Flora Growth Corp. (NASDAQ:FLGC) Q3 2022 Earnings Call Transcript

Flora Growth Corp. (NASDAQ:FLGC) Q3 2022 Earnings Call Transcript November 28, 2022

Flora Growth Corp. misses on earnings expectations. Reported EPS is $-0.1 EPS, expectations were $-0.05.

Jessie Casner: Hello, everyone, and welcome to the Flora Growth Third Quarter 2022 Earnings Results Webcast. I’m Jessie Casner, Chief Marketing Officer at Florida Growth. Please note this webcast is recorded and will be published for viewing shortly after the end of the webcast. On the call with me today are Luis Merchan, Chief Executive Officer and Chairman of the Board; Jason Warnock, Chief Commercial Officer; and Elshad Garayev, Chief Financial Officer. Today, we will discuss the results of the third quarter of 2022. This morning our unaudited financial statements for the three and nine months ended September 30, 2022 were filed with the SEC under the cover of a Form 6-K, and we disseminated our earnings release. Copies of both can be found in the Investor Relations section of Flora’s website and on EDGAR.

I’d like to remind you that during this webcast, management’s prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties. Forward-looking statements don’t guarantee future performance and therefore undue reliance should not be placed upon them. For detailed description of the factors that could cause our actual results to differ materially from any forward-looking statements made, please refer to Form 20-F filed with the SEC on May 9, 2022. The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances except as maybe required under applicable securities law. Finally, please note on the call today, management will refer to certain non-IFRS financial measures such as adjusted EBITDA and adjusted EBITDA margin, in which Flora excludes certain expenses from its IFRS financial results.

Copyright: stokkete / 123RF Stock Photo

Such non-IFRS financial measures are explained in the company’s earnings release. And with that, it’s my pleasure to introduce Flora Growth’s Chief Executive Officer and Chairman of the Board, Luis Merchan.

Luis Merchan: Thank you for the introduction, Jessie, and welcome, everyone. We appreciate the time you have taken to be with us here today. At Flora, we seek to create a world where the benefits of cannabis are accessible to everyone. We want to be the leader in providing safe, high quality cannabis to markets across the globe. The third quarter was a record period for the company. We continue to execute on our strategic initiatives during the quarter, which led to meaningful improvements across all key financial metrics. Today, we reported approximately $10.8 million in revenue for the third quarter of 2022. This number alone represents more revenue than we generated during the entirety of 2021. This is the first-time we deliver over $10 million in one quarter and we’re very proud of this milestone.

Additionally, our third quarter gross margin improved from 29.6% to 46.2% compared to the third quarter last year. This was due to increased efficiencies across our operations, including M&A integration and optimize inventory management amongst others (ph). We expect these types of improvements to continue as we head into the balance of the fourth quarter and the new year. This improvements were accomplished despite a challenging capital market, an uncertain regulatory environment and a volatile geopolitical climate. It’s clear that Flora has upward momentum. Momentum that continues to build across our three strategic pillars of House of Brands, Commercial Wholesale and Life Sciences. In our House of Brands pillar, we delivered meaningful top line revenue, representing more than 80% of our total sales.

This included revenue growth from our top selling brands JustCBD and Vessel and we accomplished this while we finalized the integration of JustCBD, Vessel and No Cap. This integration helped us realize meaningful cost savings and sales synergies. On the Commercial Wholesale front, our 247 acre cultivation facility in Colombia is fully operational. We are now harvesting high-THC cannabis on a weekly basis, and we are operating under one of the lowest cost structures in the globe. We have already cleared the regulatory path to five countries for export, and we expect to add more countries to this list in the upcoming months. This year, we were awarded a high-THC cannabis quota of 43 tons by the Colombian government, that we intend to leverage through the remainder of 2022 and throughout 2023.

