Flora Growth Corp. (NASDAQ:FLGC) Q4 2022 Earnings Call Transcript

Flora Growth Corp. (NASDAQ:FLGC) Q4 2022 Earnings Call Transcript April 3, 2023

Jessie Casner: Before we begin, I’d like to note that the webcast is being 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; as well as Elshad Garayev, Chief Financial Officer. Today, we’ll be discussing the results of fiscal year 2022. Once we complete our prepared remarks, we’ll begin the Q&A session, please feel free to use the Q&A function within the webcast. On Friday, March 31, our audited financial statements and earnings release for the period ended December 31, 2022 were filed with the SEC under the cover of a Form 10-K. 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 do not guarantee future performance, and therefore, undue reliance should not be placed upon them. For a detailed description of the factors that could cause our actual results or business to differ materially from any forward-looking statements made, please see our 10-K. 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 may be required under applicable securities law. In addition, today’s call, Flora will refer to certain non-U.S. GAAP financial measures, such as adjusted EBITDA, adjusted gross profit and adjusted gross margin, which do not have any standardized meaning prescribed by U.S. GAAP.

Please refer to our filing for the calculation of these measures and reconciliation to the most directly comparable measures calculated and presented in accordance with U.S. GAAP. These non-U.S. GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to and should not be considered in conjunction with the U.S. GAAP financial measures presented in our financial statements. We’d also like to note that all previous filings were reported under IFRS and included non-IFRS measures such as adjusted EBITDA. We may reference and compare to previously reported IFRS-based results. And with that, I will hand it over to Chairman and CEO, Luis Merchan.

Luis Merchan: Thank you, Jessie, for the intro, and good morning, everyone. We appreciate the early day and the time you have taken to be with us today. I’m proud to share the results from fiscal year 2022, where we not only met our revenue guidance by delivering a record $37.2 million in top line, but we also closed Q4 with $11.5 million in revenue, making it the highest revenue-generating quarter and year for the company to date. This performance is the result of the effectiveness of our strategy, the compelling value proposition of our products in our House of Brands, the completion and integration of our pivotal M&A transactions and the operational milestones we achieved throughout the year. 2022 was a transformational year for Flora that put in place the building blocks that will allow us to realize our mission and more than double our revenues in 2023.

It’s incredible to look back just at 2019 where Flora was pre-revenue. Now in 2023, we have the potential to become a $100 million revenue-generating company. 2022 was not without its challenges, of course. It’s important to note all we have accomplished despite having to navigate one of the most hostile business environments to date, especially for the cannabis industry. But in a nascent industry such as ours challenging years are critical in ensuring that companies build for the long haul, those built with long-term shareholder value in mind are those that will rise to the top. Ongoing pressures in the industry serve to help us fine-tune our operations, streamline the business and allow us to take advantage of an evolving M&A market. In 2022, in addition to prioritizing revenue achievement, we worked towards three key goals.

The first was the deployment of our strategy and our three-pillar approach, which we announced last year. This continues to be our road map. Each pillar, our House of Brands, Commercial Wholesale and Pharmaceutical development represents a critical area of growth for the industry, provides us with diversified revenue streams and allows us access to nearly every major global cannabis market, as cannabis reform continues to proliferate. This has also informed our reporting framework as we convert from a foreign private issuer to a U.S. domestic filer. As you will see in our filings, we now not only report performance at the company level, but by pillar as well, providing better transparency and clarity to the core of our operations. In 2022, we also prioritized the reduction of operational expenses, especially as the industry weathered macro and microeconomic headwinds.

And while there is meaningful work left to be done on this front, we believe we have the plan needed to continue optimizing our cash outflows and streamlining our operations for better efficiencies. And perhaps most importantly, we knew we needed transformational M&A activities to prepare us for the realization of our mission. At the end of 2022, we completed the acquisition of Franchise Global Health, a multinational cannabis company with primary operations in Germany. We are now actively integrating the German operations to realize the value of their existing network of 1,200 pharmacies and 28 countries of distribution and to own the cannabis supply chain from Colombia to Germany. The acquisition of Franchise, coupled with the Q1 2022 acquisition of JustCBD have fundamentally changed the makeup of our business, giving us expanded reach and diversifying our supply chain and distribution networks, both domestically and internationally.

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Throughout last year, the team worked diligently to achieve these goals and realize our ambitious revenue guidance. Our House of brands continue to show incredible traction in domestic and international markets. We saw the first export of cannabis and derivatives from our Cosechemos farming Bucaramanga, Colombia, and we completed the construction of our compound prescription pharmaceutical lab in Colombia, in Bogotá. All of these milestones bring us to today where we are poised to be a leader on the international cannabis stage. With that, I’d now like to pass it off to our Chief Financial Officer, Elshad Garayev, to discuss the financial performance for the year.

