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FLUENT — Interim / Quarterly Report 2023
Aug 28, 2023
47705_rns_2023-08-28_5ecca964-ee33-40ef-8c0e-35712e8e5048.pdf
Interim / Quarterly Report
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Cansortium Inc.
Condensed Interim Consolidated Financial Statements (Unaudited)
For the three and six months ended June 30, 2023 and June 30, 2022
(Expressed in thousands of United States Dollars unless otherwise stated)
Cansortium Inc. Index to the Condensed Interim Consolidated Financial Statements (unaudited)
Condensed Interim Consolidated Statements of Financial Position (unaudited) ----------------------------- Condensed Interim Consolidated Statements of Loss and Other Comprehensive Loss (unaudited) ---- Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity (unaudited) --------- Condensed Interim Consolidated Statements of Cash Flow (unaudited) --------------------------------------- Condensed Interim Notes to the Consolidated Financial Statements (unaudited) -------------------------- |
Page(s) |
|---|---|
| 3 4 5 6 7 - 32 |
Cansortium Inc.
Condensed Interim Consolidated Statements of Financial Position (unaudited) As of June 30, 2023 and December 31, 2022
(Amounts expressed in thousands of United States Dollars unless otherwise stated)
| June 30, | December 31, | December 31, | |||
|---|---|---|---|---|---|
| 2023 | 2022 | ||||
| Assets | |||||
| Current assets | |||||
| Cash | $ | 8,797 |
$ | 8,359 |
|
| Trade receivable | 27 | 28 |
|||
| Inventory, net | Note 3 | 7,023 |
8,973 | ||
| Biological assets | Note 4 | 511 | 996 |
||
| Prepaid expenses and other current assets | Note 5 | 872 | 883 | ||
| Total current assets | 17,230 | 19,239 | |||
| Property and equipment, net | Note 6 | 30,956 | 31,743 | ||
| Intangible assets, net | Note 7 | 93,525 | 94,291 | ||
| Right-of-use assets, net | Note 11 | 29,148 | 30,464 | ||
| Goodwill | 1,525 | 1,526 | |||
| Other assets | 808 | 768 |
|||
| Total assets | $ | 173,192 | $ | 178,031 | |
| Liabilities | |||||
| Current liabilities | |||||
| Trade payable | 6,813 | 6,931 | |||
| Accrued liabilities | 4,911 | 5,534 | |||
| Income taxes payable | 20,674 | 13,952 | |||
| Derivative liabilities | Note 9 | 8,512 | 8,676 | ||
| Current portion of notes payable | Note 10 | 339 | 741 | ||
| Current portion of lease obligations | Note 11 | 2,586 | 2,123 | ||
| Total current liabilities | 43,835 | 37,957 | |||
| - | |||||
| Notes payable | Note 10 | 58,925 | 56,969 | ||
| Lease obligations | Note 11 | 32,900 |
33,922 | ||
| Deferred tax liability | Note 8 | 18,773 | 20,290 | ||
| Other long-term liabilities | Note 10, 12 | 542 | 1,333 | ||
| Total liabilities | 154,975 | 150,471 | |||
| Shareholders' equity | |||||
| Share capital | Note 12 | 183,577 | 180,954 | ||
| Share-based compensation reserve | Note 13 | 6,466 | 6,395 | ||
| Equity conversion feature | 6,677 | 6,677 | |||
| Warrants | Note 12 | 29,634 | 28,939 | ||
| Accumulated deficit | (207,803) | (195,071) | |||
| Foreign currency translation reserve | (334) | (334) | |||
| Total shareholders'equity | 18,217 | 27,560 | |||
| Total liabilities and shareholders' equity | $ | 173,192 | $ | 178,031 |
Nature of Operations (Note 1) Related-Party Transactions (Note 16) Summary of Significant Accounting Policies (Note 2) Financial Instruments and Financial Risk Management (Note 17) Expenses By Nature (Note 14) Capital Management (Note 18) Contingencies (Note 15) Subsequent Events (Note 21)
Approved and authorized for issue on behalf of the Shareholders on August 28, 2023:
Jeffrey Batliner Chief Financial Officer
Robert Beasley Chief Executive Officer
Cansortium Inc.
Condensed Interim Consolidated Statements of Loss and Other Comprehensive Loss (unaudited) For the three and six months ended June 30, 2023 and 2022
(Amounts expressed in thousands of United States Dollars unless otherwise stated)
| 2023 2022 For the six months ended June 30, |
|
|---|---|
| 46,486 $ 42,128 $ 16,609 15,571 29,877 26,557 (1,079) (15,418) (8,092) 10,666 |
|
| 20,706 21,805 4,883 5,160 415 100 9,575 8,277 4,811 3,358 |
|
| 19,684 16,895 |
|
| 1,022 4,910 8,573 7,500 (164) 4,709 - 1,136 70 - 3 - 66 (373) |
|
| 8,549 12,971 |
|
| (7,527) (8,061) 5,205 5,516 |
|
| (12,732) (13,577) |
|
| - 8,576 |
|
| (12,732) $ (22,153) $ |
|
| - 87 |
|
| (12,732) $ (22,066) $ |
|
| Basic and diluted - continuing operations Note 16 (0.02) $ (0.05) $ |
(0.04) $ (0.09) $ |
| Weighted average number of shares Basic number of shares 296,938,910 352,230,174 |
286,804,241 252,698,567 |
| Diluted number of shares 352,230,174 307,984,934 |
339,972,379 308,498,834 |
Cansortium Inc.
Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity (unaudited) For the six months ended June 30, 2023 and the twelve months ended December 31, 2022
(Amounts expressed in thousands of United States Dollars unless otherwise stated)
| Number of unrestricted common shares Number of restricted common shares Amount Share-based compensation reserve Equity conversion feature Warrants Accumulated deficit Foreign currency translation reserve Total shareholders' equity Share capital Reserves |
|
|---|---|
| Balance, December 31, 2021 Exercise of options Issuance of options Shares issued for professional services (Note 16 a.) Foreign currency gain/(loss) on translation Issuance of warrants for convertible debenture (Note 16 c.) Release of restricted stock for consuting ageement (Note 14 c., 16 b.) Issuance of share for equity price guarantee (Note 16 d.) Net loss |
251,576,742 400,000 180,657 $ 6,176 $ 4,933 $ 28,869 $ (157,648) $ (421) $ 62,565 $ 300,000 - 135 - - - - - 135 - - - 219 - - - - 219 1,048,386 - 162 - - - - - 162 - - - - - - - 87 87 - - - - 1,744 70 - - 1,814 400,000 (400,000) - - - - - - - 11,634,615 - - - - - - - - - - - - - - (37,423) - (37,423) |
| Balance, December 31, 2022 | 264,959,743 - 180,954 $ 6,395 $ 6,677 $ 28,939 $ (195,071) $ (334) $ 27,560 $ |
| Balance, December 31, 2022 Shares issued for professional services (Note 16 e.) Issuance of options Cancellation of options |
264,959,743 - 180,954 $ 6,395 $ 6,677 $ 28,939 $ (195,071) $ (334) $ 27,560 $ 3,385,417 - 326 - - - - - 326 76 76 (5) (5) |
| Privat placement issuance of shares and warrants (Note 16 f.) | 30,000,000 - 2,297 - - 695 - - 2,992 |
| Net loss | - - - - - - (12,732) - (12,732) |
| Balance, June 30, 2023 | 298,345,160 - 183,577 $ 6,466 $ 6,677 $ 29,634 $ (207,803) $ (334) $ 18,217 $ |
Cansortium Inc.