These operational milestones come on the heels of significant announcements of positive regulatory changes for the industry in the United States, Germany and Colombia. As we achieve these key milestones across our core business units, we also added key executives to our roster, appointed Brandon Konigsberg, our former JPMorgan executive to our Board of Directors and Elshad Garayev, a former Boeing and Amazon executive as our Chief Financial Officer, further enhancing our Financial Controls and Corporate Governance capabilities. Finally, Flora has been active on the M&A front in 2022 with the acquisitions of JustBrands and No Cap. Earlier this month, we announced a definitive agreement to acquire Franchise Global Health, a pharmaceutical distributor with primary operations in Germany and licenses to import and distribute medical cannabis into the most important legal, medicinal cannabis market in the world today.

We expect to close this transformative acquisition in mid-December and based on both of our company’s guidance for 2022, we expect to have a company with at least $100 million in revenues for 2023. Our outstanding results and momentum are the product of the hard work, dedication and talents of our management, board of directors and staff around the world. Thank you, everyone. With that, I’ll hand it over to our CFO, Elshad Garayev, to review our financial performance for the third quarter of 2022.

See also 15 Countries That Produce the Most Solar Energy and Stan Druckenmiller Portfolio

Elshad Garayev: Thank you, Luis. Revenue for Q3 2022 increased 414% year-over-year to approximately $10.8 million primarily driven by sales from JustCBD and Vessel. Gross profit in the third quarter increased 703% year-over-year to approximately to $5 million. The period’s gross margin expanded significantly from 29.6% in the prior year to 46.2% and also improved from 43.9% in the first half of 2022, reflecting our ability to organically optimize our business. Increase in this margins were a result of improved inventory mix as well as new product pricing. Operating expenses in the third quarter were $10 million compared to $4.2 million in the same period last year. The increase in operating expenditures was primarily driven by OpEx from acquired businesses, administrative infrastructure, sales and marketing and expanding our operations, all of which are enabling us to deliver on our growth objectives.

Net loss for the period was $7.4 million compared to $3.6 million in the same period last year. Adjusted EBITDA in the third quarter was negative $3.9 million compared to negative $3.1 million in the same period last year. Adjusted EBITDA margin improved significantly from negative 150.1% in Q3 2021 to negative 36.5% in Q3 2022, first a signal in our path to profitability. CapEx year-to-date was $0.9 million compared to $1.5 million a year ago. The decrease was primarily driven by completion of our investments in cost of channels and our Flora lab operations. Turning to our balance sheet. As of September 30, cash and cash equivalents were $5.9 million compared to $37.6 million as of December 31, 2021. The decrease was primarily attributed to $60 million cash paid for the acquisition of JustCBD as well as higher operating expenses related to sales and marketing of acquired businesses and one- time expenses for our cost of channels operations, Flora lab expansion and M&A related transactional activities.

Today, the company remains debt free. With that, I will now hand it over to our Chief Marketing Officer, Jessie Casner.

Jessie Casner: Thank you, Elshad. Since Flora’s inception, the value of our House of Brands has been to drive meaningful consistent revenue streams that allow entry to new target markets regardless of the legal status of cannabis, opening up supply chains, distribution networks, and building customer bases. We continue to see this strategy bear fruit. The third quarter saw record sales, improvement in margins and strong direct-to-consumer and wholesale performance with more than 80% of Flora’s revenues being driven by the House of Brands division, with the majority being attributed to JustCBD and Vessel. Both brands experienced year-over-year growth and margin improvement. We also continue to realize cost synergies between our primary revenue driving business units through general and administrative reductions, supplier consolidation and channel expansion.

Sales teams have been consolidated, logistics and fulfillment are now housed under one roof and factory relationships have been leveraged to smooth out supply chain inconsistencies and get better economies of scale. In preparation for Q4 and early 2023, where we expect to see an increase in revenue for all brands given the demand of the holiday season. We increase our inventory position over 10% from our ending position in the first half of 2022 to reflect the heightened demand in the last quarter and overseas factory closures in Q1. Additionally, during the third quarter, we acquired No Cap Hemp Co. brand. This no cash royalty based acquisition bolstered our product offering. No Cap has been integrated into the JustCBD operations with the novel offering is creating opportunities for expanded product penetration in existing retailers and access to new clientele.

