AI assistant
Flow Beverage Corp. Management Reports 2025
47256_rns_2025-06-16_2e33f908-e8fe-4421-9623-b274a21ecdc8.pdf
Management Reports
Open in viewerOpens in your device viewer
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE SIX-MONTH PERIOD ENDED APRIL 30, 2025
flow
MANAGEMENT'S DISCUSSION AND ANALYSIS 3
FORWARD-LOOKING INFORMATION 3
BASIS OF PRESENTATION AND GOING CONCERN 4
NON-IFRS AND OTHER FINANCIAL MEASURES 5
BUSINESS OVERVIEW 5
SUSTAINABILITY 10
COMPANY OUTLOOK 10
SUMMARY OF FACTORS AFFECTING PERFORMANCE 11
RESULTS OF OPERATIONS – SECOND QUARTER 12
RESULTS OF OPERATIONS – YEAR-TO-DATE 16
SELECTED QUARTERLY INFORMATION 19
LIQUIDITY AND CAPITAL RESOURCES 19
NON-IFRS AND OTHER FINANCIAL MEASURES 21
OFF-BALANCE SHEET ARRANGEMENTS 21
CURRENT SHARE INFORMATION 21
CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES 22
RISK FACTORS 25
MANAGEMENT OF CAPITAL 26
SUBSEQUENT EVENTS 27
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING 27
ADDITIONAL INFORMATION 30
www.flowhydration.com
flow
Management's Discussion and Analysis
The following Management's Discussion and Analysis ("MD&A") is prepared as of June 16, 2025, and provides information concerning Flow Beverage Corp's ("Flow", the "Company", "we" or "us") financial condition and results of operations. This MD&A should be read in conjunction with our annual audited consolidated financial statements as at and for the year ended October 31, 2024, including the related notes thereto, and our unaudited condensed consolidated interim financial statements for the periods ended April 30, 2025, and April 30, 2024.
This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results, performance and achievements may differ materially from those implied by these forward-looking statements as a result of various factors, particularly under "Forward-Looking Information" and "Risk Factors".
Forward-Looking Information
Some of the information contained in this MD&A is forward-looking. This information may relate to anticipated events or results and include, but are not limited to, expectations regarding industry trends, our growth rates and growth strategies. Particularly, information regarding our expectations of future results, targets, performance achievements, prospects or opportunities is forward-looking information. As the context requires, this may include certain targets as disclosed in the AIF filed, which are based on the factors and assumptions, and subject to the risks, as set out therein and herein. Often but not always, forward-looking information can be identified by the use of forward-looking terminology such as "may", "will", "expect", "believe", "estimate", "plan", "could", "should", "would", "outlook", "forecast", "anticipate", "foresee", "continue" or the negative of these terms or variations of them or similar terminology. This information is based on Management's reasonable assumptions and beliefs in light of the information currently available to us and is made as of the date of this MD&A.
However, we do not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise, except as required under applicable securities laws in Canada. Actual results and the timing of events may differ materially from those anticipated in the forward-looking information as a result of various factors, including those described in "Risk Factors". Additional risks and uncertainties are discussed in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including the Company's annual information form dated January 29, 2025 for the fiscal year ended October 31, 2024 (the "AIF") and the annual audited consolidated financial statements for the year to date period ended on October 31, 2024, a copy of which is available under the Company's profile on SEDAR at www.sedar.com. These factors are not intended to represent a complete list of the factors that could affect us; however, these factors should be considered carefully.
We caution that the list of risk factors and uncertainties is not exhaustive, and other factors could also adversely affect our results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such information. See "Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these statements.
The purpose of the forward-looking statements is to provide the reader with a description of Management's current expectations regarding the Company's financial performance and they may not be appropriate for other purposes; readers should not place undue reliance on forward-looking statements made herein. To the extent any forward-looking information in this MD&A constitutes future-oriented financial information or financial outlook, within the meaning of applicable securities laws, such information is provided to demonstrate the potential of the
www.flowhydration.com
flow
Company and readers are cautioned that this information may not be appropriate for any other purpose. Future-oriented financial information and financial outlook, as with forward-looking information generally, are based on current assumptions and subject to risks, uncertainties and other factors. Furthermore, unless otherwise stated, the forward-looking statements contained in this MD&A are made as of the date of this MD&A, and we have no intention and undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.
Basis of Presentation and Going Concern
Our unaudited condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and are presented in Canadian dollars. Accordingly, unless otherwise noted herein, all financial information in this MD&A is presented in Canadian dollars. References to North America refer to Canada and the United States.
All references in this MD&A to "Fiscal 2025" are to the period ended April 30, 2025, and "Fiscal 2024" are to the period ended April 30, 2024.
The Company's financial statements were prepared on a going concern basis. The going concern basis assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. The Financial Statements do not include any adjustments to the amounts and classification of assets and liabilities that would be necessary should the Company be unable to continue as a going concern. Such adjustments could be material.
As at April 30, 2025, the Company has an accumulated deficit of $344.3 million and for the six months ended April 30, 2025, a net loss of $18.9 million and cash flows used in operating activities of $2.0 million. Whether, and when, the Company can attain profitability and positive cash flows from operations is subject to material uncertainty. The application of the going concern assumption is dependent upon the Company's ability to generate future profitable operations, obtain financing and maintain compliance with debt covenants. The Company will also seek to improve its results from operations and cash flows by prioritizing higher margin channels and reducing operating costs by streamlining its operations and support functions. The Company will need to raise additional capital and negotiate modifications to the Company's existing borrowings to fund its planned operations and meet its obligations. While the Company has been successful in obtaining financing to date and negotiating modifications to its existing borrowings and believes it will be able to obtain sufficient funds in the future and ultimately achieve profitability and positive cash flows from operations, there can be no assurance that the Company will achieve profitability and be able to do so on terms favourable for the Company. The above events and conditions indicate there is a material uncertainty that may cast significant doubt on the Company's ability to continue as a going concern.
The unaudited condensed consolidated interim financial statements and the accompanying notes for Fiscal 2025 were reviewed and approved by the Company's Board of Directors (the "Board") on June 16, 2025.
www.flowhydration.com
flow
Non-IFRS and Other Financial Measures
This MD&A makes reference to certain non-IFRS measures. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS, and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from Management's perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS. We use non-IFRS measures including "Adjusted EBITDA Loss", "Adjusted Net Loss", and "EBITDA Loss".
The Company uses a supplementary financial measure to disclose a financial measure that is not (a) presented in the unaudited condensed consolidated interim financial statements and (b) is, or is intended to be, disclosed periodically to depict the historical or expected future financial performance, financial position or cash flow, that is not a non-IFRS financial measure as detailed above. We use the supplementary financial measure "gross margin".
These non-IFRS and supplementary financial measures are used to provide investors with supplemental measures of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS financial measures. We also believe that securities analysts, investors and other interested parties frequently use non-IFRS and supplementary financial measures in the evaluation of issuers. Our Management also uses non-IFRS and supplementary financial measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and to determine components of Management compensation. For definitions and reconciliations of these non-IFRS and supplementary financial measures to the relevant reported measures, please see "How We Assess the Performance of Our Business" and "Results of Operations" sections of this MD&A.
Business Overview
Our History
Flow was founded by Nicholas Reichenbach in 2014 after seeing mountains of plastic bottle waste while attending the Burning Man Festival in Nevada's Black Rock Desert. Having grown up on a rural property in Southern Ontario with a natural, mineral rich aquifer, he imagined a packaged water company that could be "better for people and the planet". After scientific analyses showed that the water was spring water, free from contaminants and packed with natural minerals and electrolytes, Nicholas, along with friends and family, formed Flow and sought out the Tetra Pak Group to provide the most sustainable package available to bring the water to consumers while preserving its benefits.