Condensed Interim Consolidated Statements of Cash Flow (unaudited) For the six months ended June 30, 2023 and 2022
(Amounts expressed in thousands of United States Dollars unless otherwise stated)
| For the six months ended June 30, | For the six months ended June 30, | |
|---|---|---|
| 2023 2022 |
||
| Operating activities Net loss from continuing operations Adjustments to reconcile net loss to net cash provided by operating activities: Unrealized gain (loss) on changes in fair value of biological assets Realized (loss) gain on changes in fair value of biological assets Share-based compensation Depreciation and amortization Accretion and interest of convertible debentures Accretion and interest of term loan Interest income on notes receivable Interest of equipment loan Loss on disposal of assets Loss on debt settlement Discontinued operations Change in fair market value of derivative Interest on lease liabilities Deferred tax expense Changes in operating assets and liabilities: Trade receivable |
(12,732) $ (22,153) $ 8,092 (10,666) 1,079 15,418 415 100 8,042 6,072 266 - 6,262 6,219 - (71) 13 - 70 - - 1,136 - 8,576 (164) 4,709 2,037 1,310 (1,517) (304) 1 (33) |
|
| Inventory | 1,770 | 1,044 |
| Biological assets | (8,886) (9,290) |
|
| Prepaid expenses and other current assets | 11 | 117 |
Right of Use Assets/Liabilities Other assets Trade payable Accrued liabilities Other long-term liabilities Income taxes payable |
67 - (40) 5 (135) 374 (623) 1,877 (791) - 6,722 5,627 |
|
| Net cash provided by operating activities | 9,960 10,067 |
|
| Investing activities Purchases of property and equipment Payment of notes receivable Advances for notes receivable |
(4,339) (4,214) - 119 - (94) |
|
| Net cash used in investing activities | (4,339) (4,189) |
|
| Financing activities Net proceeds from issuance of shares and warrants Payment of lease obligations Exercise of Options Principal repayments of notes payable |
2,993 4,656 (3,188) (2,521) - 135 (4,988) (8,401) |
|
| Net cash used in financing activities | (5,183) (6,131) |
|
| Effect of foreign exchange on cash and cash equivalents | - 87 |
|
| Net increase (decrease) in cash Cash, beginning of period |
438 (166) 8,359 9,024 |
|
| Cash,end ofperiod | 8,797 8,858 |
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022
(Amounts expressed in thousands of United States Dollars unless otherwise stated)
1. NATURE OF OPERATIONS
Cansortium Inc. was incorporated under the laws of the Province of Ontario, Canada pursuant to the Ontario Business Corporations Act. (“OBCA”) on August 31, 2018. The Company’s registered office is located at 365 Bay Street, Suite 800, Toronto, Ontario, M5H2V1 and its head office is located at 5540 W. Executive Drive, Suite 100, Tampa, Florida 33609.
The Company, through its subsidiaries, is licensed to produce and sell medical cannabis in Florida and Texas and is licensed to sell medical cannabis in Pennsylvania.
The Company’s medical cannabis products are offered in oral drops, capsules, topicals, syringes, dried flower, pre-rolls, cartridges, and edibles. All of its products are marketed under the Fluent™ brand name, which was launched in May 2019. Prior to the launch of the Fluent brand the Company had operated under the Knox Medical brand. In Pennsylvania, the Company’s product portfolio is comprised of a variety of third-party branded medical cannabis products.
All of the Company’s operations are in one segment, the production and sale of medical cannabis. All revenues for the three and six months ended June 30, 2023 and 2022 were generated in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Preparation
The condensed interim unaudited consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). They have been prepared under the assumption the Group operates on a going concern basis, which assumes the Group will be able to discharge its liabilities as they fall due.
The condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34 – Interim Financial Reporting, following the same accounting policies and methods of application as those disclosed in the annual audited consolidated financial statements for the years ended December 31, 2022 and 2021. These condensed interim consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements of the Company for the years ended December 31, 2022 and 2021, including the accompanying notes thereto.
These condensed interim consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on August 28, 2023.
(b) Basis of Measurement
The condensed interim unaudited consolidated financial statements have been prepared on the going concern basis, under the historical cost convention except for certain financial assets, liabilities and biological assets that are measured at fair value.
(c) Functional and Presentation of Currency
The condensed interim unaudited consolidated financial statements are presented in thousands of United States (“U.S.”) dollars unless otherwise stated.
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Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Basis of Consolidation
The condensed interim unaudited consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Subsidiaries over which the Company has control are fully consolidated from the date control commences until the date control ceases. Control exists when the Company is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, potential voting rights that are currently exercisable are considered. Non-controlling interests in the equity of consolidated subsidiaries are shown separately in the consolidated statement of loss and comprehensive loss and in the consolidated statement of changes in shareholders’ equity. All intercompany balances and transactions are eliminated on consolidation. The information below lists the Company’s subsidiaries that are included in these condensed interim unaudited consolidated financial statements and the ownership interest held as of June 30, 2023 and December 31, 2022, respectively.
| % Ownership % Ownership June 30, 2023 December 31, 2022 Cansortium Holdings LLC 100.00% 100.00% Cansortium Pennsylvania, LLC 100.00% 100.00% Cansortium Puerto Rico, LLC 100.00% 100.00% Cansortium Texas, LLC 100.00% 100.00% Cansortium Canada Holdings Inc. 100.00% 100.00% Fluent Servicing, LLC 100.00% 100.00% Cansortium Brazil Ltda. 100.00% 100.00% Cansortium Florida, LLC 100.00% 100.00% Cansortium Colombia S.A.S.1 50.00% 50.00% Spirit Lake Road Nursery, LLC 100.00% 100.00% Cansortium Michigan LLC 100.00% 100.00% Cavern Capital Holdings LLC 100.00% 100.00% Harvest Park Lot 9 Investors LLC 100.00% 100.00% Harvest Park Lot 9 Investors No. 2 LLC 100.00% 100.00% Fluent Hemp LLC 100.00% 100.00% Cansortium Beverage Company Inc.2 - 100.00% Cansortium International Inc. 100.00% 100.00% Trick Tail Capital LLC 100.00% 100.00% |
||
|---|---|---|
1 The Company wrote-off its investment in Cansortium Colombia S.A.S as of December 31, 2022 2 Cansortium Beverage Company Inc. was dissolved in May of 2022.
e) Critical Accounting Judgments, Estimates and Assumptions
The preparation of the Company’s condensed interim consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. Actual results may differ from these estimates. 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 review affects both current and future periods.
8
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Critical judgments, estimates and assumptions that have the most significant effect on the amounts recognized on these condensed interim consolidated financial statements have been set out in Note 2 of the audited annual consolidated financial statements for the years ended December 31, 2022, and 2021.