I’ll now pass it over to our Chief Commercial Officer, Jason Warnock, to elaborate on our cultivation and commercial wholesale business.

Jason Warnock: As Luis touched on, we successfully exported CBD isolate into the U.S. and dried flower into Switzerland and the Czech Republic. Our ability to realize the full activation of our cultivation and export goals as quickly as we did is a testament to the Flora team and our growing list of global distribution partners. Our strategic M&A activity and our strong regulatory connections. Although the ability of all Colombian cannabis growers to cultivate cannabis specifically for the export of dried flower was delayed by the passage of the government regulations for April of this year. We were able to meet our goal of harvesting and exporting cannabis flower in the fall of 2022. Today, we are actively cultivating four psychoactive cannabis strains including a balanced one to one strain and three high-THC cultivars for export into international markets.

Additionally, we are producing THC derivatives for domestic medical purposes in Colombia and continue to produce CBD isolate, distillates and dry flower for the United Kingdom, Switzerland and the U.S. as well as any other countries where CBD markets are beginning to flourish. Flora is actively engaged in building the commercial export pathway for THC products, specifically through Germany, being our pending acquisition of Franchise Global Health. Leveraging their existing network of approved cannabis pharmacies, we expect to fully activate this channel in Q1 of 2023. The activation of these export pathways into the Flora supply chain will provide us a foothold in the European Union. To fully realize the potential of the EU market, we have redirected our EU GMP certification efforts towards the certification of dry bulk flower, and have actively engaged our European partners seeking distributors to fit strategically within our long term commercial wholesale strategy going into Q4 of 2022 and beyond.

I will now hand it back to Luis to discuss the progress in our Life Sciences program.

Q&A Session

Luis Merchan: Thank you, Jason. As we’ve mentioned, Life Sciences, the research and development of cannabis medication is a critical part of the future of our industry. We have achieved two key milestones this quarter. First, we have greater Flora lab 4, expanding our capabilities to manufacture custom formulations as our products with cannabis derivatives and traditional master formulas to serve the medicinal cannabis market in Colombia. Located in Bogota, then now 2,300 square foot facility was completed just a few weeks ago. Alongside the completed construction of Flora lab 4, we have formulated eight new prescription grade cannabis medications and are awaiting INVIMA certification of the lab to launch commercial. These science backed medications are formulated to treat a number of ailments, including social anxiety and acne.

With these successful operational and research steps completed, we expect that our Life Sciences division could begin realizing revenues via prescription formulations as early as the fourth quarter this year. And this completes our operational updates from our core business unit. I want to thank all of you again for attending our call today. Our third quarter has been a formative time for our company and despite the macro headwinds, I am proud to say that we are continuing to execute on our strategic goals and remain on the track to meet our 2022 revenue guidance of 35 million to 45 million. We’re engaging meaningful M&A activity across the last 12 months. We have been hyper focused on the quality of our acquisition targets, integration and realizing the full opportunity of each of these throughout the year and of course this quarter.

The last year was focused on our household brands and expansion of our consumer base. In 2023, we will see a full activation of revenues of our Colombian grown cannabis as we accelerate the supply to meet the world’s demand for high-THC and high CBD products. Our pending acquisition of Franchise Global Health is a signal of where we are placing our bets for the future. Our future where cannabis is not hemmed in by geographic boundaries, but where cannabis is growing in the most advantageous locations and move to the areas of demand across the globe. We continue to set ourselves apart from the other players in the industry, appending what an international cannabis company looks like, supporting scientific research, working with international standard setting bodies, and of course, promoting best practices that continuously streamline our supply chain.

I want to offer our sincere thank you to our customers, our shareholders, our Board of Directors and the entire Flora team. Flora growth exists to create a world where the benefits of cannabis are accessible to everyone and we are working every day to make this a reality.

Jessie Casner: Thank you, Luis. This completes our prepared remarks. As a reminder, recording of this webcast will be available within 24 hours on the Flora Growth Investor Center. Thank you all again for attending Flora Growth’s third quarter 2022 earnings results call.

End of Q&A: