31, 2020, and the comparative period is the twelve months ended March 31, 2020.
Cannabis Industry Involvement Statement
Cannabis is legal in each jurisdiction where Fiore is engaged in, however, cannabis remains illegal under US federal law and the approach to enforcement of US federal law against cannabis is subject to change. Shareholders and investors need to be aware that adverse enforcement actions could affect their investments and that Fiore's ability to access private and public capital could be affected and or could not be available to support continuing operations. Fiore's business is conducted in a manner consistent with each jurisdiction’s laws and complies with their licensing requirements. The Company has internal compliance procedures in place as well as compliance focused attorneys engaged to monitor changes in laws and compliance with Canadian, US Federal and State Law.
In Nevada, the Company holds state approved licenses for medical and recreational cultivation and production. The Company complies with its ongoing monthly reporting and inspections for its licensing in
Fiore Cannabis Ltd. (Formerly Citation Growth Corp. and Liht Cannabis Corp.) Management’s Discussion and Analysis
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Nevada, with the City of North Las Vegas and the Nevada Department of Taxation. The company has not renewed its distribution license application as third-party distributors prove more cost effective.
In California, the Company holds an adult-use license and a medicinal cannabis retail license. The Company also owns two properties, with two conditional use permits for medical and adult use cannabis cultivation associated to each property.
In Canada, the Company owns a 40-acre property located in Celista, British Columbia and has two cannabis growing facilities that are under construction. A total of ten engineered bio-secure facilities (each totalling 10,000 square feet) can be constructed on the site. Two buildings are currently being constructed, of which one is nearing completion. The Company currently has a pending late-stage 100,000 sq. ft. license application submitted to Health Canada under the Cannabis Act for the property.
The Company has the same philosophical view as the guidelines set out in the Cole Memo (rescinded), and strictly complies with its guidelines, which include: preventing the distribution of cannabis to minors, preventing revenue from the sale of cannabis going to criminal enterprises, preventing the diversion of cannabis from states where it is legal to states where it is not, preventing state legal activity from being a “front” for the distribution of other illicit drugs, preventing violence in the cultivation and distribution of cannabis, preventing intoxicated driving and other public health consequences associated with cannabis use, preventing of cultivation of cannabis on public lands, as well as, preventing the use of cannabis on Federally owned property.
Corporate Overview
Fiore Cannabis Ltd.(“Fiore” or the “Company”), was incorporated under the Business Corporations Act (British Columbia) on April 24, 2007 as “0789189 B.C. Ltd”. On October 28, 2020, the Company changed its name to “Fiore Cannabis Ltd” from “Citation Growth Corp”.
On June 12, 2019, the Company consolidated its share capital on the basis of one (1) post-consolidated common share for every four (4) pre-consolidated common shares. All information in these MD&A is presented on a post-share consolidation basis.
The Company’s common shares are currently trading on the Canadian Stock Exchange (“CSE”) under the symbol “FIOR” and on the OTCQX Markets under the ticker symbol “FIORF”.
Fiore is in the business of cultivation and production of medical and recreational marijuana with operations in the United States in the states of Nevada and California. The Company has six state approved licenses in Nevada which consist of medical and recreational marijuana cultivation licenses, medical and recreational production licenses, medical cannabis licenses associated with lands owned in Washington, and a distribution license with a dispensary in California. The Company also has a pending application with Health Canada to become a licensed producer under the Cannabis Act (Canada) (“Cannabis Act”).
Business Overview
Nevada, United States
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The Company holds 6 state approved licenses, which include two medical cultivation, two recreational cultivation, one medical production and one recreational production licenses.
Fiore’s two 5,000 sq. ft. facilities located on its 7.1 acres of property at the Apex Business Park in North Las Vegas, Nevada. The facilities currently produce an average of 436 kilograms annually and annual full capacity is at 1,200 kilograms. During the second quarter of 2020, the company started upgrading the grow methodologies by procuring an improved organic soil recipe and starting a wholesale changeover to LED lighting, which has the capability of tripling current yield capacity while reducing energy consumption. The light changeover was completed in fourth quarter of 2020. The licenses are approved to expand to up to approximately 300,000 sq. ft. of both cultivation and production facilities. The Company’s products include certified Enviroganic premium flower, pre-rolls, concentrates (including vapes) and edibles. The average selling price of organic buds was $8.98 per gram, with prices ranging from $8.82 to $9.83 per gram and the average selling of price pre-rolls is $6.74, with prices ranging from $6.34 to $7.34 per pre-roll.
All premium cannabis is certified as organically grown by Envirocann. The certifications provide verification that the Company meets or exceeds NOP (National Organic Program) standards for cultivation and that it is using only OMRI, WSDA or CDFA certified inputs, is following social justice directives and has accurate and complete record keeping practices.