3. INVENTORY
As of June 30, 2023 and December 31, 2022, inventory consisted of the following:
| June 30, | December 31, | December 31, | ||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Supplies, packaging and materials | $ | 2,676 |
$ | 2,685 |
| Work in progress | 1,066 | 1,906 | ||
| Finishedgoods | 3,281 | 4,382 | ||
| Balance at end ofperiod | $ | 7,023 | $ | 8,973 |
Inventory material costs included in cost of goods sold during the six months ended June 30, 2023 and 2022, were $(444) and $4,854, and respectively. Salaries and benefits charged to cost of goods sold for the three and six months ended June 30, 2023 and 2022, were $2,470 and $1,975, respectively. Capitalized depreciation expensed to costs of sales for the three and six months ended June 30, 2023 and 2022, were $1,927 and $1,322 respectively.
4. BIOLOGICAL ASSETS
The Company’s biological assets consist of cannabis plants. A reconciliation of the beginning and ending balances of biological assets for the three months ended June 30, 2023 and year ended December 31, 2022 is as follows:
| June 30, | December 31, | December 31, | ||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Balance at beginning of period | $ | 996 |
$ | 3,297 |
| Cost incurred until harvest | 8,885 | 16,355 | ||
| Effect of unrealized change in fair value of biological assets | (8,092) | (9,620) | ||
| Transferred to inventoryupon harvest | (1,279) | (9,036) | ||
| Balance at end ofperiod | $ | 511 | $ | 996 |
As of June 30, 2023, all biological assets were live plants.
The Company measures its biological assets at their fair value less costs to sell. This is determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and the expected selling price less costs to sell per gram.
The fair value measurements for biological assets have been categorized as Level 3 in the IFRS 13 fair value hierarchy as there is no actively traded commodity market for plants or dried product. The Company’s method of accounting for biological assets attributes value accretion on a straight-line basis throughout the life of the biological asset from initial cloning to the point of harvest.
9
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
4. BIOLOGICAL ASSETS (Continued)
These estimates are subject to volatility in market prices and a number of uncontrollable factors, which could significantly affect the fair value of biological assets which will affect the amount reflected in the gain or loss on biological assets in future periods.
The following table quantifies each significant unobservable input, and provides the impact a 10% increase or decrease in each input would have on the fair value of biological assets:
| As at June | 30, 2023 | As at December 31, 2022 | As at December 31, 2022 | |
|---|---|---|---|---|
| Assumptions | Input | 10% Change | Input | 10% Change |
| (i) Weighted average of expected loss of plants until harvest (a) | 13% | $7 | 15% | $17 |
| (ii) Expected yields for cannabis plants (average grams per plant) (b) | 67 | $46 | 47 | $100 |
| (iii) Weighted average number of growing weeks completed as percentage of total growing weeks as at period end |
55% | $46 | 47% | $100 |
| (iv) FL Estimated selling price per gram (c) | $7.12 per gram | $1,206 | $7.12 | $1,121 |
| (v)FL Cost to sellpergramper flower and trim,respectively | $6.90pergram | $1,160 | $4.03 | $7.79 |
-
(a) Weighted average of expected loss of plants until harvest represents the expected loss of plants that will not survive to the point of harvest. It does not include any financial loss on a surviving plant.
-
(b) Expected average yields for cannabis plants vary based on the mix of strains existing at each reporting date.
-
(c) The estimated selling price per gram represents the actual sales price for the Company’s various strains sold as retail products. The selling price is impacted by the mix of expected THC levels from the plants.
The Company estimates the harvest yields for cannabis at various stages of growth. As of June 30, 2023, it is expected that the Company’s biological assets will yield approximately 3,707,794 grams of dry cannabis when harvested, as of December 31, 2022 the Company expected to harvest.3,322,073 grams. As of June 30, 2023 and December 2022, the Company had 66,161 and 82,667 plants that were classified as biological assets, respectively.
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
| June 30, | December | December | 31, | |||
|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||
| Prepaid insurance | $ | 570 |
$ | 576 |
||
| Other prepaid expenses | 276 | 283 | ||||
| Deposits | 25 | 24 | ||||
| Balance at end ofperiod | $ | 872 | $ | 883 |
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Cansortium Inc.
Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022
(Amounts expressed in thousands of United States Dollars unless otherwise stated)
6. PROPERTY AND EQUIPMENT
A reconciliation of the beginning and ending balances of property and equipment for the six months ended June 30, 2023 and the year ended December 31, 2022, is as follows:
| as follows: | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Furniture and | Computer | Manufacturing | Leasehold | Construction | ||||||||||||||
| Land | fixtures | equipment | equipment | improvements | Buildings | in progress | Vehicles | Total | ||||||||||
| Cost | ||||||||||||||||||
| Balance as of January 1, 2022 | $ | 212 |
$ | 1,036 |
$ | 1,774 |
$ | 9,305 |
$ | 32,293 |
$ | - |
$ | 1,463 |
$ | 389 |
$ | 46,472 |
| Additions | - | 53 | (134) | 320 | 1,313 | - | 5,246 | - | 6,797 | |||||||||
| Construction completed | - | 103 | 24 | 675 | 4,252 | - | (5,054) | - | - | |||||||||
| Disposals | - | - | - | (218) | - | (26) | - | (245) | ||||||||||
| Balance as of December 31, 2022 | 212 | 1,192 | 1,664 | 10,300 | 37,639 | - | 1,628 | 389 | 53,024 | |||||||||
| Accumulated depreciation | ||||||||||||||||||
| Balance as of January 1, 2022 | - | 347 | 725 | 2,477 | 8,692 | - | - | 70 | 12,310 | |||||||||
| Additions | - | 158 | 386 | 1,428 | 6,998 | - | - | 44 | 9,014 | |||||||||
| Disposals | - | (0) | - | (2) | (41) | - | - | - | (43) | |||||||||
| Balance as of December 31, 2022 | - | 505 | 1,112 | 3,903 | 15,648 | - | - | 114 | 21,281 | |||||||||
| Property and equipment, net | $ | 212 | $ | 687 | $ | 552 | $ | 6,398 | $ | 21,991 | $ | - | $ | 1,628 | $ | 275 | $ | 31,743 |
| Cost | ||||||||||||||||||
| Balance as of January 1, 2023 | $ | 212 |
$ | 1,192 |
$ | 1,664 |
$ | 10,300 |
$ | 37,639 |
$ | - |
$ | 1,628 |
$ | 389 |
$ | 53,024 |
| Additions | - | 0 | 70 | 391 | 3,109 | - | 769 | - | 4,339 | |||||||||
| Construction completed | - | 358 | 349 | 74 | 1,329 | - | (2,110) | - | - | |||||||||
| Disposals | - | - | - | (15) | - | (56) | - | (70) | ||||||||||
| Balance as of June 30, 2023 | 212 | 1,550 | 2,083 | 10,765 | 42,062 | - | 231 | 389 | 57,293 | |||||||||
| Accumulated depreciation | ||||||||||||||||||
| Balance as of January 1, 2023 | - | 505 | 1,112 | 3,903 | 15,648 | - | - | 114 | 21,281 | |||||||||
| Additions | - | 105 | 209 | 766 | 3,954 | - | - | 22 | 5,056 | |||||||||
| Disposals | - | - | - | - | - | - | - | - | - | |||||||||
| Balance as of June 30, 2023 | - | 610 | 1,320 | 4,669 | 19,602 | - | - | 136 | 26,337 | |||||||||
| Property and equipment, net | $ | 212 | $ | 940 | $ | 763 |
$ | 6,097 | $ | 22,461 | $ | - | $ | 231 | $ | 253 | $ | 30,956 |
For the six months ended June 30, 2023 and 2022, the Company charged $3,390 and $3,269 of depreciation to the production of biological assets and inventory, respectively.