Key Milestones
During and subsequent to the period ended April 30, 2025, the Company achieved several notable commercial and strategic milestones:
- Retail Expansion: The Company activated conventional listings with Loblaws and secured new 1L product listings at both Shoppers Drug Mart and Sobeys, further strengthening its presence in key national retail banners across Canada.
www.flowhydration.com
flow
-
Strategic Partnerships: Flow announced its designation as an Official Partner of Inter Miami CF for the 2025 Major League Soccer season, supporting brand visibility through high-profile sports marketing. Additionally, the Company entered into a Strategic Advisory Agreement with José Bautista, six-time MLB All-Star and three-time Silver Slugger award recipient, enhancing its brand endorsement portfolio.
-
Financing Activity:
- On February 5, 2025, the Company closed the second tranche of its non-brokered private placement offering of unsecured convertible debenture units. A total of 43.382 units were issued at a price of CAD $10,000 per unit for gross proceeds of USD $300,000 (CAD $433,820), supporting the Company's ongoing working capital and growth initiatives.
- On February 24, 2025, the Second Amendment Term Loan was further amended to amend the payment date of the continuation fee which became due effective February 28, 2025, to be payable July 1, 2025, with the maturity date of the loan remaining November 1, 2028.
- On February 28, 2025, the Company obtained a letter of credit with JPMorgan Chase Bank in the amount of $4 million, expiring on February 28, 2026. The beneficiary of the line of credit was Tetra Pak, and the line of credit was guaranteed by Export Development Canada.
- Effective May 2025, the Company entered into a $2 million secured term note with NFS, bearing interest at 15% per annum, maturing May 23, 2028. Under the agreement, no payments are required for the first three months, followed by equal monthly installments over 33 months. This is a related party transaction.
- On June 4, 2025, the Company closed secured term financing facilities with NFS of up to $4 million ("NFS Term Loan"). The NFS Term Loan will mature on a date that is three years from the date of issue and bear interest at a rate of 15% per annum. Under the agreement, no payments are required for the first three months, followed by equal monthly installments over 33 months. This is a related party transaction.
- On June 4, 2025, the Company closed a secured convertible loan facility with RI Flow LLC of up to $6 million. The convertible facility bears interest at 15% per annum, matures in 18 months, and includes a conversion option into subordinate voting shares at CAD 0.065 per share after one year. This is a related party transaction.
Our Business Model
Flow is an innovative beverage company and one of the pioneers in the "better for you better for the planet" consumer needs state. Most of our business is represented by Flow Alkaline Spring Water; however, the Company has expanded into a variety of organic flavored waters. As of the date of filing, Flow owns two virtually identical water sources in terms of key minerals, in Bruce County, Ontario and Augusta County, Virginia. Flow packages its products in its production facility in Aurora. The packaging facility in Aurora, Ontario consists of approximately 150,000 square feet, operates four Tetra Pak A3 / Flex filling machines and has a capacity of approximately 500,000 Tetra Paks per day.
Flow markets its premium alkaline spring water in original unflavored and a range of award-winning organic in sizes ranging from 330 ml to 1 liter, and in six, twelve, eighteen and twenty-four pack. Flow gets product to market through an omni-channel distribution strategy, including conventional, food service and convenience channels. As part of this strategy, the Company leverages a network of distributors to support our coverage of over 38,000 stores in North America. Flow operates a fast-growing e-commerce business mostly developed with Shopify with more than 4,000 subscription customers. Flow has also developed strategic partnerships with third party premium brands in adjacent categories to co-pack their products in the Tetra Prisma format. As at the date hereof, Flow had approximately 137 full-time employees in Canada. Flow has a robust ESG agenda, including sustainable packaging, resources preservation, carbon neutrality and a high score on our B-Corp certification.
www.flowhydration.com
flow
Sales and Marketing Strategy
Our goal is to grow Flow as one of the leading premium water brands in North America. To achieve this aim, Flow's sales and marketing strategy is fivefold:
- Further investment in key channels - Over the course of the next three years, invest in Natural and Conventional channels to support continued retail growth.
- Grow our ecommerce business - Leverage the successful direct-to-consumer ("DTC") subscription program, continuing to directly engage with our rapidly growing customer base.
- Expand into food service - Broaden consumer product trial to generate incremental revenue while responding to the increasing receptivity to sustainable packaging.
- Innovate and expand our product portfolio within our core and adjacent categories - Drive meaningful innovation that is focused on deepening our relationship with the Glow Getter and Wellness Enthusiast, delivering products that enhance her holistic wellness lifestyle while ensuring Flow shows up across all her functional beverage occasions. Through innovation, we will continue to not only unlock new revenue opportunities across DTC and our growing retail channels but also deliver new stories and campaigns to keep our audiences and partners engaged in the Flow brand.
- Build and amplify our brand - Establish Flow as the leading premium water brand focused on product superiority and sustainability by continuously looking for new ways to connect with our community of core consumers through digital campaigns, social media, influencer partnerships, athlete and celebrity relationships, and event sponsorships – both at the community and brand-defining levels.
Our Financial Model
Our financial model is based on sustaining top line growth, developing stable gross margins and controlling operational, general and administrative costs to provide a path towards profitability. This will require continued investment in our brand, e-commerce, innovation, systems, internal controls and distribution. These investments will allow us to improve our profitability year-on-year and create significant value for our shareholders in the medium to long-term.
How We Assess the Performance of Our Business
The key performance indicators below are used by Management in evaluating the performance of our Company and assessing our business. We refer to certain key performance indicators used by Management and typically used by our competitors in the Canadian consumer health industry, some of which are not recognized under IFRS as identified below. See "Non-IFRS and Other Financial Measures" for more information on each non-IFRS financial measure, non-IFRS ratio and supplementary measure. See "Results of Operations" for a quantitative reconciliation of each non-IFRS financial measure to its most directly comparable financial measure disclosed in our annual audited consolidated financial statements to which the measure relates.
Revenue
Revenue is derived primarily from the sale of packaged water and co-packing services. Packaged water is sold to distributors, retail, wholesale and direct customers.
www.flowhydration.com
flow
For sales to distributors, revenue is recognized when control of the goods has transferred to the distributor, which is dependent on specific shipping terms. Following shipping, the distributor has full discretion over the manner of distribution and has the primary responsibility when selling the goods and bears the risks of obsolescence and loss in relation to the goods. A receivable is recognized by the Company when control of the goods has transferred to the distributor as this represents the point in time at which the right to consideration becomes unconditional, as only the passage of time is required before payment is due.
For sales to retailers, wholesalers and direct customers, revenue is recognized when control of the goods has transferred, which is dependent on the specific shipping terms. Payment of the transaction price is due at the point in which control transfers.
The Company enters into co-packing agreements with customers. The Company is required to make estimates regarding the total number of units to be delivered under the contracts. The Company also makes estimates regarding the total consideration to which the Company expects to be entitled to in exchange for the services provided. The total consideration to which the Company expects to be entitled to can vary based on estimates regarding penalties for minimum purchase commitments, expected total units to be delivered and pricing discounts. Revenue is recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
The Company provides sales discounts and reductions through contract price discounts, payment terms, point of sale price reduction arrangements and customer returns and markdowns. If variable, the Company uses its accumulated historical experience to estimate the variable consideration to which it is entitled to, using the most likely outcome method. If considered highly probable that a significant reversal in the cumulative revenue recognized will not occur, such consideration shall be recognized in revenue.
The Company conducts extensive promotional activities, primarily through the use of cooperative advertising, coupons, in-store displays, slotting fees and other funded costs from retail partners. The costs of such activities are recorded as a reduction of revenue over the period in which the goods or services are transferred to the customer, to the extent the consideration is not in exchange for a distinct good or service.
Refer to Notes 14 & 16 in our unaudited condensed consolidated interim financial statements for the disclosure on disaggregated revenue.