Fiore will begin to diversify its product lines in the upcoming months to offer its customers an even wider range of premium quality flower, extracts, edibles and concentrates. The Company’s focus will be on its certified organic Diamante Labs products that are healthier for the end user. Diamante Labs was founded on the determination to formulate high quality extracts by using closed loop hydrocarbon processes as well as premium solventless extracts.
The COVID-19 pandemic saw the Las Vegas retail cannabis market close down due to government regulations. The global pandemic affected the normal course of business and created a level of uncertainty. Fiore took this unfortunate time to shift focus to operation and growth efficiencies and prepare for the reopening of the retail cannabis market and dispensaries. From February to December 2020, Fiore stored all cannabis harvests in their vault and freezers for future processing into concentrates and bulk distillate. In July 2020, the moratorium of the cannabis licenses in Nevada were lifted by the newly created Cannabis Control Board (CCB) which has created opportunities for the purchase and transfer of cannabis licenses.
Desert Hot Springs, California, United States
The Company owns a total of 2.47 acres of properties located in Desert Hot Springs, California. There are two conditional use permits for medical and adult recreational cannabis cultivation facilities awarded to these properties. The company applied for a 10-year extension on these permits and were approved on September 1, 2020.
The Company is operating a dispensary in Desert Hot Springs, California, Green Leaf Wellness Dispensary LLC (“Green Leaf”), which currently holds an Adult-use and Medicinal retail licenses.
Lynden, Whatcom County, Washington, United States
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The Company, through Marapharm Washington, LLC (“MWA”), owns 13.85 acres of land and buildings specifically approved for cannabis business use. During the nine months ended December 31, 2020, the property was sold for gross proceeds of $2,500 USD.
Kelowna, BC, Canada
The Company, through Full Spectrum Medicinal Inc. (“Full Spectrum”), owns a 40-acre property and two cannabis growing facilities that are under construction located in Celista, British Columbia. A total of ten engineered bio-secure facilities (each totaling 10,000 square feet) can be constructed on the site (the “Celista Project”), and Fiore currently has a pending late-stage 100,000 square feet license application under the Cannabis Act for the Celista Project. Two 10,000 square foot facilities are under construction, one of which is nearing completion.
On April 19, 2021, the Company entered into a Memorandum of Understanding with PECA Properties to transfer ownership of Fiore’s Celista Project as well as the Company’s wholly owned subsidiaries, Marapharm Inc and Full Spectrum Medicinal Inc., in consideration for debt and liabilities associated with the purchasing stakeholders. The final transaction enables Fiore to clean up its balance sheet by eliminating approximately $4.8 million of liabilities, including a mortgage and other obligations. As of December 31, 2020, the assets and liabilities of Celista Project, which includes land located in Celista, BC, and the latestage license application under the Cannabis Act, have been reclassified as held for sale.
Significant Events and other Corporate Developments during Nine Months ended December 31, 2020
Financing
On June 24, 2020, the Company closed the second, third and final tranche of a non-brokered private placement of 3,930,721 units at $0.15 per unit for gross proceeds of $589. Each unit consists of one common share and one share purchase warrant. Each warrant is exercisable into one common share of the Company at a price of $0.22 per share for a period of 18 months expiring December 25, 2021, subject to an accelerated expiry if the VWAP of the Company’s common shares is equal to or above $0.50 for a period of ten consecutive trading days.
On August 20, 2020, the Company closed the first tranche of a private placement of two-year 10% unsecured non-convertible debentures for total gross proceeds of $780. The debentures mature on August 20, 2022 at a price of $1,000 per debenture unit. Each debenture unit consisted of $1,000 principal amount of debenture and 2,000 common share purchase warrant exercisable at $0.15 per share for a period of 2 years. The Company paid $39 in cash and issued 78,000 common share purchase warrants at a fair value of $3 as finder’s fee.
On October 21, 2020, the Company closed the second tranche of a private placement of two-year 10% unsecured non-convertible debentures for total gross proceeds of $252. The debentures mature on October 21, 2022 at a price of $1 per debenture unit. Each debenture unit consists of $1 principal amount of debenture and 2,000 common share purchase warrants exercisable at $0.15 per share for a period of 2 years. The Company paid $13 in cash and issued 25,000 common share purchase warrants as finder’s fee.
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On December 17, 2020, the Company closed the third and final tranche of a private placement of two-year 10% unsecured non-convertible debentures for total gross proceeds of $175. The debentures mature on December 17, 2022 at a price of $1 per debenture unit. Each debenture unit consists of $1 principal amount of debenture and 2,000 common share purchase warrants exercisable at $0.15 per share for a period of 2 years. Together with the first and second tranche closed in August and October, the Company raised a total of $1,207.
On December 22, 2020, the Company entered into a secured revolving credit promissory note with a company controlled by a director of the Company for a principal amount of US$2,000. The loan carries an interest rate of 10% per annum and is secured by the Apex facility in North Las Vegas and dispensary in Desert Hot Springs. The loan has a one-year term with an option to extend by one additional year. In consideration of the loan, the Company will issue three million shares to the lender at a price of $0.085 and two million common share purchase warrants at an exercise price of $0.15. As at December 31, 2020, the Company received US$550 from the revolving loan and issued 825,000 common shares for a fair value of $70 and 550,000 warrants for a fair value of $30 expiring December 23, 2022.
ACC Settlement (“the Settlement”)
On August 18, 2020, Howard Misle, the former CEO and director of the company and the former controlling shareholder of ACC, entered into a settlement agreement with the Company to reacquire the legal title of ACC in return of 18,515,424 common shares of the Company. In addition, the Company agreed to pay (i) US$650 on or before August 18, 2020 (ii) US$453 to be paid as follows: US$75 (minimum) by February 17, 2021 and the balance in six equal monthly payments from March 15, 2021 to August 15, 2021. A total amount of $1,456 (US$1,103) has been accrued for the settlement. Pursuant to the settlement agreement, on its closing, ACC was dissolved. Subsequent to December 31, 2020, US$201 cash settlement was paid.
As at March 31, 2020, an estimated fair value of $1,574 for the 18,515,424 common shares was included in the treasury reserve. On August 25, 2020, 18,515,424 common shares were returned to the treasury for cancellation.
On January 1, 2020, the Company lost its de facto control of ACC shortly followed by the resignation of Howard Misle, for former controlling shareholder of ACC, on January 13, 2020. As a result, the Company deconsolidated ACC and recognized a loss on deemed disposal of subsidiary of $12,253 which consists of (i) $10,982 from the settlement based on the net liabilities of $3,023 of ACC as at January 1, 2020, (ii) $221 of accounts receivable write off and (iii) $901 of inventory write off, and (iv) $149 of legal fees incurred during the acquisition.
As of March 31, 2020, the assets and liabilities of ACC were deconsolidated from the Company’s Consolidated Statements of Financial Position as a result of the Settlement and its results of operations were reclassified and included in loss from discontinued operations for all periods.
LOI to Purchase Micro Cultivation Facility in British Columbia
On October 6, 2020, the Company executed a non-bonding letter of intent with 1208417 BC. Ltd dba Laughing Turtle Farms to purchase their micro cultivation facility in British Columbia. The LOI was terminated in April 2021.
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LOI to Purchase Retail Cannabis Locations in Okanagan Valley of B.C.
On October 8, 2020, the Company executed a non-bonding letter of intent with 1260474 BC. Ltd. To purchase two completed retail cannabis stores located in the Okanagan Valley of British Columbia. The LOI was terminated in April 2021.
LOI to Establish Supply Agreement with Boaz Craft Cannabis
On October 19, 2020, the Company executed a non-bonding letter of intent with Boaz Craft Cannabis based in Calgary, Alberta to supply cannabis from its micro cultivation facility in Vernon, BC (Laughing Turtle Farms) in 2021 upon the closing of Laughing Turtle Farms Definitive Agreement.
Changes to the Board of Directors and Management
Mr. Alnoor Nathoo resigned from the Board effective July 22, 2020.
The Company appointed Mr. Ron Stern to the Board effective July 22, 2020.
The Company appointed Mr. Dylan Rexing to the Board effective October 7, 2020.
Mr. Kevin Cornish resigned as interim director effective October 7, 2020 and continue to be the CFO/COO of the Company.
The Company appointed Mr. James O’Sullivan as Company Secretary effective November 23, 2020.
Mr. Shane Dungey and Mr. Ron Stern resigned from the Board effective February 26, 2021.
Subsequent Events
Financing
On April 21, 2021, the Company closed a non-brokered private placement of 6,445,880 units at $0.15 per unit for gross proceeds of $967. Each unit consists of one common share and one common share purchase warrant. Each warrant is exercisable into one common share of the Company at a price of $0.22 per share for a period of 18 months expiring October 21, 2022, subject to an accelerated expiry if the VWAP of the Company’s common shares is equal to or above $0.50 for a period of ten consecutive trading days.
Subsequent to December 31, 2020, the Company received US$1,450 from the revolving credit promissory note. (Note 12(e)) As a consideration, the Company issued 2,175,000 common shares at a fair value of $399 and 1,450,000 warrants an exercise of $0.15 expiring December 23, 2023.
Definitive Agreement to Sell Surplus Cannabis Licenses
On March 30, 2021, the Company executed a definitive agreement with Allied Corp. to sell a surplus cultivation license for its Apex facility in Las Vegas for US$1,500. A land lease agreement and revenuesharing agreement for incremental sales from the facility has been negotiated between the parties. Fiore
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will be assisting Allied with the genetics and selection of cannabis strains for their new operation as well as consulting on the marketing of eventual cannabis products through Fiore’s already established medical and retail partnerships.
Celista Project
On April 19, 2021, the Company entered into a Memorandum of Understanding with PECA Properties to transfer ownership of Fiore’s Celista Project as well as the Company’s wholly owned subsidiaries, Marapharm Inc and Full Spectrum Medicinal Inc., in consideration for debt and liabilities associated with the purchasing stakeholders. The final transaction enables Fiore to clean up its balance sheet by eliminating approximately $4.8 million of liabilities, including a mortgage and other obligations.
Tonasket, Washington Property
On February 17, 2021, a marijuana production license in Washington State, which the Company owned an option and right of first refusal, was sold for a consideration of US$110. The license was held by the former Director of Operation on behalf of the Company. The underlying intangible assets was fully written down in fiscal year ended March 31, 2020.
Selected Quarterly Financial Information
| Net loss from | Net loss and | |||
|---|---|---|---|---|
| continuing | comprehensive | Basic and diluted | ||
| Quarters ending | Revenue | operations | loss | lossper share |
| $ | $ | $ | $ | |
| 31-Dec-20 | 538 | (10,746) | (11,433) | (0.07) |
| 30-Sep-20 | 550 | (962) | (1,248) | (0.01) |
| 30-Jun-20 | 578 | (5,043) | (5,655) | (0.04) |
| 31-Mar-20 | 529 | (28,433) | (26,932) | (0.30) |
| 31-Dec-19 | 690 | (3,293) | (4,733) | (0.03) |
| 30-Sep-19 | 741 | (3,546) | (3,994) | (0.04) |
| 30-Jun-19 | 650 | (2,934) | (3,355) | (0.04) |
| 31-Mar-19 | 413 | (15,618) | (14,923) | (0.30) |
As of year ended March 31, 2020, the assets and liabilities of ACC were deconsolidated from the Company’s Consolidated Statements of Financial Position as a result of the Settlement and its results of operations were reclassified and included in loss from discontinued operations for all periods.
Discussion of Operations
Revenues
The Company’s revenues were derived from the sale of cannabis produced from the Company’s North Las Vegas facilities as well as sales from the California Green Leaf dispensary.
The Company commenced operations at its Las Vegas facilities and commercial wholesale of recreational cannabis in May 2019. Due to the Coronavirus pandemic and shut down of adult-use dispensaries in Las
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Vegas, the Company did not generate any revenue during the nine months ended December 31, 2020 as compared to gross revenue of $39 and $692 (Net revenues - $30 and $530) during the three and twelve months ended March 31, 2020, respectively.
During the three and nine months ended December 31, 2020, the Company generated gross revenues of $537 and $1,645 (Net revenues - $490 and $1,500), respectively, from its California dispensary as compared to gross revenues of $474 and $1,819 (Net revenues - $425 and $1,639) during the three and twelve months ended March 31, 2020, respectively.
Cost of Sales
Cost of sales consists mainly of production costs, costs of goods purchased and fair value adjustments on sale of inventory and biological asset transformation.
The costs of goods purchased during the three and nine months ended December 31, 2020 amounted to $310 and $1,000, respectively, which consisted of cannabis and other products purchased for resale through the California dispensary.
Fair value adjustments relate to biological assets and inventory. Biological assets consist of cannabis plants at various stages of growth before harvest which are recorded at fair value less costs to sell. At harvest, the biological assets are transferred to inventory at their fair value which becomes the deemed cost for inventory. After harvest, costs are capitalized to inventory and expensed to costs of sales when sold.
During the three and nine months ended December 31, 2020, the Company recognized an unrealized gain (loss) due to biological asset transformation of gain $169 and loss of $62 (March 31, 2020 – unrealized gain of $162 and $544), respectively. During the nine months ended December 31, 2020, the Company produced 148,083 grams of dried cannabis which were stored as fresh frozen for future extraction purposes. As of December 31, 2020, the biological assets were on average 50% complete and it was expected that the Company’s biological assets would yield approximately 188,060 grams of cannabis when harvested. The Company’s estimates are, by their nature, subject to change. Changes in the anticipated yield will be reflected in future changes in the fair values of biological assets. The weighted average fair value less cost to complete and cost to sell of the cannabis plants was $3.71 per gram.
General and Administrative Expenses
General and administrative expenses consisted of the following:
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| Three months ended December 31, 2020 Three months ended March 31,2020 |
Nine months ended December 31, 2020 Twelve months ended March 31,2020 |
|
|---|---|---|
| Consulting fees Business acquisition costs Shareholder and investor relations Office and general Professional fees Management fees and wages |
$ $ 39 1,172 - 842 15 116 387 283 298 271 295 289 |
$ $ 280 1,790 - 1,248 617 738 832 984 568 574 1,618 1,087 |
| 1,034 2,973 |
3,915 6,421 |
Consulting fees decreased by $1,133 and $1,510, during the three and nine months ended December 31, 2020, respectively compared to the three and twelve months ended March 31, 2020. During the twelve months ended March 31, 2020, the Company issued 1,100,000 common shares at fair value of $413 for service provided by certain consultants in related to the Celista project, 2,500,000 common shares at a fair value of $456 for business development consulting services and 2,000,000 common shares at a fair value of $365 to certain former directors and management of the Company for consulting services.
Business acquisition costs of $842 and $1,248 incurred in the three and twelve months ended March 31, 2020 mainly due to the 3,250,000 finder’s shares issued for ACC acquisition at a fair value of $1,219.
Shareholder and investor relations expenses were $617 for the nine months ended December 31, 2020 compared to $738 for the year ended March 31, 2020, consistent with a nine-month period of activity as compared to the year end March 31, 2020.
Management fees and wages increased by $6 and $531 during the three and nine months ended December 31, 2020 as a result of 9,952,020 common shares issued to the management for signing bonus and services at a fair value of $1,028.
Depreciation and Amortization
Depreciation and amortization were $222 and $678, respectively, during the three and nine months ended December 31, 2020 as compared to $377 and $733 during the three and twelve months ended March 31, 2020.
The Company recorded depreciation of $82 and $462 for the three and nine months ended December 31, 2020, respectively, (March 31, 2020 - $33 and $283), for the North Las Vegas facilities and the dispensary in California. During the three and nine months ended December 31, 2020, the Company recorded amortization of $36 and $112, respectively, (March 31, 2020 - $105 and $336), for the Las Vegas and California marijuana licenses.
Share-based Compensation
Share-based compensation decreased by $3,028 during the nine months ended December 31, 2020.
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During the nine months ended December 31, 2020, the Company recognized share-based compensation of
-
$752 for 7,941,108 RSUs awarded;
-
$505 for 7,986,108 options granted; and
-
During the twelve months ended March 31, 2020, the Company recognized share-based compensation of
-
$3,041 for 5,705,000 RSUs awarded;
-
$208 for 566,250 options granted; and
-
$1,036 for performance and retention bonus shares granted.
Finance and Other Costs
Finance and other costs included interests on loans and borrowings, convertible debenture accretion expenses, lease liability accretion expenses and bank charges. For the nine months ended December 31, 2020, financing costs were $1,883 which includes loan interest expenses of $1,044 and accretion expenses of $701. For the twelve months ended March 31, 2020, financing costs were $2,309 which includes loan interests of $890 and accretion expenses of $1,251.
Impairment of Intangible Assets
During the nine months ended December 31, 2020, the Company recorded an impairment charge to intellectual property in the amount of $8,517 (March 31, 2020 - $8,500) relating to the acquisition of Full Spectrum, and to the sublease right in the amount of $nil (March 31, 2020 - $711) relating to the Washington property held for sale.
Loss on deemed disposal of subsidiary
During the year ended March 31, 2020, the Company recognized a loss from deemed disposal of subsidiary of $12,253 which consists of (i) $10,982 from the Settlement with Howard Misle based on the net liabilities of $3,023 of ACC as at January 1, 2020, (ii) $221 of accounts receivable write off and (iii) $901 of inventory write of, and (iv) $149 of legal fees incurred during the acquisition.
Outlook
The company is focusing on operational and financial efficiencies in relation to its core assets and potential divestitures of its noncore assets. These strategies will help enhance the Company’s suite of portfolio products with the addition of a new established brand Diamante within the state of Nevada to complement Fiore’s established Fiore cannabis flower brand.
Liquidity and Capital Resources
The Company manages liquidity risk by ensuring, as far as reasonably possible, that it has sufficient capital to meet working capital and operating requirements as well as its financial obligations and commitments. The Company has historically financed its operations and met its capital requirements primarily through debt and equity financings. The Company’s facilities in Las Vegas Nevada are now fully operational and wholesale sales of recreational cannabis started in May 2019. However, the Company is still currently
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dependent on its ability to raise funds through debt and equity financings and disposition of its assets consisting of lands and buildings in British Columbia and California.
As of December 31, 2020, the Company had working capital deficiency of $6,223 (March 31, 2020 - working capital deficiency of $4,440) and cash of $406. The decrease in working capital of $1,783 was primarily due to increases in short term loans and borrowings of $2,084 and derivative liabilities of $1,357, decrease in assets held for sale of $3,522 offset by decreases in the liabilities associated with assets held for sale of $3,034, short term convertible debentures of $1,845 and increase in accounts receivable of $412.
Net cash on hand increased from $49 as at March 31, 2020 to $406 as at December 31, 2020. The increase in cash resulted mainly from net cash generated from financing activities of $3,701 offset by net cash used for operations of $3,015, and capital expenditures of $263.
Operating activities
For the nine months ended December 31, 2020, cash used in operating activities resulted primarily from cash flows used for operations of $2,351 and cash outflows of $664 related to changes in non-cash working capital. Cash used in operating activities for the twelve months ended March 31, 2020 resulted primarily from cash flows used for operations of $3,912 and cash inflows of $1,282 related to changes in non-cash working capital.
Investing activities
Cash used in investing activities for the nine months ended December 31, 2020, consisted of purchase of production equipment of $206 and acquisition of intangible assets of $57 related to the Nevada marijuana cultivation license.
Cash used in investing activities for the twelve months ended March 31, 2020 was for the constructions of facilities of $534, purchase of production equipment of $328, acquisition of intangible assets of $253 related to the Nevada cultivation marijuana license and Health Canada license application offset by net proceeds from the sale of lands and buildings located in Magna Bay, British Columbia of $600.
Financing activities
Cash provided by financing activities for the nine months ended December 31, 2020, primarily consisted of shares issued for cash of $590 and loans and borrowings of $3,263. During the twelve months ended March 31, 2020, the Company closed a non-convertible debenture private placement for gross proceeds of $488, received loans and borrowings of $1,193 and $1,502 from equity financing.
Capital Expenditures
The Company’s capital expenditures include buildings under construction, buildings and leasehold improvements, production equipment and other equipment and furniture. Such expenditures are funded through joint ventures, loans and borrowings and debt and equity financings. Capital expenditures for the nine months ended December 31, 2020 were $610 as compared to $1,110 for the twelve months ended March 31, 2020.
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Contractual Obligations
A summary of the Company’s contractual obligations which outlines the year the payments are due is as follows:
| Total < 1year 1 – 3years 3 – 5years |
|
|---|---|
| Accounts payable and accrued liabilities Income tax payable Loans and borrowings Lease liabilities Convertible debentures Liabilities associated with assets held for sale |
$ $ $ $ |
| 5,674 5,674 - - |
|
| 356 356 - - |
|
| 4,164 3,084 1,080 - |
|
| 288 133 155 - |
|
| 4,373 2,006 2,367 - |
|
| 3,498 3,498 - - |
|
| 18,353 14,751 3,602 - |
The Company has limited capital and plans to satisfy its requirements for the next 12 months through equity and debt financings and sale of its none-core assets.
Management is committed to raising additional capital to fund its operations and meet its financial obligations and commitments. Although the Company has raised funds during the quarter end, there can be no assurance that it will be able to secure additional financing. The Company has properties in British Columbia and California listed for sale.
Capital Disclosure
The Company considers its capital structure to include net residual equity of all assets, less liabilities. Capital is comprised of the Company’s shareholders’ equity and any debt that it may issue. As at December 31, 2020, the Company’s shareholders’ equity was $3,048 (March 31, 2020 - $17,638) and it had current liabilities of $16,316 (March 31, 2020 - $17,218). Management’s objective is to manage its capital to ensure that there are adequate capital resources to safeguard the Company’s ability to continue as a going concern through the optimization of its capital structure. The capital structure consists of share capital and working capital.
To achieve this objective, management adjusts its capital resources to respond to changes in economic conditions and risk characteristics of the underlying assets. The capital resources used for operations were mainly from proceeds of the issuance of common shares.
Off-Balance Sheet Arrangements
The Company had no material off-balance sheet arrangements as at December 31, 2020 and as at the date of this MD&A, that have, or are reasonably likely to have, a current or future effect on the financial performance or financial condition of the Company.
Related Party Transactions
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The compensation paid or payable to directors, officers and former officers of the Company included consulting and management services, and an aggregate of 7,336,108 stock options (March 31, 2020 – 250,000) and 9,476,108 RSUs (March 31, 2020 – 3,250,000) issued to these related parties.
Key compensation personnel include the Company’s directors and officers. The compensation paid or accrued to directors and officers consisted of the following:
| Nine months ended December 31,2020 Twelve months ended March 31,2020 |
|
|---|---|
| Consulting fees to former directors and officers(i) Linda Sampson – former CEO & director Kurt Keating – former Director of US Operations Hanspaul Pannu – former CFO Nilda Rivera – former CFO Corey Klassen – former director Management fees(i) Erik Anderson – CEO & director Kevin Cornish – CFO & COO Marcel LeBlanc – Chairman & director Richard Huhn – former director Dylan Rexing – director James O’Sullivan – corporate secretary Nilda Rivera – former CFO Howard Misle – former CEO & director Alnoor Nathoo – former director Rahim Mohamed – former CEO & director Kurt Keating – former Director of US Operations Hanspaul Pannu – former CFO Share-based compensation Erik Anderson – CEO & director Kevin Cornish – CFO, COO & director Marcel LeBlanc – Chairman & director Shane Dungey – director Alnoor Nathoo – former director Richard Huhn – former director Nilda Rivera – former CFO Ramandeep Gill – former director Rahim Mohamed – former CEO & director Hanspaul Pannu – former CFO Linda Sampson – former CEO & director |
$ $ 35 165 - 135 - 13 - 6 - 45 |
| 35 364 433 40 202 69 4 - 445 - 26 - 3 - - 113 - 139 86 155 - 325 - 95 - 20 |
|
| 1,199 956 332 - 164 - 423 1,309 182 - 155 - 9 621 - 340 - 17 - 829 - 193 - 16 |
|
| 1,265 3,325 |
|
| 2,499 4,645 |
All related party transactions were in the ordinary course of business and were measured at their exchange amount as agreed to by the related parties.
Commitments and Contingencies
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Please refer to Note 18 to the Company’s Annual Financial Statements for a detailed disclosure on commitments and contingencies including outstanding claims and litigations.
Critical Accounting Estimates
The preparation of the Company’s Interim Financial Statements in conformity with IFRS requires management to exercise judgment and to make estimates and assumptions that affect the application of accounting policies and the reported amounts of revenues, expenses, assets, liabilities and disclosures. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
Refer to Note 3 to the Company’s Annual Financial Statements for a detailed discussion of the areas in which critical accounting estimates were made and where actual results may differ from the estimates under different assumptions and conditions that may materially affect financial results of the Company’s statement of financial position reported in future periods.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Changes in Accounting Policies
The Company adopted the new IFRS 3 – Business Combinations accounting standard effective April 1, 2020. The adoption of this standard did not have a material impact on the consolidated financial statements for the nine months ended December 31, 2020.
Financial Instruments
| Fair value Basis of measurement Fair value hierarchy |
|
|---|---|
| Financial assets Cash Accounts receivable Financial liabilities Accounts payable and accrued liabilities Income tax payable Loans and borrowings Convertible debentures(1) Derivative liabilities(1) |
$ |
| 406 FVTPL N/A |
|
| 496 Amortized cost N/A |
|
| 5,674 Amortized cost N/A |
|
| 356 Amortized cost N/A |
|
| 4,164 Amortized cost Level 2 |
|
| 4,373 Amortized cost Level 2 |
|
| 1,565 FVTPL Level 3 |
The Company is exposed in varying degrees to a few risks from financial instruments. A discussion of the types of financial risks the Company is exposed to, and how such risks are managed by the Company, is provided in Note 21 to the Annual Financial Statements.
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Summary of Outstanding Share Data
As at the date of this MD&A, the Company had the following issued and outstanding securities:
| Description of securities | Number of securities |
|---|---|
| Issued and outstanding common shares Warrants Stock options RSUs Convertible debentures |
|
| 145,166,874 | |
| 30,082,394 | |
| 6,064,858 | |
| - | |
| 10,542,992 |
Controls and Procedures
In connection with National Instrument 52-109 (“NI 52-109”), the CEO and CFO of the Company have filed a Venture Issuer Basic Certificate with respect to the financial information contained in the Annual Financial Statements and accompanying MD&A as at December 31, 2020 (together the “Annual Filings”).
In contrast to the certificate under NI 52-109, the Venture Issuer Basic Certification does not include representations relating to the establishment and maintenance of disclosure controls and procedures and internal control over financial reporting, as defined in NI 52-109. For further information, the reader should refer to the Venture Issuer Basic Certificates filed by the Company with the Interim Filings on SEDAR at www.sedar.com.
Disclosure Controls and Procedures
Disclosure controls and procedures (“DC&P”) are intended to provide reasonable assurance that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified by securities regulations and that information required to be disclosed is accumulated and communicated to management. Internal controls over financial reporting (“ICFR”) are intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with IFRS.
Venture companies are not required to provide representations in the Annual and Interim Filings relating to the establishment and maintenance of DC&P and ICFR, as defined in NI 52-109. In particular, the CEO and CFO certifying officers do not make any representations relating to the establishment and maintenance of (a) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation, and (b) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s IFRS. The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in their certificates regarding the absence of misrepresentations and fair disclosure of financial information. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost
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effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
Additional Information
Additional disclosure of the Company’s, material change reports, new release, and other information can be obtained on SEDAR at www.sedar.com, or by requesting further information from the Company’s head office in Kelowna, BC Canada.
Cautionary Statement Regarding Forward-Looking Information
This MD&A contains forward-looking statements that relate to our current expectations and views of future events. These statements relate to future events or future performance. Statements which are not purely historical are forward-looking statements and include any statements regarding beliefs, plans, outlook, expectations or intentions regarding the future including words or phrases such as "anticipate", "objective", "may", "will", "might", "should", "could", "can", "intend", "expect", "believe", "estimate", "predict", "potential", "plan", "is designed to", "project", "continue", or similar expressions suggest future outcomes or the negative thereof or similar variations. Forward-looking statements may also include, among other things, statements about the Company's: ability to reinvest profits generated from its operations; future business strategy; expectations of obtaining licenses and permits; expectations regarding expenses, sales and operations; future customer concentration; anticipated cash needs and estimates regarding capital requirements and the need for additional financing; total processing capacity; the ability to anticipate the future needs of customers; plans for future products and enhancements of existing products; future growth strategy and growth rate; future intellectual property; regulatory approvals and other matters; and anticipated trends and challenges in the markets in which the Company may operate.
Such statements and information are based on numerous assumptions regarding present and future business strategies and the environment in which the Company will operate in the future, including the demand for our products; anticipated costs and ability to achieve goals; the Company's ability to complete any contemplated transactions; historical prices of cannabis; and that there will be no regulation or law that will prevent the Company from operating its businesses; the state of the economy in general and capital markets in particular; present and future business strategies; the environment in which the Company will operate in the future; the estimated size of the cannabis market; and other factors, many of which are beyond the control of the Company. While such estimates and assumptions are considered reasonable by the management of the Company, they are inherently subject to significant business, economic, competitive and regulatory uncertainties and risks. Although the Company believes that the assumptions underlying these statements are reasonable, they may prove to be incorrect. Given these risks, uncertainties and assumptions, the reader should not place undue reliance on these forward-looking statements.
Forward-looking statements are subject to known and unknown risks, uncertainties and other important factors that may cause the actual results to be materially different from those expressed or implied by such forward-looking statements, including but not limited to: business, economic and capital market conditions; the ability to manage the Company's operating expenses, which may adversely affect the Company's financial condition; the Company's ability to remain competitive; regulatory uncertainties; market conditions and the demand and pricing for our products; exchange rate fluctuations; security threats; the
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Company's relationships with its customers, distributors and business partners; the Company's ability to attract, retain and motivate qualified personnel; industry competition; the impact of technology changes on the Company's products and industry; the Company's ability to successfully maintain and enforce its intellectual property rights and defend third-party claims of infringement of their intellectual property rights; the impact of litigation that could materially and adversely affect our business; the Company's ability to manage its working capital; and the Company's dependence on key personnel. The Company is not a positive cash flow company, has a history of losses and it may not actually achieve its plans, projections, or expectations.
Important factors that could cause actual results to differ materially from the Company's expectations include, consumer sentiment towards the Company's products and cannabis generally; risks related to the Company ability to maintain its licenses issued by governments in good standing; uncertainty with respect to the Company’s to grow, store and sell cannabis; risks related to the costs required to meet the obligations related to regulatory compliance; risks related to the extensive control and regulations inherent in the industry in which the Company operates; risks related to governmental regulations, including those relating to taxes and other levies; risks related an early stage business and a business involving an agricultural product and a regulated consumer product; risks related to building brand awareness in a new industry and market; risks relating to restrictions on sales and marketing activities imposed by governments; risks inherent in the agricultural business; risks relating to energy costs; risks relating to product liability claims, regulatory action and litigation; risks relating to recall or return of products; and risks relating to insurance coverage; global economic climate; equipment and building failures; increase in operating costs; decrease in the price of cannabis; security threats; government regulations; loss of key employees and consultants; additional funding requirements; volatility in the securities of the Company; changes in laws; technology failures; failure to obtain permits and licenses; anticipated and unanticipated costs; competition; risks associated with the substantial obligations of being a public company; and failure of counterparties to perform their contractual obligations. This list is not exhaustive of the factors that may affect the forwardlooking statements. Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements.
Except as required by law, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future event or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. Neither the Company nor any of its representatives make any representation or warranty, express or implied, as to the accuracy, sufficiency or completeness of the information in this MD&A. Neither the Company nor any of its representatives shall have any liability whatsoever, under contract, tort, trust or otherwise, to the reader or any person resulting from the use of the information in this MD&A by the reader or its representatives or for omissions from the information in this MD&A.
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