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Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
7. INTANGIBLE ASSETS
Intangible assets consist of cannabis licenses and trademarks and brands. A reconciliation of the beginning and ending balances of intangible assets for the six months ended June 30, 2023 and year ended December 31, 2022, are as follows:
| as follows: | |||
|---|---|---|---|
| Trademarks | |||
| Licenses | and brands | **Total ** | |
| Balance as of January 1, 2022 | |||
| Cost | 94,488 | 8,850 | 103,338 |
| Additions | - | - | - |
| Disposals | - | - | - |
| Balance as of December31,2022 | 94,488 | 8,850 | 103,338 |
| Balance as of January 1, 2022 | |||
| Accumulated amortization | 904 | 6,612 | 7,516 |
| Additions | 159 | 1,372 | 1,531 |
| Disposals | - | - | - |
| Balance as of December31,2022 | 1,063 | 7,984 | 9,047 |
| Intangible assets, net | 93,425 | 866 | 94,291 |
| Balance as of January 1, 2023 | |||
| Cost | 94,488 | 8,850 | 103,338 |
| Additions | - | - | - |
| Disposals | - | - | - |
| Balance as ofJune 30,2023 | 94,488 | 8,850 | 103,338 |
| Balance as of January 1, 2023 | |||
| Accumulated amortization | 1,063 | 7,984 | 9,047 |
| Additions | 80 | 686 | 766 |
| Disposals | - | - | - |
| Balance as ofJune 30,2023 | 1,143 | 8,670 | 9,813 |
| Intangible assets, net | 93,345 | 180 | 93,525 |
Amortization expense for the three and six months ended June 30, 2023 and 2022, was $383 and $766, respectively for both periods.
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Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
8. INCOME TAXES
Income tax for the three and six months ended June 30, 2023 and 2022 consisted of the following:
| June 30, 2023 June 30, 2022 3,610 $ 3,165 $ (319) 339 3,291 $ 3,504 $ Three months ended |
Six months ended | |
|---|---|---|
| June 30, 2023 June 30, 2022 |
||
| Current Tax Expense DeferredTax Expense |
6,722 $ 5,891 $ (1,517) (375) |
|
| Total income taxes | 5,205 $ 5,516 $ |
Income tax expense is recognized based on management’s estimate of the weighted average effective annual income tax rate expected for the full financial year. The U.S. statutory tax rate used for the three and six months ended June 30, 2023 and 2022 was 21%.
9. DERIVATIVE LIABILITIES
A reconciliation of the beginning and ending balances of the equity price guarantee derivative liabilities during the six months ended June 30, 2023 and year ended December 31, 2022 is as follows:
| Balance as of January 1, 2022 | $ | 3,960 |
|---|---|---|
| Fair value change | 4,716 | |
| Balance as of December 31, 2022 | $ | 8,676 |
| Fair value change | (164) | |
| Balance as of June 30, 2023 | $ | 8,512 |
Price guarantees are recorded as a liability measured at fair value on the consolidated statement of financial position. In determining the fair value of the price guarantee, these liabilities are marked–to–market at each reporting period with the change in fair value recorded in the consolidated statements of loss and comprehensive loss.
Fluent Servicing Acquisition
In connection with the acquisition of the remaining interest of Fluent Servicing on August 15, 2018, the Company issued 4,400,000 membership interest units of Cansortium Holdings LLC that were exchanged into 4,400,000 common shares (or equivalent proportionate voting shares) of Cansortium subject to a price floor of $2.75 (“Equity Price Guarantee”), expiring on March 21, 2021.
On January 16, 2020, the Company completed the restructuring of its existing promissory note issued in connection with the acquisition of Fluent Servicing, as well as the terms pertaining to the Equity Price Guarantee, reducing the price floor from $2.75 to $0.65 per share for the 4,400,000 common shares originally issued and agreeing to transfer to the seller, Can Endeavour LLC (“Can Endeavour”) an additional 14,215,385 common shares (or equivalent proportionate voting shares) that were previously returned by the Company’s founders, subject to a price floor of $0.65 per share which expires on May 23, 2023.
On May 6, 2021, the Company satisfied its obligations under the amended note payable dated January 16, 2020, in the principal amount of $12,933 to Can Endeavour. Pursuant to the terms of the amended note, Can Endeavour elected to convert the principal amount of the amended note into 21,555,483 common shares of the
13
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
9. DERIVATIVE LIABILITIES (Continued)
Company at a price of $0.60 per share. The common shares have been issued by the Company to Can Endeavour and all accrued interest on the amended note has been repaid in cash. Accordingly, the Company has satisfied its obligations under the amended note.
On December 21, 2022, the Company amended its agreement of the terms pertaining to the Equity Price Guarantee, reducing the price floor from $0.65 to $0.40 per share for the 18,615,385 common shares issued and agreeing to transfer Can Endeavour an additional 11,634,615 common shares resulting in a total 30,250,000 common shares (or equivalent proportionate voting shares). If Can Endeavour elects to sell some or all of its common shares, and the proposed purchase price is less than the floor of $0.40 per share, then the Company shall have the first right to purchase some or all of its common shares for $0.40 per share. The price floor expires at the earlier of December 31, 2025 or 20 consecutive days where common shares trade at a minimum or $4.13 while maintaining a minimum trade volume of minimum of 3 million.
The Company used a Monte-Carlo simulation model to estimate the fair value of the Equity Price Guarantee derivative liability. This is a Level 3 recurring fair value measurement. The key Level 3 inputs used by management to determine the fair value are the expected future volatility in the price of the Company’s shares and the expected life of the Equity Price Guarantee. The Company believes that a 1 % difference in the inputs used for this fair value measurement would not cause a material difference to the fair value amount.
The following assumptions were used to value the Equity Price Guarantee derivative liability using the MonteCarlo simulation model as of June 30, 2023 and December 31, 2022:
| June 30, | December 31, | |
|---|---|---|
| 2023 | 2022 | |
| Volatility | 85.00% | 105.00% |
| Risk-free interest rate | 4.54% | 4.02% |
| Expected life (years) | 2.5 years | 3.0 years |
| Share price | $0.10 | $0.16 |
| Exercise price | $0.40 | $0.40 |
For the three and six month period ended June 30, 2023, the Company recorded a loss of $442 and $164, respectively. The Company recorded a gain of $3,007 and $4,709 for the three and six month period ended June 30, 2022, respectively.
10. NOTES PAYABLE
As of June 30, 2023 and December 31, 2022, notes payable consisted of the following:
| June, | December 31, | December 31, | ||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Automobile loan (a) | $ | 26 |
$ | 32 |
| Senior Secured Term Loan (b) | 56,092 |
54,096 | ||
| Equipment loan (c) | 319 |
744 | ||
| Convertible Debenture (d) | 2,826 | 2,838 | ||
| Total notes payable | 59,264 | 57,710 | ||
| Less current portion of notes payable | (339) | (741) | ||
| Notespayable, net of currentportion | $ | 58,925 | $ | 56,969 |
14
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
10. NOTES PAYABLE (Continued)
(a) Automobile Loan
Notes payable collateralized by vehicles purchased, bearing interest ranging from 4.59% to 5.44% per annum, maturing through December 2025.
(b) Senior Secured Term Loan (the “Term Loan”)
On April 29, 2021, the Company entered into a senior secured term loan in the amount of $71,000 (the “Term Loan”). The Term Loan bears interest of 13% per annum, payable quarterly, with a maturity date of April 29, 2025. In connection with the transaction, 12.5 million warrants with an exercise price of $1.20 were issued to certain participants in the Term Loan. Subject to certain conditions of the Term Loan, the Company has the ability to prepay the Term Loan as well as to increase the Term Loan by up to $20 million. The Company assessed the prepayment option and determined that it is closely related as the exercise price of the option approximates the amortized cost of the note, and as such did not recognize a derivative instrument. The warrants had a downround protection feature applicable for the first 60 days after the issuance of the warrants, which reduced the exercise price in the event the Company issued shares during the period for less than the exercise price.
As a result, the warrants failed fixed-for-fixed criteria and were accounted for as a derivative liability for the first 60 days accounted for at FVTPL. The Company valued the warrants at $11,207 based on the following assumptions used in the Black-Scholes model: exercise price of $1.20, underlying share price of $1.20, expected life of 4 years, risk-free interest rate of 0.77% and annualized volatility of 113%.
The Company incurred a total of $4,944 of transactions in relation to the Term Loan. The Company allocated $4,164 of transaction costs to the debt and immediately expensed $780 allocated to the warrants. The fair value of the debt component was measured as the residual value of $52,659 following the deduction of the warrants value and the transaction costs from the total proceeds received of $68,030.
As part of the Term Loan, the Company is required to be in compliance with the following financial covenants: • Minimum liquidity of $4,500 as of June 30, 2023.
• Minimum debt service coverage ratio of 2.5x.
On June 28, 2021, the down-round protection feature expired triggering the warrants to meet fixed-for-fixed criteria and the Company accounted for the warrants as equity instruments. The Company revalued the warrants at $9,018 with a gain of $2,189 recognized on the change in fair value and reclassified the outstanding balance to warrants in equity. The Company valued the warrants at $9,018 based on the following assumptions used in the Black-Scholes model: exercise price of $1.20, underlying share price of $1.01, expected life of 3.84 years, riskfree interest rate of 0.87% and annualized volatility of 113%.
On May 6, 2022 and June 6, 2022, the Company completed repayments of the Term Loan in the aggregate amount of $3,418, incurring in a loss on debt settlement of $1,136. As of June 30, 2023 and December 31, 2022, the principal amount outstanding under the Term Loan was $56,092 and $54,096, Unamortized debt issuance costs related to the term loan was $9,743 as of June 30, 2023 and $11,739 as of December 31, 2022.
As of June 30, 2023, the Company was in compliance with its covenants under the Term Loan.
15
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
10. NOTES PAYABLE (Continued)
(c) Equipment Loan
As of June 30, 2023, notes payable balance comprised of two collateralized equipment loans, bearing interest ranging from 0% to 6.45% per annum, maturing through August 2026.
(d) Convertible debenture
On April 29, 2022, the Company completed a non-brokered private placement (the “Private Placement”) that includes a 10.0% unsecured convertible debenture in the principal amount of $3,500 (the “Debenture”), as well as 3,076,923 pre-funded common share purchase warrants (each a “Pre-Funded Warrant”) at a price of $0.39 per Pre-Funded Warrant, for aggregate gross proceeds of $4,700, resulting in an increase of $1,744 and $70 to equity conversion feature and warrants, respectively. The Debenture will come due in 2032 and the principal amount then outstanding is convertible into common shares of the Company at a conversion price of $0.79 per common share. Each Pre-Funded Warrant shall entitle the holder to purchase one common share at an additional exercise price of $0.40 per common share (for a total common share issue price equal to $0.79) for a period of 12 months from the date of issuance. As of December 31, 2022, the principal amount outstanding under the Debenture was $3,362 and unamortized debt issuance costs was $1,867.
The Private Placement was entered into at the same time as the modification of the existing lease for the Sweetwater facility. Both transactions were entered into with the same counterparty and as such, the Company performed an assessment to determine the unit of account. The Company determined that accounting for each separate individual transaction in accordance with its legal form would not faithfully represent the overall commercial substance and as such the transactions were accounted for as follows:
-
The right of use asset and lease liability were remeasured based on the revised lease terms and payments. The Company allocated incremental payments from the lease amendment that were not representative of the fair value of the lease. For the year ended December 31, 2022, incremental lease payments of $27 were allocated to the Debenture.
-
The debt component of the convertible debenture was measured based on interest rates applicable to the Company for comparable instruments without a conversion feature, and the residual amount was attributed to the equity components consisting of warrants and the conversion feature.
-
The Pre-Funded Warrants were measured at their fair value using the Black-Scholes model and the remaining proceeds were then allocated to the conversion feature and recognized in the equity conversion feature reserve in equity. Total transaction costs of $40 were allocated proportionately to the debt, conversion feature and Pre-Funded Warrants.
==> picture [458 x 136] intentionally omitted <==
16
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
10. NOTES PAYABLE (Continued)
The balance outstanding under the convertible debenture as at June 30, 2023 and December 31, 2022 is as follows:
| June 30, | December 31, | December 31, | ||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||
| Balance at the beginnig of the period | $ | 2,838 |
$ | - |
||
| Proceeds | - | 2,846 | ||||
| Interest and accretion | 266 | 362 | ||||
| Prepayments of principal and interest | (278) | (370) | ||||
| Balance at the end of theperiod | $ | 2,826 | $ | 2,838 | ||
A reconciliation of the beginning and ending balances of the notes payable for the six months ended June 30, 2023 and the year ended December 31, 2022 is as follows:
| June 30, | December 31, | December 31, | |||||
|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||
| Balance at the beginning of the period | $ | 57,710 |
$ | 54,293 |
|||
| Proceeds from convertible debenture and warrants | - | 4,700 | |||||
| Transaction costs on convertible debenture and warrants | - | (40) | |||||
| Issuance of warrants for convertible loan | - | (1,814) | |||||
| Proceeds from equipment loans | - | 748 | |||||
| Note Settlement | - | (924) | |||||
| Interest and accretion | 6,542 | 12,594 | |||||
| Repayments of principal and interest | (4,988) | (12,982) | |||||
| Loss on debt settlement | - | 1,136 | |||||
| Balance at the end of theperiod | $ | 59,264 | $ | 57,710 | |||
17
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
11. LEASES
The Company's leasing activities include the lease of cultivation and manufacturing facilities used in the production of cannabis and related products and office premises.