Elshad Garayev: Thank you, Luis. I would like to begin by reiterating that Flora is no longer a foreign private issuer, and we officially moved to U.S. GAAP reporting standards as of most recent filings. As such, we look forward to providing you with updated growth and performance metrics that more clearly align with our €“ to our strategy. Turning to the full year 2022. We were able to generate $37.2 million in revenue, representing 314% increase year-over-year. This was primarily driven by our House of Brand businesses. When we examine in first quarter of 2022, revenue was $11.5 million, representing 7% sequential increase from Q3 ’22, bolstered primarily by organic growth. Gross profit for 2022 increased by 494% to $14.4 million.

We continue to see significant expansion in our gross margin compared to the prior year, which increased from 27% to 39%. Increase in gross margin was primarily due to the integration and revenue recognition of high-margin acquired businesses. Our operating expenses for period were $67.7 million, of which almost half were noncash charges, including impairment charge of $26.2 million. Impairment was primarily related to the House of Brand acquisition values impacted by a recent decline in market conditions and company share price. Other noncash items in our operating expenses included our depreciation and amortization – depreciation, amortization, purchase price allocation and share-based compensation charges. Those expenses include operational charges from our JustBrands business unit, which was acquired in February 2022 and M&A-related transaction charges.

Notably, operating expenses as a percentage of sales decreased when compared to last year. Company also disclosed adjusted EBITDA non-U.S. GAAP measure, which excludes certain noncash and other nonrecurring charges. We believe adjusted EBITDA provides meaningful and useful financial information as a measure – as a measure demonstrates business operating performance. For the period, Flora reported adjusted EBITDA loss of $18.3 million, an increase of 11% when compared with 2021. It’s important to note that this increase occurred while company simultaneously increase revenue 314% year-over-year. Adjusted EBITDA margin for the 2022 experienced meaningful improvement as compared with 2021, while net loss for the period was $52.6 million compared to $21.4 million in 2021.

Net loss margin for full year 2022 improved to negative 141.6% from negative 237.9% in fiscal year 2021. CapEx in the year decreased to $1.3 million. Decrease was primarily driven by completion of the larger projects in 2021, such as build-out of Cosechemos cultivation facility, while 2022 capital expenditures include the smaller scale projects focused on activating our cultivation facility and investment in Flora Labs. Turning to balance sheet. As of December 31, 2022, cash and cash equivalents were $9.5 million. This represents decrease from our December 31, 2021 cash position of $37.6 million, primarily attributed to roughly to $16 million cash paid for acquisition of JustCBD, as well as higher operating expenses related to sales and marketing of acquired businesses, one-off cash expenses and M&A-related charges.

I will now hand it over to our Chief Marketing Officer, Jessie Casner, to cover our House of Brands update.

Jessie Casner: Thank you, Elshad. 2022 is a standout year for the House of Brands division, having driven the majority of the company’s revenue. Turning to JustCBD. The acquisition of this company proved to be exceptionally accretive as we look at the contributions and synergies realized across the roughly 10 months of Flora ownership in 2022. And while many other players in the CBD space have seen contraction in their business, JustCBD continues at a healthy growth rate. JustCBD achieved record-breaking sales during the Black Friday sales event in Q4, making it the most successful sales event in the brand’s history. This was due in part to the new all-in-one vape line introduced in Q4, which has quickly become a customer favorite.

The fourth quarter also saw the expansion of our already popular CBD plus line with new flavors, potencies quickly becoming a top 5 best seller since its original launch in Q2 of 2022. This line of products was developed to reacquire a large and undervalued audience segment of nearly 20 million potential customers who had previously reported that their experience with CBD from a myriad of brands didn’t meet their expectations. With new research and CBD’s mechanism of action as well as innovation in the extraction and formulation phase of production, the team developed a new offering set more actionable dosages designed to leverage the entourage effect a full spectrum hemp and deliver a better experience for our customers. Looking at Vessel, the team delivered on their ongoing commitment to supporting their community by partnering with the Arbor Day Foundation.

Vessel committed to planting 5,000 trees in just 3 months via a buy one plant one program, and we’re proud to say that the Vessel community helped exceed that goal in the fourth quarter. Vessel also launched new products in the dry-herb category, which leverages Vessels patent-pending Helix technology. The launch of these products helped the dry-herb category hit an all-time revenue high in the fourth quarter. We’re also pleased to report that the synergies between JustCBD and Vessel brands continue to bear fruit in the fourth quarter with the launch of a co-branded line of products. This limited edition battery collection featured two top-selling Vessel form factors in JustCBD’s signature colorways and branding. The collaboration resulted in the most successful co-branded product launch in Vessels history and one of the fastest sell-through time frames for any one product franchise.