Gross profit
"Gross profit" is defined as net revenue less cost of sales. Cost of revenue includes product-related costs, labour, other operating costs such as rent, production equipment repairs and maintenance, and amortization. Our cost of revenue may include different costs compared to other manufacturers and distributors in the North American shelf-stable water market. Management believes that gross profit is a useful measure in assessing the Company's underlying operating performance before operating expenses.
Gross margin
"Gross margin" is defined as gross profit divided by net revenue. Gross margin is a supplementary financial measure.
www.flowhydration.com
flow
Sales and marketing
Our sales and marketing expenses are primarily comprised of non-customer-specific promotional costs.
General and administrative
Our general and administrative expenses are primarily comprised of travel, professional fees, repairs and maintenance, rent, and licenses and subscriptions. Our general and administrative expenses also include regulatory, legal, accounting, insurance and other expenses associated with being a public company.
Salaries and benefits
Our salaries and benefits expenses are primarily comprised of wages, long-term consultants and benefits.
EBITDA Loss
"EBITDA Loss" is defined as consolidated net loss before: (i) income tax expense; (ii) finance expense, net; and (iii) amortization and depreciation of property, plant, and equipment, right of use assets and intangible assets. The amortization and depreciation amount is taken from the statement of cash flows, as it is inclusive of all amortization and depreciation that is allocated to overhead. EBITDA Loss is a non-IFRS financial measure and its most directly comparable financial measure that is disclosed in our unaudited condensed consolidated interim financial statements is net loss. We believe that EBITDA Loss is a useful measure to assess the performance and cash flow of our Company.
Adjusted EBITDA Loss
"Adjusted EBITDA Loss" is defined as EBITDA Loss before: (i) impairment of assets and restructuring; (ii) share-based compensation, (iii) (gain) loss on option revaluation, (iv) foreign exchange loss, and (v) gain (loss) on debt modification. Adjusted EBITDA Loss is a non-IFRS financial measure and its most directly comparable financial measure that is disclosed in our unaudited condensed consolidated interim financial statements is net loss. We believe Adjusted EBITDA Loss is a useful measure to assess the performance and cash flow of our Company as it provides more meaningful operating results by excluding the effects of income tax expense, finance expense, depreciation and amortization costs, and expenses we believe are not reflective of our underlying business performance.
Adjusted Net Loss
"Adjusted Net Loss" is defined as consolidated net loss adjusted for the impact of: (i) restructuring and other transaction costs; (ii) gain (loss) on option revaluation; (iii) gain (loss) on debt modification; (iv) share-based compensation. Adjusted Net Loss is a non-IFRS financial measure and its most directly comparable financial measure that is disclosed in our financial statements is net loss. We believe Adjusted Net Loss is a useful measure to assess the performance of our Company as it provides more meaningful operating results by excluding the effects of expenses that are not reflective of our underlying business performance.
www.flowhydration.com
9 of 30
flow
Sustainability
Flow believes that doing what's best for its customers also means doing what's best for the planet. As a result, Flow has always committed to utilizing high-quality, sustainably sourced, naturally alkaline spring water, packaged in mostly renewable plant-based, recyclable cartons.
Sustainability for Flow includes minimizing its impacts on the environment, maximizing its positive impacts on customers' health and wellness, and giving back to the communities it operates in and benefits from. Flow is also committed to the following sustainability pillars:
- Protecting our sources
- Using sustainable packaging
- Climate protection
- Supporting the circular economy
- Having positive social impacts
Flow has the highest B Corp rating of any bottled water company in the world and has been a Certified B Corp since 2017. B Corp certification is only given to companies that meet the highest standards of environmental sustainability and accountability and use business as a force for good.
These achievements are no accident. Flow's packaging, supplied by Tetra Pak, is made with up to 81% renewable materials. The largest ingredient in our packaging material is paperboard, which is sourced from the Forest Stewardship Council ("FSC"), while the cap is made from renewably sourced sugarcane. Our flavors are QAI Organic certified as we strive to give our consumers the cleanest ingredients possible, while also helping to reduce the number of harmful chemicals released into our environment.
Together, the steps Flow has taken to operate with the highest environmental standards has diverted over 130 million plastic bottles of water from entering landfills and with zero net operational emissions.
Flow also makes ongoing donations to charitable causes, supporting disaster relief efforts across the US and Canada, and had over 300 volunteer hours from its employees supporting community outreach and engagement.
Company Outlook
The Company's strategy is focused on the long-term profitable growth of the Flow brand. Industry trends for premium, sustainable and enhanced water remain favorable. Elevated demand for sustainable product formats and recent contract wins are expected to help accelerate growth of net revenue.
Flow plans to continue implementing operational cost saving initiatives in an effort to increase margins and improve operational cash flows. The Company is also focused on improving internal processes and systems to enable general and administrative expense reduction.
www.flowhydration.com
flow
Summary of Factors Affecting Performance
Foreign Exchange
Our unaudited condensed consolidated interim financial statements are presented in Canadian dollars, which is the functional currency of the Company and the presentation currency for the consolidated financial statements. As we continue to execute on our omni-channel distribution strategy in the US, a larger portion of our revenue and cost of goods sold are derived in US dollars. A significant portion of our revenue and cost of goods sold continue to be derived in US dollars as a result of our continued growth and market penetration. We do not hedge our exchange rate exposure through financial instruments. As we continue to expand our footprint in North America, we will assess our currency exposure and take further steps as may be required to proactively manage this exposure.
Seasonality
The beverage industry is subject to seasonal demand fluctuations as consumers increase their consumption during the summer months, which is further impacted by weather during the spring, summer, and fall. Seasonality can have an impact on our net revenue and the comparison year over year.
www.flowhydration.com
flow
Results of Operations – Second Quarter
| In Canadian dollars except percentages | Three-month period ended April 30 | |||
|---|---|---|---|---|
| $ | 2025 % of revenue | $ | 2024 % of revenue | |
| Net revenue | 10,040,460 | 100% | 12,054,530 | 100% |
| Cost of revenue | 7,758,626 | 77% | 8,712,814 | 72% |
| Gross profit | 2,281,834 | 23% | 3,341,716 | 28% |
| Operating expenses | ||||
| Sales and marketing | 430,070 | 4% | 1,554,983 | 13% |
| General and administrative | 2,940,739 | 29% | 2,900,732 | 24% |
| Salaries and benefits | 2,799,007 | 28% | 2,640,987 | 22% |
| Amortization and depreciation | 400,011 | 4% | 422,224 | 4% |
| Share-based compensation | (24,828) | — | 510,845 | 4% |
| Operating expenses | 6,544,999 | 65% | 8,029,771 | 67% |
| Loss before the following | (4,263,165) | (42%) | (4,688,055) | (39%) |
| Other income | (15,762) | — | (838) | — |
| Finance expense, net | 3,025,066 | 30% | 2,126,601 | 18% |
| Foreign exchange (gain) loss | (197,339) | (2%) | (947) | — |
| Restructuring and other costs | 202,678 | 2% | 298,640 | 2% |
| Gain on option revaluation | (11,571) | — | (83,018) | (1%) |
| Loss (gain) on debt modification and other | 3,195,789 | 32% | — | — |
| Net loss for the period | (10,462,026) | (104%) | (7,028,493) | (58%) |
| Other comprehensive gain (loss) that may be reclassified to profit or loss subsequently | ||||
| Exchange gain on translation of foreign operations | 121,783 | 1% | 339,234 | 3% |
| Net other comprehensive loss | 121,783 | 1% | 339,234 | 3% |
| Total comprehensive loss | (10,340,243) | (103%) | (6,689,259) | (55%) |
| Loss per share – basic and diluted | $ (0.12) | $ (0.10) | ||
| Weighted average number of common shares outstanding – basic and diluted | 86,436,195 | 69,815,209 | ||
| Total Assets | 68,863,876 | 57,474,839 | ||
| Non-Current Liabilities | 36,550,401 | 40,045,631 | ||
| EBITDA loss | (6,140,235) | (61%) | (4,227,103) | (35%) |
| Adjusted EBITDA loss | (2,975,506) | (30%) | (3,501,583) | (29%) |
| Adjusted net loss | (7,099,958) | (71%) | (6,302,026) | (52%) |
www.flowhydration.com
flow
Net revenue
Net revenue decreased by 17%, or $2.0 million, to $10.0 million, compared to $12.1 million in Q2 2024. The decline was primarily attributable to a reduction in Flow-branded net revenue, which decreased to $3.6 million from $7.0 million in the prior year. This decline reflects temporary disruptions in production and fulfillment, as well as the Company's strategic decision to exit certain commercial partnerships with U.S. retail customers. The decrease was partially offset by an increase in co-packing revenue, which rose to $5.0 million from $3.6 million in Q2 2024, driven by new co-packing agreements and higher volumes under existing customer contracts.
Cost of revenue
Cost of revenue decreased by 11%, or $0.9 million, to $7.8 million, compared to $8.7 million in Q2 2024. The reduction was primarily driven by the consolidation of all Flow-branded production to the Company's Aurora facility, resulting in improved operational efficiencies and enhanced overhead absorption following the commissioning of a fourth production line. Despite the absolute reduction in cost, cost of revenue as a percentage of net revenue increased to 77%, compared to 72% in the prior year.
Gross profit
Gross profit for the three months ended April 30, 2025, was $2.3 million, a decrease of 32% or $1.0 million compared to $3.3 million in Q2 2024. The decline was primarily driven by lower net revenue as described above, which outpaced the reduction in cost of revenue, resulting in compressed gross margins for the quarter.
Sales and marketing
Sales and marketing expense decreased by 72%, or $1.2 million, to $0.4 million, compared to $1.6 million in Q2 2024. The decrease is partially related to a marketing rebate recorded in the period related to qualifying marketing activities that promote Flow branded products and growth in the Tetra packaging format. Additionally, in response to lower production and fulfillment volumes, the Company reduced spending on advertising, trade marketing, and other sales and marketing initiatives during the quarter. Sales and marketing expense as a percentage of revenue decreased to 4% compared to 13% in 2024.
General and administrative
General and administrative expense increased by 1%, or $0.04 million, to $2.94 million, compared to $2.90 million in Q2 2024. The increase also reflects higher professional fees related to alcohol production consulting and advisory services incurred in connection with recent financing activities. As a subset of general and administrative expenses, logistics and distribution was materially lower than prior year after a complete redesign of our fulfillment and logistics strategy, anchored in a transition to third party logistics ("3PL"). General and administrative expense as a percentage of revenue increased to 29% compared to 24% in Q2 2024.
Salaries and benefits
Salaries and benefits increased by 6%, or $0.2 million, to $2.8 million, compared to $2.6 million in Q2 2024. The increase is driven by the Q4 2024 increase in US headcount as we continue to grow the US market. Salaries and benefits expense as a percentage of revenue increased to 28% compared to 22% in Q2 2024.
www.flowhydration.com
flow
Amortization and depreciation
Amortization and depreciation expense remained flat at $0.4 million, in Q2 2025 and 2024.
Share-based compensation
Share-based compensation expense decreased by 105% or $0.47 million, to a gain of $0.03 million compared to $0.5 million in Q2 2024. Share-based compensation expense as a percentage of revenue decreased to 0.2% compared to 4% in Q2 2024.
Finance expense
Finance expense increased by 42%, or $0.9 million, to $3.0 million, compared to $2.1 million in Q2 2024. Finance expense as a percentage of revenue increased 30% compared to 18% in Q2 2024. The year-over-year increase reflects the impact of higher debt levels and higher effective interest rates on newly issued or amended borrowings. During the period, the Company entered into or amended several financing arrangements, including the NFS Term Loans, the Second Amendment Term Loan, and the Export Development Canada loan, all of which bear interest rates ranging from 8.5% to 18%. In addition, deferred financing fees and interest accretion related to debt modifications contributed to the higher expense. The Company continues to monitor its capital structure and is evaluating opportunities to reduce borrowing costs and improve liquidity.
Foreign exchange loss
Foreign exchange loss increased by $0.2 million, from the foreign exchange gain of $947 in Q2 2024 to foreign exchange loss of $0.2 million in Q2 2025. The increase primarily reflects the impact of a stronger U.S. dollar on the revaluation of the Company's U.S. dollar-denominated liabilities and intercompany balances. The Company is exposed to currency fluctuations due to its U.S. operations and cross-border financing arrangements. While the Company does not currently employ formal hedging strategies, it continues to monitor currency exposure and assess risk mitigation opportunities as part of its broader treasury management strategy.
Restructuring and other transaction costs
Restructuring and other transaction costs decreased by 32%, or $0.1 million, to $0.2 million, compared to $0.3 million in Q2 2024. Restructuring and other transaction costs as a percentage of revenue remained flat at 2% in Q2 2025 and 2024. The decrease reflects lower severance and consulting costs associated with organizational streamlining initiatives compared to the prior year, when the Company undertook broader cost reduction measures. The current period charges primarily relate to targeted operational adjustments as the Company continues to optimize its cost structure and align resources with strategic priorities.
Net loss
Net loss increased by 49%, or $3.5 million, to $10.5 million, compared to a loss of $7.0 million in Q2 2024. The increased loss was primarily driven by lower gross profit, resulting from a $2.0 million decline in net revenue with only a modest reduction in cost of revenue. Additionally, finance expenses rose by $0.9 million due to higher debt levels and interest rates, and the Company recognized a $3.2 million loss related to a debt modification. These increases were partially offset by a $1.1 million reduction in operating expenses, primarily within sales
www.flowhydration.com
flow
and marketing. The Company continues to focus on cost discipline and improving revenue quality to support future profitability.
EBITDA loss¹ decreased by 45%, or $1.9 million, to $6.1 million, compared to $4.2 million in Q2 2024.
Adjusted EBITDA loss improved by 15%, or $0.5 million, to $3.0 million, compared to $3.5 million in Q2 2024.
Adjusted net loss increased by 13%, or $0.8 million, to $7.1 million, compared to $6.3 million in Q2 2024.
www.flowhydration.com
15 of 30
flow
Results of Operations – Year-to-Date
| In Canadian dollars except percentages | Six-month period ended April 30 | |||
|---|---|---|---|---|
| $ | 2025 % of revenue | $ | 2024 % of revenue | |
| Net revenue | 21,478,684 | 100% | 20,322,339 | 100% |
| Cost of revenue | 16,771,050 | 78% | 18,238,142 | 90% |
| Gross profit | 4,707,634 | 22% | 2,084,197 | 10% |
| Operating expenses | ||||
| Sales and marketing | 831,369 | 4% | 2,871,964 | 14% |
| General and administrative | 5,392,923 | 25% | 7,783,128 | 38% |
| Salaries and benefits | 5,448,149 | 25% | 4,944,157 | 24% |
| Amortization and depreciation | 808,724 | 4% | 2,217,433 | 11% |
| Share-based compensation | 975,228 | 5% | 2,052,641 | 10% |
| Operating expenses | 13,456,393 | 63% | 19,869,323 | 98% |
| Loss before the following | (8,748,759) | (41%) | (17,785,126) | (88%) |
| Other income | (22,441) | — | (47,096) | — |
| Finance expense, net | 5,944,954 | 28% | 4,801,136 | 24% |
| Foreign exchange loss | 163,057 | 1% | 92,484 | — |
| Restructuring and other costs | 424,021 | 2% | 395,741 | 2% |
| Gain on option revaluation | (22,914) | — | (57,770) | — |
| Loss (gain) on debt modification and other | 3,633,030 | 17% | (576,309) | (3%) |
| Net loss for the period | (18,868,466) | (88%) | (22,393,312) | (110%) |
| Other comprehensive gain (loss) that may be reclassified to profit or loss subsequently | ||||
| Exchange gain(loss) on translation of foreign operations | 181,307 | 1% | 1,293,543 | 6% |
| Net other comprehensive loss | 181,307 | 1% | 1,293,543 | 6% |
| Total comprehensive loss | (18,687,159) | (87%) | (21,099,769) | (104%) |
| Loss per share – basic and diluted | $ (0.22) | $ (0.35) | ||
| Weighted average number of common shares outstanding – basic and diluted | 84,401,734 | 63,531,532 | ||
| Total Assets | 68,863,876 | 57,474,839 | ||
| Non-Current Liabilities | 36,550,401 | 40,045,631 | ||
| EBITDA loss | (10,707,219) | (50%) | (15,123,049) | (74%) |
| Adjusted EBITDA loss | (5,534,797) | (26%) | (13,216,262) | (65%) |
| Adjusted net loss | (13,859,101) | (65%) | (20,579,009) | (101%) |
www.flowhydration.com
flow
Net revenue
Net revenue increased by 6%, or $1.2 million, to $21.5 million, compared to $20.3 million in 2024. The increase in net revenue is primarily driven by the increase in co-pack net revenue by 73%, or $4.9 million, to $11.6 million in 2025, compared to $6.7 million in 2024. This increase was driven by new co-packing agreements and increased volumes under existing partnerships. This is partially offset by a decrease in Flow brand net revenue by 28%, or $3.7 million, to $9.9 million in 2025, compared to $13.6 million in 2024. This decrease was driven by temporary disruptions to production and fulfillment, and the strategic exit of commercial partnerships with certain US retail partners.
Cost of revenue
Cost of revenue decreased by 8%, or $1.4 million, to $16.8 million, compared to $18.2 million in 2024. The decrease in cost of revenue is driven by the consolidation of all Flow brand production to the Aurora production facility, and better overhead absorption due to the addition of a fourth line. Cost of revenue as a percentage of revenue decreased to 78% compared to 90% in 2024.
Gross profit
Gross profit increased by 126%, or $2.6 million, to a profit of $4.7 million, compared to a profit of $2.1 million in 2024. Gross margin increased to 20% of revenue, compared to 10% in 2024. Higher gross margin was driven by overhead absorption and production efficiencies gained through the consolidation of production to the Aurora production facility, the addition of a fourth line, a focus on higher margin channels for the Flow brand, and ramp-up of co-pack. Additionally, inventory write-downs and provisions were lower in the current period.
Sales and marketing
Sales and marketing expense decreased by 71%, or $2.1 million, to $0.8 million, compared to $2.9 million in 2024. The decrease is partially related to a marketing rebate recorded in the period related to qualifying marketing activities that promote Flow branded products and growth in the Tetra packaging format. Sales and marketing expense as a percentage of revenue decreased to 4% compared to 14% in 2024.
General and administrative
General and administrative expense decreased by 31%, or $2.4 million, to $5.4 million, compared to $7.8 million in 2024. The decrease reflects the results of our comprehensive, cross-functional restructuring efforts which were substantially completed by the end of Q2 2024. The increase also reflects higher professional fees related to alcohol production consulting and advisory services incurred in connection with recent financing activities. As a subset of general and administrative expenses, logistics and distribution was materially lower than prior year after a complete redesign of our fulfillment and logistics strategy, anchored in a transition to third party logistics ("3PL"). General and administrative expense as a percentage of revenue decreased to 25% compared to 38% in 2024.
www.flowhydration.com
flow
Salaries and benefits
Salaries and benefits increased by 10%, or $0.5 million, to $5.4 million, compared to $4.9 million in 2024. The increase is driven by increased headcount in our US sales team as we continue to grow the US market. Salaries and benefits expense as a percentage of revenue increased to 25% compared to 24% in 2024.
Amortization and depreciation
Amortization and depreciation expense decreased by 64% to $0.8 million, compared to $2.2 million in 2024.
Share-based compensation
Share-based compensation expense decreased by 52% to $1.0 million, compared to $2.0 million in 2024. Share-based compensation expense as a percentage of revenue decreased to 5% compared to 10% in 2024.
Finance expense
Finance expense increased by 24%, or $1.1 million, to $5.9 million, compared to $4.8 million in 2024. Finance expense as a percentage of revenue increased to 28% compared to 24% in 2024. The increase is attributable to higher borrowings and increased interest rates associated with several new or amended debt agreements, including the NFS Leasing facilities, Export Development Canada loan, and convertible debentures. The increase also includes accretion and deferred financing costs associated with loan amendments and new instruments. The Company continues to actively manage its capital structure and evaluate opportunities to reduce its cost of capital.
Foreign exchange loss
Foreign exchange loss increased by 77%, or $0.1 million, from the foreign exchange loss of $0.1 million in Q2 2024 to foreign exchange loss of $0.2 million Q2 2025. The increase was driven by the impact of foreign currency fluctuations on the Company's U.S. dollar-denominated intercompany balances and financing arrangements. The Company's exposure to foreign exchange risk arises primarily from its U.S. operations and cross-border transactions. While no formal hedging arrangements are in place, the Company regularly monitors its exposure and considers strategic options to mitigate risk.
Restructuring and other transaction costs
Restructuring and other costs for the six months ended April 30, 2025, were $0.4 million, consistent with the $0.4 million recorded in the same period in 2024. These costs primarily relate to organizational changes and streamlining initiatives aimed at improving operational efficiency.
Net loss
Net loss decreased by 16%, or $3.5 million, to $18.9 million, compared to a loss of $22.4 million in 2024. The improvement in net loss was primarily due to increased gross profit and a reduction in total operating expenses, largely driven by decreases in sales and marketing and general and administrative costs. These gains were partially offset by higher finance expenses and a loss recognized on debt modification. The Company remains
www.flowhydration.com
flow
focused on improving profitability through revenue growth, disciplined cost control, and prudent capital management.
EBITDA loss² decreased by 29%, or $4.4 million, to $10.7 million, compared to $15.1 million in 2024.
Adjusted EBITDA loss decreased by 58%, or $7.7 million, to $5.5 million, compared to $13.2 million in 2024.
Adjusted net loss decreased by 33%, or $6.7 million, to $13.9 million, compared to $20.6 million in 2024.
Selected Quarterly Information
The following table presents selected quarterly financial information for the last eight fiscal quarters in Canadian dollars:
| Q2 2025 | Q1 2025 | Q4 2024 | Q3 2024 | Q2 2024 | Q1 2024 | Q4 2023 | Q3 2023 | |
|---|---|---|---|---|---|---|---|---|
| $ | $ | $ | $ | $ | $ | $ | $ | |
| Net revenue | 10,040,460 | 11,438,224 | 11,847,830 | 13,759,877 | 12,054,530 | 8,267,809 | 9,691,696 | 13,156,526 |
| Gross profit | 2,281,834 | 2,425,800 | 2,471,278 | 4,629,252 | 3,341,716 | (1,257,519) | 893,690 | 417,047 |
| Net loss | (10,462,026) | (8,406,440) | (8,678,923) | (7,179,079) | (7,028,493) | (15,364,819) | (10,881,689) | (14,263,825) |
| Loss per share - basic and diluted | (0.12) | (0.10) | (0.11) | (0.10) | (0.10) | (0.27) | (0.19) | (0.26) |
Liquidity and Capital Resources
Overview
Our principal uses of funds are for operating expenses, sales and marketing, capital expenditures, finance costs and debt service requirements. We believe that cash generated from our operations, together with amounts raised through the non-brokered and brokered private placements and modifications to existing borrowings, will be sufficient to support our 12-month operating expenses, capital expenditures, and future debt service requirements. In addition, we believe that our capital structure provides us with significant financial flexibility to pursue our future growth strategies. However, our ability to fund operating expenses, capital expenditures, future debt service requirements and dividends will depend on, among other things, our future operating performance, which will be affected by general economic, financial and other factors, including factors beyond our control. See "Risk Factors" as well as the "Summary of Factors Affecting Performance" in this MD&A for additional information. We review acquisition and investment opportunities in the normal course of our business and may make select acquisitions and investments to implement our business strategy when suitable opportunities arise.
www.flowhydration.com
flow
Cash Flows
The following table presents our cash flows for the Six-month periods ended April 30, 2025, and April 30, 2024:
| Six-month period ended April 30 | ||
|---|---|---|
| In Canadian dollars | 2025 | 2024 |
| Cash flows used in operating activities | (1,978,839) | (9,659,823) |
| Cash flows used in investing activities | (577,169) | (485,651) |
| Cash flows from (used in) financing activities | (5,319,564) | 5,346,486 |
| Net change in cash during the period | (7,875,572) | (4,798,988) |
| Cash, beginning of the period | 8,607,678 | 6,494,733 |
| Cash, end of the period | 732,106 | 1,695,745 |
Cash flow used in operating activities
Net cash used in operating activities was $2.0 million for the six months ended April 30, 2025, compared to $9.7 million in the prior year period, representing an improvement of $7.7 million. The year-over-year improvement was primarily driven by a lower net loss, improved gross margin, and a significant reduction in working capital outflows. In particular, inventories decreased by $1.4 million and prepaid expenses declined as prior period equipment deposits were utilized. Trade payables also decreased by a smaller amount relative to the prior year. These improvements reflect management's continued focus on cash discipline, operational efficiency, and working capital optimization.
Cash flow used in investing activities
Net cash used in investing activities was $0.6 million for the six months ended April 30, 2025, compared to $0.5 million in the prior year. The outflows primarily related to capital expenditure for equipment at the Company's Aurora facility. While relatively consistent with the prior year, the current period's investment reflects a more focused deployment of capital tied to strategic infrastructure and capacity enhancement projects.
Cash flow from (used in) financing activities
Cash used in financing activities was $5.3 million for the six months ended April 30, 2025, compared to net cash provided of $5.3 million in the prior year period. The change reflects a shift from net inflows in 2024, which included proceeds from new borrowings to net outflows in 2025 driven by scheduled debt repayments, interest payments, and lease obligations. In particular, lease payments totaled $2.9 million, and interest payments increased significantly in the current year due to higher debt servicing costs. The Company continues to actively manage its capital structure and liquidity position in light of near-term operating and financing needs.
www.flowhydration.com
20 of 30
flow
Non-IFRS and Other Financial Measures
The following tables provide a reconciliation of consolidated net loss to EBITDA loss, adjusted EBITDA loss and adjusted net loss for the three and six-month periods ended April 30, 2025, and April 30, 2024:
| | Three-month period ended
April 30 | | Six-month period ended
April 30 | |
| --- | --- | --- | --- | --- |
| In Canadian dollars | 2025 | 2024 | 2025 | 2024 |
| Consolidated net loss: | (10,462,026) | (7,028,493) | (18,868,466) | (22,393,312) |
| Finance expense, net | 3,025,066 | 2,126,601 | 5,944,954 | 4,801,136 |
| Amortization and depreciation | 1,296,725 | 674,789 | 2,216,293 | 2,469,127 |
| EBITDA loss | (6,140,235) | (4,227,103) | (10,707,219) | (15,123,049) |
| Share-based compensation | (24,828) | 510,845 | 975,228 | 2,052,641 |
| Restructuring and other transaction costs | 202,678 | 298,640 | 424,021 | 395,741 |
| Foreign exchange loss | (197,339) | (947) | 163,057 | 92,484 |
| Gain on option revaluation | (11,571) | (83,018) | (22,914) | (57,770) |
| Loss (gain) on debt modification and other | 3,195,789 | — | 3,633,030 | (576,309) |
| Adjusted EBITDA loss | (2,975,506) | (3,501,583) | (5,534,797) | (13,216,262) |
| Consolidated net loss: | (10,462,026) | (7,028,493) | (18,868,466) | (22,393,312) |
| Share-based compensation | (24,828) | 510,845 | 975,228 | 2,052,641 |
| Restructuring and other transaction costs | 202,678 | 298,640 | 424,021 | 395,741 |
| Gain on option revaluation | (11,571) | (83,018) | (22,914) | (57,770) |
| Loss (gain) on debt modification and other | 3,195,789 | — | 3,633,030 | (576,309) |
| Adjusted net loss | (7,099,958) | (6,302,026) | (13,859,101) | (20,579,009) |
See "How We Assess the Performance of Our Business" for an explanation of the composition of such measure.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Current Share Information
As of the date hereof, the Company had 6,106,566 Multiple Voting Shares and 83,617,106 Subordinate Voting Shares issued and outstanding. As of the date hereof, an aggregate of 1,486,778 options to acquire common shares are outstanding, an aggregate of 10,621,439 warrants to acquire common shares are outstanding, an
www.flowhydration.com
flow
aggregate of 3,718,971 deferred share units representing the right to receive common shares in accordance with the Company's Omnibus incentive plan and an aggregate of 3,925,970 restricted share units representing the right to receive common shares in accordance with the terms of our long-term incentive plan.
Critical Accounting Judgments and Estimates
The preparation of the Company's financial statements in conformity with IFRS requires Management to make estimates, judgments and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates.
Estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. 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.
The following are the critical judgments, apart from those involving estimations, that management has made in the process of applying the Company's accounting policies and that have the most significant effect on the amounts recognized in the Financial Statements:
Promotional incentives
For various promotional incentives, the Company estimates the most likely amount payable to each customer under each trade and incentive program using expected sales volume and historical spending patterns.
Trade and other receivables
The recognition of trade and other receivables and loss allowances requires the Company to assess credit risk and collectability. The Company considers historical trends and any available information indicating a customer could be experiencing liquidity or going concern problems and the status of any contractual or legal disputes with customers in performing this assessment. The Company has established a process to review historical credit loss experiences and assess forward-looking factors specific to the debtors and the economic environment.
Inventories
Inventories consist of raw materials and finished goods recorded at the lower of cost and net realizable value. Inventories are written down to net realizable value when the cost of inventories is estimated to be unrecoverable due to obsolescence, damage or slow movement. Actual net realizable value can vary from the estimated provision.
The cost of inventories also involves estimates in determining the allocation of fixed and variable production overhead. These estimates include determination of normal production capacity and nature of expenses to be allocated.
Debt modifications
In accordance with IFRS 9 Financial Instruments ("IFRS 9"), the Company is required to assess whether a modification to a debt instrument results in a modification or extinguishment. In an extinguishment, the financial liability, which represents the obligation to pay coupon interest and principal in the future, is initially measured
www.flowhydration.com
flow
at its fair value and subsequently measured at amortized cost. When measuring the fair value of the liability, it is based on several assumptions, including contractual future cash flows, discount rates and the presence of any derivative financial instruments.
Co-packing revenue
The Company enters into co-packing agreements with customers. The Company is required to make estimates regarding the total number of units to be delivered under the contract. The Company also makes estimates regarding the total consideration to which the Company expects to be entitled to in exchange for the services provided. The total consideration to which the Company expects to be entitled to can vary based on estimates regarding penalties for minimum purchase commitments, expected total units to be delivered and pricing discounts. Revenue is recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
Fair Values
The carrying values of cash, trade and other receivables, trade and other payables and borrowings approximate fair values due to the short-term nature of these items or being carried at fair value or, for borrowings, interest payables are close to the current market rates.
Financial instruments recorded at fair value on the consolidated financial statements of financial position are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company's valuation techniques. A level is assigned to each fair value measurement based on the lowest-level input significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:
- Level 1 – Unadjusted quoted prices as at the measurement date for identical assets or liabilities in active markets.
- Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
- Level 3 – Significant unobservable inputs that are supported by little or no market activity. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value. During the year, there were no transfers of amounts between levels.
Fair value of stock options is determined using the Black-Scholes option-pricing model. Inputs to the model are subject to various estimates related to volatility, interest rates, dividend yields and expected life of the stock options issued. Fair value inputs are subject to market factors, as well as internal estimates.
www.flowhydration.com
flow
New standards, amendments and interpretations adopted by the Company
International Accounting Standard 1, Presentation of Financial Statements ("IAS 1")
In January 2020, the IASB issued Classification of Liabilities as Current or Non-current (Amendments to IAS 1). The amendments aim to promote consistency in applying the requirements by helping companies determine whether, in the consolidated statements of financial position, debt and other liabilities with an uncertain settlement date should be classified as current (due or potentially due to be settled within one year) or non-current. The amendments include clarifying the classification requirements for debt a company might settle by converting it into equity.
The amendments are effective for annual periods beginning on or after January 1, 2024. The amendments did not have an impact on the Financial Statements.
Significant New Accounting Standards Not Yet Adopted
Amendments to IFRS 9 and IFRS 7: Classification and Measurement of Financial Instruments
In May 2024, the IASB issued amendments to IFRS 9, Financial Instruments ("IFRS 9") and IFRS 7, Financial Instruments: Disclosures ("IFRS 7"), relating to the classification and measurement requirements of financial instruments recognized within those standards. These amendments clarify that a financial liability is to be derecognized on the "settlement date" and introduces an accounting policy to derecognize financial liabilities settled through an electronic payment system before the settlement date if certain conditions are met; clarify how to assess the contractual cash flow characteristics of financial assets that include "environmental, social and governance"- linked features and other similar contingent features; clarify the treatment of non-recourse assets and contractually linked instruments; and require additional disclosures for financial assets and liabilities with contractual terms that reference a contingent event and equity instruments classified at fair value through other comprehensive income. These amendments will be effective for annual periods beginning on or after January 1, 2026 and will be applied retrospectively with an adjustment to opening retained earnings. Prior periods will not be required to be restated and can only be restated without using hindsight. Entities can early adopt the amendments that relate to the classification of financial assets plus the related disclosures and can apply other amendments subsequently. The Company does not expect material impacts from these amendments on its annual Financial Statements.
Issuance of IFRS 18: Presentation and Disclosure in Financial Statements ("IFRS 18")
In April 2024, the IASB issued IFRS 18, which will replace IAS 1. The issuance introduces new categories and subtotals in the consolidated statements of loss and comprehensive loss, requires disclosure of management-defined performance measures, and includes new requirements for the location, aggregation and disaggregation of financial information. The new standard will require the classification of all income and expenses within the consolidated statements of loss and comprehensive loss into one of five categories: operating, investing, financing, income taxes and discontinued operations. In addition, entities will be required to present subtotals and totals for "operating profit or loss", "profit or loss before financing and incomes taxes" and "profit or loss"; introduce the concept of a management-defined performance measure ("MPM"), which it defines as a subtotal of income and expenses that an entity uses in public communications outside financial statements, to communicate management's view of an aspect of the financial performance of the entity. The standard will require the disclosure of information about an entity's MPMs, including how the measure is calculated and reconciled to the most comparable subtotal specified by IFRS; and introduce a principle for determining the location of information based on identified "roles" of the primary financial statements and the notes as well as require aggregation and disaggregation of information with reference to similar and dissimilar characteristics. IFRS 18 will be effective for annual periods beginning on or after January 1, 2027, and will apply
www.flowhydration.com
24 of 30
flow
retrospectively. Early adoption is permitted and must be disclosed. The Company is in the process of evaluating the impact of this standard on its annual Financial Statements.
Risk Factors
The Board, in conjunction with management, is responsible for risk management and the identification of the principal risks of the Company's business and oversight of management's implementation of appropriate systems to effectively monitor, manage and mitigate the impact of such risks. This includes identifying, evaluating and hedging financial risks based on the requirements of our organization. The Board provides guidance for overall risk management, covering many areas of risk including but not limited to foreign exchange risks, interest rate risks, credit risks and liquidity risks. As part of assessing and implementing appropriate policies and procedure to address specified risks, the Board may delegate financial and related risk management to the Audit Committee.
Credit Risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from deposits with banks and outstanding receivables. The Company trades only with recognized, creditworthy third parties. The Company assesses the creditworthiness of customers who wish to trade on credit terms.
The Company does not hold any collateral as security but mitigates this risk by dealing only with what management believes to be financially sound counterparties and, accordingly, does not anticipate significant loss for non-performance.
Credit loss impairment is determined based upon review of specific accounts as the Company does not have significant historical uncollectible receivables.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is not exposed to interest rate risk as at January 31, 2025, as there are no material long-term borrowings outstanding subject to variable interest rates.
Foreign Currency Risk
Foreign currency risk arises on financial instruments that are denominated in a currency other than the functional currency in which they are measured. The Company's primary exposure with respect to foreign currencies is from United States dollar, trade and other receivables and trade and other payables in entities whose functional currency is other than the currency in which these financial instruments are denominated in.
A change of 1% in foreign currency exchange rates would not have a significant impact on the results of operations. Fluctuations in foreign exchange rates could cause unanticipated fluctuations in the Company's operating results.
www.flowhydration.com
25 of 30
flow
Liquidity Risk
Liquidity risk is the risk the Company will not be able to meet its financial obligations as they come due. The Company's exposure to liquidity risk is dependent on the Company's ability to raise additional financing to meet its commitments and sustain operations. The Company mitigates liquidity risk by management of working capital, cash flows, the issuance of share capital and if desired, the issuance of debt. The Company's trade and other payables are all due within twelve months from the date of the unaudited condensed consolidated interim financial statements.
If unanticipated events occur that impact the Company's ability to meet its forecast and continue to fund customer acquisition cost, research and development, and administrative requirements, the Company may need to take additional measures to increase its liquidity and capital resources, including obtaining additional debt or equity financing or strategically altering the business forecast and plan. The Company will also seek to improve its results from operations and cash flows by prioritizing higher margin channels and reducing operating costs by streamlining its operations and support functions. Whether and when the Company can attain profitability and positive cash flows from operations is subject to material uncertainty. While the Company has been successful in obtaining financing to date and believes it will be able to obtain sufficient funds in the future and ultimately achieve profitability and positive cash flows from operations, there can be no assurance that the Company will achieve profitability and be able to do so on terms favourable for the Company. Failure to obtain adequate financing on satisfactory terms could have a material adverse effect on the Company's results of operations or financial condition.
The Company is obligated to the following contractual maturities of undiscounted cash as at April 30, 2025 in Canadian dollars:
| Carrying amount | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 and over | Total | |
|---|---|---|---|---|---|---|---|
| $ | $ | $ | $ | $ | $ | $ | |
| Trade and other payables | 26,070,464 | 26,070,464 | — | — | — | — | 26,070,464 |
| Lease obligations | 37,565,322 | 6,216,052 | 6,154,257 | 5,398,269 | 6,062,504 | 27,211,418 | 51,042,500 |
| Borrowings | 48,526,380 | 36,724,696 | 8,164,498 | 2,060,887 | 903,582 | — | 47,853,663 |
| Convertible debt | 4,794,603 | 280,244 | 280,244 | 3,320,143 | 280,244 | 2,942,566 | 7,103,441 |
| 116,956,769 | 69,291,456 | 14,598,999 | 10,779,299 | 7,246,330 | 30,153,984 | 132,070,068 |
Refer to Note 8 in the unaudited condensed consolidated interim financial statements for a detailed discussion of the Company's borrowings, including new borrowings during the quarter.