(a) Right-of-use assets
| (a) Right-of-use assets |
||||
|---|---|---|---|---|
| June 30, | December 31, | |||
| 2023 | 2022 | |||
| Cost | ||||
| Balance at beginning of period | $ | 44,029 |
$ | 29,590 |
| Additions | 525 | $ | 14,818 |
|
| Disposals | - | (379) | ||
| Balance at end of period | 44,554 | 44,029 | ||
| Accumulated Depreciation | ||||
| Balance at beginning of period | $ | 13,565 |
$ | 10,421 |
| Additions | 1,841 | 3,144 | ||
| Balance at end of period | 15,406 | 13,565 | ||
| Right-of-use-assets, net | $ | 29,148 | $ | 30,464 |
(b) Lease Liabilities
| (b) Lease Liabilities |
||||
|---|---|---|---|---|
| June 30, | December 31, | |||
| 2023 | 2022 | |||
| Balance at beginning of period | $ | 36,045 |
$ | 23,591 |
| Additions | 592 | 15,014 | ||
| Disposals | - | (401) | ||
| Interest on lease liabilities | 2,037 | 3,612 | ||
| Interest payments on lease obligations | (2,037) | (3,611) | ||
| Principalpayments on lease obligations | (1,151) | (2,160) | ||
| Balance at end ofperiod | $ | 35,486 | $ | 36,045 |
| Less current portion of lease obligations | (2,586) | (2,123) | ||
| Lease obligations, net of currentportion | $ | 32,900 | $ | 33,922 |
On May 1, 2022, the Company modified its lease agreements on six retail store fronts. The purpose of the modifications was to eliminate the variable component of rent, which was based on a percentage of gross sales and extend the term. The lease payments for these retail store fronts are now fixed. As a result of the modifications, the Company recognized additional right-of-use asset and lease liability of $5,657.
On May 1, 2022, the Company modified its lease agreement on its Sweetwater facility. The modification extended the lease termination date, increased the monthly payments, and was entered into concurrently with the Private Placement as disclosed in Note 14(d). As a result of the modification, the Company recognized an additional rightof-use asset and lease liability of $235.
18
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
12. SHAREHOLDERS’ EQUITY
| 12. SHAREHOLDERS’ EQUITY | |
|---|---|
| Share capital | |
| Number of unrestricted common shares Number of restricted common shares Amount |
|
| Balance, December 31, 2021 Exercise of options Issuance of options Shares issued for professional services (Note 16 a.) Foreign currency gain/(loss) on translation Issuance of warrants for convertible debenture (Note 16 c.) Release of restricted stock for consuting ageement (Note 14 c., 16 b.) Issuance of share for equity price guarantee (Note 16 d.) Netloss |
251,576,742 400,000 180,657 $ 300,000 - 135 - - - 1,048,386 - 162 - - - - - - 400,000 (400,000) - 11,634,615 - - - - - |
| Balance, December 31, 2022 | 264,959,743 - 180,954 $ |
| Balance, December 31, 2022 Shares issued for professional services (Note 16 e.) Issuance of options Cancellation of options |
264,959,743 - 180,954 $ 3,385,417 - 326 |
| Privat placement issuance of shares and warrants (Note 16 f.) | 30,000,000 - 2,297 |
| Netloss | - - - |
| Balance, June 30, 2023 | 298,345,160 - 183,577 $ |
Equity shares transactions
During the three months ended June 30, 2023 and year ended December 31, 2022, the following transactions were recorded in shareholders’ equity:
a. On November 2, 2022, the Company issued to its Board of Directors members, 1,048,386 shares at $0.155 per share as compensation resulting in an increase to share capital of $162 to satisfy the board of directors’ fee obligation.
b. On July 25, 2022, under the Uriah Settlement, the Company released 400,000 restricted common shares previously issued to the noteholder which were subject to performance milestones that were not achieved. These shares were released as part of the settlement and resulted in no increase to share capital.
c. On April 29, 2022, the Company completed a non-brokered private placement (the “Private Placement”) that included a 10.0% unsecured convertible debenture in the principal amount of $3,500 (“the Debenture”), as well as 3,076,923 pre-funded common share purchase warrants (each a “Pre-Funded Warrant”) at a price of US$0.39 per Pre-Funded Warrant, for aggregate gross proceeds of $4,700 resulting increase of $1,744 and $70 to equity conversion feature and warrants, respectively. The Debenture will come due in 2032 and is convertible into common shares of the Company at a conversion price of $0.79 per common share. Each Pre-Funded Warrant shall entitle the holder to purchase one common share at an additional exercise price of $0.40 per common share (for a total common share issue price equal to $0.79) for a period of 12 months from the date of issuance.
19
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
12. SHAREHOLDERS’ EQUITY (Continued)
As a part of determining the unit of account, the Company determined that the transaction price of $1,200 for the Pre-Funded Warrant was not representative of its fair value. Therefore, the Company used the Black-Scholes Model to determine the fair value of the Pre-Funded Warrant on the date of issuance. The fair value of the PreFunded Warrant was $71 using the Black-Scholes Model with the following assumptions: an underlying share price of $0.22, a risk-free rate of 2.60%, an expected volatility of 70%, an expected life of 1 year and an expected dividend yield of 0%.
d. On December 21, 2022, the Company amended its Equity Price Guarantee and issued 11,634,615 common shares, or equivalent proportionate voting shares, to a related party.
e. On January 6, 2023 and June 2, 2023, the Company issued to its Board of Directors’ members, 1,354,167 and 2,031,250 shares at $0.12 per share and $0.08 per share, respectively, as compensation resulting in an increase in share capital of $325 for the six-month period ending June 30, 2023.
f. On February 28, 2023, the Company closed a non-brokered private placement offering of 30,000,000 units, at a price of $0.10 per unit, for aggregate gross proceeds of $3,000,000. Each unit consists of one common share of the Company and one-half common share purchase warrant. Each full warrant entitles the holder to purchase one common share of the Company at an exercise price of $0.15 per full common share purchase warrant for a period of 36 months from the issuance date.
The allocation of proceeds on initial recognition was based on the relative fair values of the common shares issued and the warrants. On the date of issuance, the Company determined that the fair value of the common shares was $3,300,000 based on an underlying share price of $0.11, and that the fair value of the warrants was $998,517. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: an underlying share price of $0.11, an exercise price of $0.15, a risk-free rate of 3.94%, an expected volatility of 105.9%, an expected life of 3 years and an expected dividend yield of 0%. After applying the relative fair values, the Company allocated $2,303 to the common shares, and $697 to the warrants. The Company also incurred transaction costs of $7 on issuance of the common shares warrants. The transaction costs were allocated based on the relative fair value of the shares and warrants and were recorded as a reduction to the transaction price of the instruments within equity.
Share Capital
As of June 30, 2023, the share capital of the Company is comprised of 272,418,520 common shares, 2,592,664 proportionate voting shares (each proportionate voting share is convertible into ten common shares), 43,534,060 warrants and 10,555,556 stock options. For the purpose of the statement of changes in shareholders’ equity, the proportionate voting shares have been included as part of common shares based on the 1 for 10 conversion ratio.
During the three and six month periods ending June 30, 2023, stock options granted to third-party consultants totaling 3,150,000 with a weighted average exercise price of .33 expired.