In the food and beverage category, Mambe our line of natural fruit juices and canned food servicing Latin America, secured the rights to sell non-cannabinoid juices into the Juan Valdez coffee chain. The agreement finalized in December provides access to the most well-known coffee brand to come out of Columbia and which boasts over 300 outposts across the country. Reflecting on 2022, our priorities were to integrate JustCBD and Vessel into the broader organization, identify synergies, including expanded distribution opportunities, leveraging our new network of doors and to streamline operations and logistics across all brands. We’re pleased with the progress made on all of our key initiatives and the overall performance of this critical pillar.

As we look ahead to 2023, we expect this pillar to contribute approximately 45% of our overall revenue target and for our brands to continue their organic trajectory. I’ll now pass it back to Luis to elaborate on our cultivation and commercial wholesale business.

Luis Merchan: As we look at our commercial and wholesale operation through the lens of our cultivation, 2022 was punctuated by three key models. The first one was April 1 when the Colombian government allowed licensed producers to begin planting high THC flower for export. The second one was late August when plants began coming out of the ground for testing and processing and the third one was October when the first product began leaving Colombia for other licensed geographies. Product harvested and processed in Q4 is now in our partner facility in Portugal going through E&P sterilization and stabilization certification and with follow-on product shipments underway and earmarked for distribution in critical geographies like Australia and Germany.

As we look at wholesale distribution, our acquisition of FGH has meaningfully accelerated our path to the Germany, European markets with one of the first cannabis distribution licenses ever given and a network of 1,200 pharmacies, Flora is now better positioned than ever to capitalize on the opportunity presented in Europe. We expect that the acquired distribution business will be the primary revenue driver of this pillar this year, contributing up to 45% of our total top line. As a leading global cannabis organization, we have gained a comprehensive understanding of the complexities and significant barriers of entry into the international cannabis supply chain. The movement of cannabis from point A to point B is highly intricate and very few players across the globe possess the knowledge and relationships with the regulatory agencies required for successful navigation.

However, our organization has built strong relationships and gained valuable insights, allowing us to effectively navigate this complex landscape. Now back to Jessie for a review of our pharmaceutical pillar.

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Q&A Session

Jessie Casner: Thank you, Luis. Looking at our pharmaceutical pillar, the team continued to make progress in 2022 with our global research and development efforts, as well as the completion of our Flora Lab 4 facility in Colombia. The team is led by Dr. Annabelle Manalo-Morgan, and they completed all preclinical work for the study being conducted in conjunction with the University of Manchester in the U.K. The study will explore the use of proprietary cannabinoid formulations in patients suffering from musculoskeletal pain and will leverage a novel measurable pain data collection techniques with the help of EEG readings. Currently, the study awaits agency approvals in order to progress. In addition to the work we’ve initiated in the research, the team also completed the construction of Flora Lab 4, which is a 2,300 square foot state-of-the-art facility in Bogotá, specializing in custom formulations and the compounding of cannabis prescription medications.

This lab completed its e-beam inspection and approval process and now doctors around Colombia can prescribe 8 proprietary cannabis-based formulations that are fully covered by the Colombian sponsored health care system. We expect to see revenues from this lab beginning in Q2 of this year. We expect this pillar to contribute up to 10% of the total revenue in fiscal year 2023. And while we know the future of the industry lies in the transformation of cannabis into mainstream medications, our investment in this pillar will continue to be commensurate with the revenue it generates. And that completes our operational updates from our core business units. I’ll pass it back to Luis for closing remarks.

Luis Merchan: All right. I want to thank all of you again for attending today’s webinar. 2022 was a transformative year for our company. It was marked by acquisition – by acquisitions, by improved growth metrics and diversified revenue streams. Our strategy is proven to be a road map for success, providing Flora with access to nearly every major market in the cannabis industry. Our brands continue to show impressive traction in both domestic and international markets. Our expanding reach and diversified supply chain positions us well to become one of the top global cannabis company – companies. Today, I remain more confident than ever in Flora’s opportunity to not only be one of the largest players in the international cannabis industry, but to change the global landscape of cannabis as we connect consumers with world-class products, distributors with medical-grade cannabis and patients with the medicines that they need.

With record-setting revenue in the fourth quarter and the year, we have established a strong foundation and the necessary momentum to achieve our revenue guidance of $90 million to $105 million in 2023. As always, I’d like to close by offering a sincere thank you to our customers, our shareholders, our Board of Directors and the entire Flora team. And with that, I’m going to pass it over to Jessie, so we can open up the Q&A.

A – Jessie Casner: Thank you, Luis, and thank you, Elshad. So this completes our prepared remarks on the performance of Flora in 2022, and we will begin our Q&A session. So let’s begin with Aaron Grey from AGP, I’ll go ahead and invite Aaron to the call. Hi, Aaron.

Aaron Grey: Hi, good morning. Can you guys hear me, okay?