Covenants
The Senior Term Loan, the Delayed Draw Term Loan, and the Second Amendment Term Loan contain certain covenants, measured quarterly, based on minimum liquidity values. As at April 30, 2025, in anticipation of not
www.flowhydration.com
flow
being in compliance with the covenants, the Company obtained from the lender an agreement to waive the Company's compliance with the covenants solely for the fiscal quarter ending April 30, 2025.
As at April 30, 2025, the Company was not in compliance with certain covenants under the NFS Loan Agreement, including those related to aged payables and the timely notification of proceedings. A waiver of these covenant breaches was obtained from the lender subsequent to the end of the reporting period.
Management of Capital
The Company has implemented various capital policies, procedures and processes that are utilized to achieve its capital management objectives. These include optimizing the cost of capital and maximizing shareholder return while balancing the interests of stakeholders. The Company's capital is composed of share capital and borrowings, which assist in financing (i) acquisitions and/or (ii) working capital requirements. The Company's primary uses of capital are financing its operations, acquisitions of production capability, and fixed assets to support our vertically integrated growth strategy. The Company currently funds these requirements from cash raised through past share issuances, convertible debt, other credit facilities, and funds from operations. The Company's objectives when managing capital are to ensure that the Company will continue to have enough liquidity so it can provide services to its customers and increase shareholder value.
Subsequent Events
Effective May 2025, the Company entered into a $2 million secured term note with NFS, bearing interest at 15% per annum, maturing May 23, 2028. Under the agreement, no payments are required for the first three months, followed by equal monthly installments over 33 months. This is a related party transaction.
On June 4, 2025, the Company closed secured term financing facilities with NFS of up to $4 million ("NFS Term Loan"). The NFS Term Loan will mature on a date that is three years from the date of issue and bears interest at a rate of 15% per annum. Under the agreement, no payments are required for the first three months, followed by equal monthly installments over 33 months. This is a related party transaction.
On June 4, 2025, the Company closed a secured convertible loan facility with RI Flow LLC of up to $6 million. The convertible facility bears interest at 15% per annum, matures in 18 months and includes a conversion option into SVS at CAD $0.065 per share after one year. This is a related party transaction.
Disclosure Controls and Procedures and Internal Control Over Financial Reporting
In accordance with National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings ("NI 52-109"), the Company has filed certificates signed by its Chief Executive Officer and its Chief Financial Officer ("Certifying Officers") that, among other things, report on the design and operating effectiveness of disclosure controls and procedures ("DC&P") and the design and operating effectiveness of internal control over financial reporting ("ICFR"). The establishment and maintenance of DCP and ICFR is the responsibility of management. In addition, the Certifying Officers have certified that the Company has disclosed in this MD&A for each material weakness relating to design existing at the financial year end (a) a description of the material weakness; (b) the impact of the material weakness on the Company's financial reporting and its ICFR; and (c) the Company's current plans, if any, or any actions already undertaken, for remediating the material weakness.
www.flowhydration.com
flow
Disclosure Controls and Procedures ("DC&P")
The Company has designed DC&P to provide reasonable assurance that material information relating to the Company is made known to the Certifying Officers, and that information required to be disclosed to satisfy the Company's continuous disclosure obligations is recorded, processed, summarized, and reported within the time periods specified by applicable Canadian securities legislation. Management, under the supervision of the Certifying Officers, has evaluated the effectiveness of the DC&P and based on that evaluation, the Certifying Officers have concluded that the DC&P were not effective as at April 30, 2025.
Internal Controls Over Financial Reporting ("ICFR")
In accordance with NI 52-109, the establishment and maintenance of DCP and ICFR is the responsibility of Management. DCP and ICFR has been designed by Management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
The Company's ICFR includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, ICFR may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. These inherent limitations include, but are not limited to, human error and circumvention of controls and as such, there can be no assurance that the controls will prevent or detect all misstatements due to errors or fraud, if any.
The control framework used to design the Company's ICFR is based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) on Internal Control – Integrated Framework (2013 framework).
Management, under the supervision of the Certifying Officers, has evaluated the effectiveness of ICFR and based on that evaluation, the Certifying Officers have concluded that the Company's ICFR was not effective as at April 30, 2025, due to the existence of certain material weaknesses relating to design existing at financial year end.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the assessment of the effectiveness of the Company's ICFR, Management identified material weaknesses that existed as of October 31, 2024. These consisted of material weaknesses in the Company's control environment, information and communication processes, control activities, period-end financial reporting, non-routine, unusual or complex transactions, transaction-level control activities, and information technology general controls. These material
www.flowhydration.com
flow
weaknesses remain unremedied at April 30, 2025 and pertain to three main areas: (i) Control environment, and (ii) Information Technology General Controls.
Control Environment
The Company did not design or implement adequate oversight processes and structures, or an organizational design to support the achievement of the Company's objectives in relation to internal controls. The Company identified multiple deficiencies in internal controls, primarily due to the control environment not being mature enough to support the growth and increasing complexity of the business. As a result, pervasive issues exist within the control environment that impact the ability of the Company to maintain effective ICFR. In addition, accountability for adherence to policies and processes across the organization was not consistently enforced; and as such, there is increased likelihood of misstatements occurring. This material weakness contributed to the following further material weaknesses:
- Risk Assessment procedures did not fully identify risks of misstatement that could, individually or in combination with others, increase the vulnerability of the Company to material misstatements to the financial statements, whether intentional or unintentional.
- Monitoring activities did not operate effectively to identify control gaps and control deficiencies in significant processes in a timely manner. In addition, monitoring activities did not operate to identify new risks related to changes in the business, and as such, these risks were not assessed or responded to in the internal control environment.
- Information and communication processes did not effectively operate to ensure that appropriate and accurate information was available to financial reporting personnel on a timely basis to fulfill their roles and responsibilities. Significant changes at the employee level and within senior management have also impacted information and communication, as well as the overall control environment.
These entity level control deficiencies did not result in a misstatement to the financial statements.
Information Technology General Controls
The Company did not design and maintain effective controls over some information technology ("IT") general controls for information systems that are relevant to the preparation of its financial statements, specifically, with respect to:
- Controls related to tracking, costing and reconciling inventory. These controls were not operating effectively at year end.
- Data validation controls, to ensure underlying data and information being used for the purposes of financial reporting is complete and accurate
The IT deficiencies did not result in a misstatement to the financial statements.
Status of Remediation Plan
Management has begun revising internal control over financial reporting. Management is committed to implementing changes to our internal control over financial reporting to ensure that the control deficiencies that contributed to the material weaknesses are remediated. The following remedial activities are in progress:
www.flowhydration.com
flow
- We are continuing to implement additional ongoing oversight, training and communication programs for Management and personnel to reinforce the Company's standard of conduct, enhance understanding of assessed risks, and clarify individual responsibility for control activities at various levels within the Company.
- As of the date of this MD&A, Management has restructured the organizational chart to more clearly define roles and responsibilities as needed to meet the needs of the internal control environment.
- We continue to be in the design and development of controls related to our ERP and IT ecosystem, along with implementing additional user training and process documentation.
While we believe these actions will contribute to the remediation of material weaknesses, we have not completed all the corrective processes, procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate the material weaknesses, we may need to take additional measures to address the control deficiencies. Until the remediation steps set forth above, including the efforts to implement any additional control activities identified through our remediation processes, are fully implemented and concluded to be operating effectively, the material weaknesses described above will not be considered fully remediated.
Changes in Internal Control Over Financial Reporting
Other than disclosed above, there have been no changes in the Company's internal control over financial reporting during the Company's quarter ended April 30, 2025, that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.
Additional Information
Additional information relating to the Company, including the Company's AIF is available on SEDAR at www.sedar.com.
www.flowhydration.com