Flora Growth Corp. (not Zerostack Corp.) — Q2 2023 Form 10-Q
The supplied filing is Flora Growth Corp.’s unaudited 10-Q for the quarter and six months ended June 30, 2023, filed August 10, 2023. Amounts below are in U.S. dollars. Flora manufactures and distributes consumer cannabinoid products and distributes pharmaceutical and medical cannabis products. Its reporting segments were House of Brands, Commercial & Wholesale, and Pharmaceuticals. The company adopted U.S. GAAP presentation for all periods shown; it had previously reported under IFRS.
Key financial results
| Metric | Three months ended June 30, 2023 | Six months ended June 30, 2023 | Prior-year comparable |
|---|---|---|---|
| Revenue | $21.5 million | $40.8 million | $8.9 million and $13.1 million, respectively |
| Gross profit / margin | $4.0 million / 18% | $9.3 million / 23% | $3.3 million / 37%; $5.5 million / 42% |
| Operating loss | $40.1 million | $42.4 million | $21.5 million; $27.8 million |
| Net loss | $44.6 million | $48.5 million | $24.7 million; $32.3 million |
| Loss per share attributable to Flora | $6.58 | $7.21 | $6.42; $8.80 |
| Cash used in operating activities | Not separately presented | $7.8 million | $11.0 million |
Revenue growth primarily reflects the inclusion of acquired FGH, which contributed $10.8 million in Q2 and $18.8 million in the first half, and higher JustCBD sales. The gross-margin decline was attributed mainly to FGH’s lower-margin pharmaceutical distribution business. The filing provides no EBITDA measure or formal revenue or earnings guidance.
Financial position and liquidity
- At June 30, cash was $1.8 million (plus $25,000 restricted cash), down from $8.9 million at year-end 2022. Cash and restricted cash at period-end were $1.807 million.
- Current assets were $22.3 million and current liabilities $17.8 million, for working capital of approximately $4.4 million. Total assets were $30.5 million, total liabilities $20.3 million, and total equity $10.2 million.
- Debt was approximately $1.2 million, including a €1.0 million FGH credit facility secured by receivables and a small insurance-premium loan. The €1.0 million facility was renewed on the same terms and has no predetermined maturity date. Operating lease liabilities totaled $2.2 million.
- Operating cash outflow was $7.8 million; investing outflow was $0.2 million and financing inflow was $0.1 million. Cash declined by $7.3 million during the period, including the effect of cash classified as held for sale.
Material changes and unusual items
- Flora recorded $34.9 million of continuing-operations asset impairment expense in the first half, including goodwill impairments of $19.6 million for JustCBD and $3.7 million for FGH, and impairments of long-lived assets. The filing cites declining share prices, difficult capital-market conditions, and weaker recoverable values as indicators.
- Colombian operations were classified as discontinued operations following a July 5, 2023 agreement to sell the related subsidiaries and assets for CAD $0.8 million (about $0.6 million). The reported first-half discontinued-operations loss was $8.3 million, including $4.7 million of impairment and a $1.9 million expected disposal loss. The company reported receiving CAD $0.5 million after quarter-end and expected the balance at closing; the sale was expected to close by August 18, 2023.
- The company’s 1-for-20 reverse share split became effective June 9, 2023; share and per-share figures were retrospectively adjusted. Flora reported 6,854,596 common shares outstanding as of August 3, 2023.
- On June 26, 2023, Flora said Nasdaq had notified it that it regained compliance with the minimum bid-price requirement.
Outlook, risks, and contingencies
- Going concern: Management stated that $1.8 million of cash was insufficient to fund planned growth and meet obligations, and that substantial doubt existed about the company’s ability to continue as a going concern for at least one year after issuance. Management was evaluating cost reductions and possible equity, debt, strategic-partner, or other financing; availability and terms were uncertain. Failure to raise funds could require curtailing or ceasing operations.
- Costs and profitability: Management said operating expenses exceed gross profit and described ongoing overhead-reduction efforts. It expects continued operating losses and negative operating cash flows in the foreseeable future.
- Contingencies: Recorded provisions totaled $5.2 million, including $3.0 million for a German legal claim and $2.2 million for estimated U.S. sales taxes. The German claim is subject to an indemnity from Flora’s CEO and related parties, capped at $5.0 million; the company recorded $3.4 million of indemnification receivables. Other FGH-related claims and the indemnity’s scope and recoverability remain relevant.
- Controls: Management concluded disclosure controls and procedures were not effective at June 30, 2023, primarily due to a material weakness described in the 2022 annual report. No material change in internal control was reported during the quarter.
- Other stated risks include cannabis regulation and demand, product liability and recalls, inventory shelf life, acquisitions and integration, access to capital, regulatory compliance, and the potential effects of industry and market conditions. The filing gives no quantified forward guidance.
Important facts for investors to verify
- Confirm the filing identity: the document is Flora Growth Corp.’s 10-Q, not a Zerostack Corp. filing.
- Assess available liquidity, near-term cash needs, financing plans, and the going-concern disclosure against subsequent developments.
- Review the assumptions and valuation methods behind the large goodwill and long-lived-asset impairments, and whether further impairments may be needed.
- Check completion and final proceeds of the Colombian asset sale, including the treatment of held-for-sale assets and liabilities.
- Evaluate receivable collectability, sales-tax exposure, legal claims, and the practical collectability and limits of the CEO-related indemnity.
- Review the remediation status of the material weakness and the company’s ability to reduce overhead while maintaining sales and margins.