Earnings per share have been calculated using the weighted average number of shares outstanding during a period on a total outstanding and fully dilutive basis. The potential conversion of warrants, convertible debt, and stock options into common shares. The weighted average number of basic and diluted shares are presented in the table below:
20
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022
(Amounts expressed in thousands of United States Dollars unless otherwise stated)
12. SHAREHOLDERS’ EQUITY (Continued)
| SHAREHOLDERS’ EQUITY(Continued) | ||
|---|---|---|
| June 30, | December 31, | |
| 2023 | 2022 | |
| Weighted average number of shares - basic | 286,804,241 | 252,698,567 |
| Weighted average warrants | 40,601,969 | 39,389,699 |
| Weighted average options | 12,566,169 | 16,410,568 |
| Weighted average number of shares - diluted | 339,972,379 | 308,498,834 |
Warrant activity for the Company for the six-month period ended June 30, 2023 and year ended December 31, 2022, is as follows:
| Warrants | |||
|---|---|---|---|
| Balance as of December 31, 2021 | 38,184,396 | ||
| Expired | (5,457,500) | ||
| Granted | 3,076,923 | ||
| Balance as of December 31, 2022 | 35,803,819 | ||
| Expired | (7,269,759) | ||
| Granted | 15,000,000 | ||
| Balance as of June 30, 2023 | 43,534,060 |
||
Stock option activity for the Company for the six-month period ending June 30, 2023 and year ended December 31, 2022, is as follows:
| Weighted Average | Weighted Average | ||||
|---|---|---|---|---|---|
| Options Issued | Exercise Price | ||||
| Balance as of December 31, 2021 | 16,955,500 | $ | 0.52 | ||
| Granted | 700,000 | $ | 0.20 |
||
| Exercised | (300,000) | $ | 0.45 |
||
| Forfeited | (3,924,444) | $ | 0.44 |
||
| Balance as of December 31, 2022 | 13,431,056 | $ | 0.53 | ||
| Forfeited | (3,375,500) | $ | 0.33 |
||
| Granted | 500,000 | $ | 0.10 |
||
| Balance as of June 30, 2023 | 10,555,556 | $ | 0.57 | ||
13. STOCK BASED COMPENSATION
On March 14, 2019, the Board of Directors (the “Board”) of the Company approved a Stock Option Plan (the “Plan”). Under the Plan, the Board may grant options to acquire common shares of the Company to officers, employees, and consultants, to a limit of 10% of the outstanding common shares of the Company, including proportionate voting shares. The purpose of the Plan is to provide the Company with a share-related mechanism to attract, retain and motivate qualified executives, employees, and consultants to contribute toward the long-term goals of the Company, and to encourage such individuals to acquire shares of the Company as long-term investments.
On January 6, 2023 and June 2, 2023, the Company issued to its Board of Directors’ members, 1,354,167 and 2,031,250 shares at $0.12 and $0.08 per share, respectively, as compensation resulting in an increase to share capital of $325 for the six-month period ending June 30, 2023.
21
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
13. STOCK BASED COMPENSATION (Continued)
On March 14, 2019, the Board of Directors (the “Board”) of the Company approved a Stock Option Plan (the “Stock Option Plan”). Under the Stock Option Plan, the Board may grant options to acquire common shares of the Company to officers, employees, and consultants. The aggregate number of shares available for issuance under the Stock Option Plan and RSU Plan (described below) is limited to 10% of the outstanding common shares of the Company, including proportionate voting shares. The purpose of the Stock Option Plan is to provide the Company with a share-related mechanism to attract, retain and motivate qualified executives, employees, and consultants to contribute toward the long-term goals of the Company, and to encourage such individuals to acquire shares of the Company as long-term investments.
On May 17, 2021, the Board approved a Restricted Share Unit Award Plan (the “RSU Plan”). Under the RSU Plan, the Board may grant restricted share units of the Company to officers, employees, and consultants. The aggregate number of shares available for issuance under the Stock Option Plan and RSU Plan (described below) is limited to 10% of the outstanding common shares of the Company, including proportionate voting shares. The purpose of the RSU Plan is to provide the Company with a share-related mechanism to attract, retain and motivate qualified executives, employees, and consultants to contribute toward the long-term goals of the Company.
July 14, 2023, the board approved an option cancellation agreement whereas options held by certain employees that were out of the money will be exchanged for restricted stock units. In addition, the board granted additional restricted stock units to key employees of the Company.
14. EXPENSE BY NATURE
General and administrative expenses for the three and six months ended June 30, 2023 and 2022, are as follows:
| follows: | |
|---|---|
| 2023 2022 General and administrative Legal and professional fees 728 $ 898 $ Salaries and benefits 1,325 674 Insurance 250 227 For the three months ended June 30, |
2023 2022 For the six months ended June 30, |
| 1,599 $ 1,622 $ 2,339 1,817 712 776 |
|
| Variable rent expenses 58 23 |
(67) 46 |
| Travel and entertainment 46 23 Recruiting - 28 Investor relations and regulatory fees - 41 Payroll processing fees - 46 Other 341 360 Totalgeneral and administrative 2,748 $ 2,320 $ |
78 44 - 63 - 82 - 70 636 640 |
| 5,298 $ 5,160 $ |
22
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
14. EXPENSE BY NATURE (Continued)
Sales and marketing expenses for the three and six months ended June 30, 2023 and 2022, are as follows:
| 2023 2022 Sales and marketing Salaries and benefits 3,827 $ 2,871 $ Advertising expenses 350 360 Variable rent expenses (1,291) 343 Legal and professional fees 110 44 Security 74 110 Supplies 191 87 Software 130 82 Other 2,185 293 Total sales and marketing 5,576 $ 4,190 $ For the three months ended June 30, |
2023 2022 ended June 30, For the six months |
|---|---|
| 7,440 $ 5,414 $ 664 809 (2,566) 759 165 93 119 214 424 263 212 164 3,117 561 |
|
| 9,575 $ 8,277 $ |
15. COMMITMENTS AND CONTINGENCIES
(a) Contingencies
The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation as of June 30, 2023, medical marijuana regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.
(b) Claims and Litigation
From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of June 30, 2023, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations, except for the claims disclosed below. There are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party or has a material interest adverse to the Company’s interest.
February 7, 2023, the Company settled litigation with MXY Holdings, LLC relating to a management agreement for $1,000. As of March 31, 2023 and December 31, 2022, the total outstanding amount was $958 and $1,000, which was classified $542 and $417 as short-term liabilities based on the settlement terms.
23
Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022
(Amounts expressed in thousands of United States Dollars unless otherwise stated)
16. RELATED-PARTY TRANSACTIONS
Key management personnel compensation
Key management personnel are those persons having the authority and responsibility for planning, directing and controlling activities for the Company, directly and indirectly. The key management personnel of the Company are the members of the Company’s executive management team and Board of Directors. For the three and six months ended June 30, 2023 and 2022, key management personnel compensation consisted of the following:
| 2023 2022 2023 2022 For the six months ended June 30, For the three months ended June 30, |
2023 2022 2023 2022 For the six months ended June 30, For the three months ended June 30, |
|---|---|
| Salary 714 $ 659 $ 1,425 $ Option-based compensation - - 29 All other compensation 163 200 325 |
1,132 - 400 |
| Total 876 $ 859 $ 1,779 $ |
1,532 $ |
On February 28, 2023, the Company closed a non-brokered private placement offering of 30,000,000 units, at a price of $0.10 per unit, for aggregate gross proceeds of $3,000,000. Each unit consists of one common share of the Company and one-half common share purchase warrant. Each full warrant entitles the holder to purchase one common share of the Company at an exercise price of $0.15 per full common share purchase warrant for a period of 36 months from the issuance date. As part of the private placement, the Company issued to its Executive Chairman 10,000,000 shares and 5,000,000 warrants.
On January 6, 2023 and June 2, 2023, the Company issued to its Board of Directors’ members, 1,354,167 and 2,031,250 shares at $0.12 and $0.08 per share, respectively, as compensation resulting in an increase to share capital of $325 for the six-month period ending June 30, 2023.
17. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
Financial instruments
The Company’s financial instruments consist of cash, trade receivable, trade payable, accrued liabilities, derivative liabilities, notes payable, lease obligations, and other long-term liabilities.
Financial assets
- (i) Cash is comprised of deposits held in financial institutions and cash on hand.
Financial liabilities
-
(i) Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such liabilities are recognized initially at fair value and subsequently on an amortized cost basis using the effective interest method, less any impairment losses. They are included in current liabilities, except for maturities greater than 12 months after the end of the reporting period, which are classified as non-current liabilities.
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(ii) Other financial liabilities include the Company's trade payable and accrued liabilities and notes payable . The effective interest method is used to calculate the amortized cost of a financial liability and allocates interest income over the corresponding period.
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Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
17. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (Continued)
- (iii) The effective interest rate is the rate that is used to discount estimated future cash receipts or payments over the expected life of the financial asset or liability.
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the reliability of the inputs to fair value measurements. The three levels of hierarchy are:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and
Level 3 – Inputs for the asset or liability that are not based on observable market data.
There have been no transfers between fair value levels during the year.
The carrying values of financial instruments at June 30, 2023 are summarized in the following table:
| Amortized cost | FVTPL | Total | |
|---|---|---|---|
| Financial Assets | |||
| Cash and cash equivalents | — | 8,797 |
8,797 |
| Trade receivable | 27 | — |
27 |
| Financial Liabilities | |||
| Trade payable | 6,813 | — |
6,813 |
| Accrued liabilities | 25,585 | — |
25,585 |
| Derivative liabilities | — | 8,512 |
8,512 |
| Notes payable | 59,264 | — |
59,264 |
| Lease obligations | 35,486 | — |
35,486 |
| Other long-term liabilities | 542 | — |
542 |
The carrying values of financial instruments at December 31, 2022 are summarized in the following table:
| Amortized cost | FVTPL | Total | |
|---|---|---|---|
| Financial Assets | |||
| Cash and cash equivalents | — |
8,359 | 8,359 |
| Trade receivable | 28 | — | 28 |
| Financial Liabilities | |||
| Trade payable | 6,931 | — | 6,931 |
| Accrued liabilities | 5,535 | — | 5,535 |
| Derivative liabilities | — | 8,676 | 8,676 |
| Notes payable | 57,710 | — | 57,710 |
| Lease obligations | 36,045 | — | 36,045 |
| Other long-term liabilities | 1,333 | — | 1,333 |
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Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
17. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT (Continued)
Financial risk management
The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board mitigates these risks by assessing, monitoring, and approving the Company’s risk management processes:
(a) Credit risk
Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure as of June 30, 2023 is the carrying amount of cash, trade receivable and note receivable. All cash is placed with major U.S. financial institutions. Credit risk from due from trade receivable and note receivable arises from the possibility that amounts due become uncollectible.
(b) Market risk
Market risk is the risk that the future cash flows or the fair value of a financial instrument will fluctuate because of changes in market conditions.
- (i) Other price risk
Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices, other than those arising from interest rate risk.
The Company is not significantly exposed to other price risk with respect to its financial instruments, as their fair values and future cash flows are not impacted materially by fluctuations in market prices.
(ii) Currency risk
The consolidated operating results and consolidated financial position of the Company are reported in U.S. dollars. Some of the Company’s financial transactions are denominated in currencies other than the U.S. dollar. The results of the Company’s operations are subject to currency transaction and translation risks.
As of June 30, 2023, the Company had no hedging agreements in place with respect to foreign exchange rates. The Company has not entered into any agreements or purchased any instruments to hedge possible currency risks at this time as it deems its foreign currency exposure to be nominal.
(iii) 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’s financial debts have fixed rates of interest and therefore expose the Company to a limited interest rate fair value risk.
(c) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities. The Company manages liquidity risk through the management of its capital structure. The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due.
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Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
17. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT ( Continued)
The Company had the following contractual obligations as of June 30, 2023:
| Trade payable Accrued liabilities Notes payable |
< 1year 1 to 3years 3 to 5years > 5years 6,813 $ - $ - $ - $ 4,911 - - - 9,885 77,859 1,112 51 |
Total 6,813 $ 4,911 88,908 |
|---|---|---|
| Lease obligations | 6,482 12,756 11,853 26,403 |
57,493 |
| Total | 28,091 $ 90,616 $ 12,965 $ 26,454 $ |
158,125 $ |
The Company had the following contractual obligations as of December 31, 2022:
| < 1year 1 to 3years 3 to 5years > 5years |
Total | |
|---|---|---|
| Trade payable | 6,931 $ - $ - $ - $ |
6,931 $ |
| Accrued liabilities Notes payable Lease obligations |
5,534 - - - 9,873 10,706 70,783 1,706 5,692 12,294 12,327 34,026 |
5,534 93,068 64,339 |
| Total | 28,030 $ 23,000 $ 83,110 $ 35,732 $ |
169,872 $ |
18. CAPITAL MANAGEMENT
The Company’s capital management objectives are to maintain financial flexibility in order to pursue its strategy of organic growth and to provide returns to its shareholders. The Company defines capital as the aggregate of its capital stock and borrowings.
Total managed capital is as follows:
| Notes payable Share capital |
June 30, December 31, 2023 2022 59,264 $ 57,710 $ 183,577 180,954 |
|---|---|
| Total managed capital | 242,841 $ 238,664 $ |
The Company manages its capital structure in accordance with changes in economic conditions. In order to maintain or adjust its capital structure, the Company may elect to issue or repay financial liabilities, issue shares, repurchase shares, pay dividends or undertake any other activities as deemed appropriate under the specific circumstances. The Company is not subject to any externally imposed capital requirements. Management reviews its capital management approach on an ongoing basis. There were no material changes to this approach during the six months ended June 30, 2023 and the year ended December 31, 2022.
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Cansortium Inc. Condensed Interim Notes to the Consolidated Financial Statements (unaudited) As of June 30, 2023 and 2022 (Amounts expressed in thousands of United States Dollars unless otherwise stated)
19. FINANCE COSTS
The Company’s finance costs for the three and six month periods ended June 30, 2023 are as follows:
| 2023 2022 Interest income (16) $ (2) $ Interest expense 2,221 2,286 Accretion costs 1,103 898 Interest on right ofuse assets 1,016 661 Finance costs, net 4,324 $ 3,843 $ For the three months ended June 30, |
2023 2022 For the six months ended June 30, |
|---|---|
| (24) $ (74) $ 4,422 4,544 2,139 1,713 2,036 1,316 |
|
| 8,573 $ 7,500 $ |
20. DISPOSAL OF ASSETS
In June 2022, the Company officially exited its Homestead Florida cultivation facility, thereby writing off certain receivables, and property and equipment, recognizing a loss of $672 in the statement of loss and comprehensive loss for six months ended June 30, 2023.
21. SUBSEQUENT EVENTS
Based on the advice of its legal and tax advisors, the Company determined that it was eligible to receive Employee Retention Credit (“ERC”) initially enacted under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) from quarter one and quarter two of 2021 in the amount of $4,055 (the “Credit”). The Company submitted amended payroll tax returns to the IRS in the third quarter of 2023 for the Credit. In August 2023, the Company sold the Credit to a non-related third party for gross proceeds of $3,433.
On July 19, 2023, the Company entered into a seven-year lease to house our corporate office as part of the Company’s headquarters relocation from Miami to Tampa Florida.
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