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spk00: Greetings and welcome to Flower One second quarter 2021 earnings conference call. At this time, all participants are on the listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Philip Carlson, Managing Director at KCSA. Thank you. You may begin.
spk03: Good morning, everyone, and welcome to Flower One's second quarter 2021 results earnings conference call. With me today are Kellan O'Keefe, Flower One's president and CEO, and Richard Groberg, Flower One's interim CFO. Before we begin, please let me remind you that during this conference call, Flower One's management may make forward-looking statements. These forward-looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in the risk factor section of our CDAR filings. Any forward-looking statements should be considered in light of these factors. Please also note, as a safe harbor, any outlook we present is as of today. Management does not undertake any obligation to revise any forward-looking statements in the future. Now I'd like to turn the call over to Kellen. Kellen, please go ahead.
spk04: Thank you, Phil, and welcome, everyone, to Flower One's second quarter 2021 conference call. I am delighted to be hosting our first earnings call in quite some time and my first earnings call as the company's president and CEO. I am extremely proud to share that FlowerOne exceeded our revenue guidance and reported the second consecutive quarter of record revenue, continuing the best performance in the history of the company. Q2 was my first full quarter leading FlowerOne after assuming the interim CEO position mid-first quarter in January of 2021. It is highly encouraging to see the immediate impact of the restructuring and operational improvements throughout the organization. The quarter's results demonstrate that the steps taken to turn the business around are working. Positioning FlowerOne for long-term success and value creation for shareholders via strong and sustainable growth. The new board of directors and management team remain focused on the financial discipline and operational excellence required to meet or exceed projections and achieve positive cash flow. The results from the second quarter demonstrate we have made significant progress towards this goal. Over the past several months, we have worked to improve the quality of cannabis that comes out of our facility. which has enabled us to generate a significantly higher average price per pound. Our commitment to quality has been well received by the market, allowing us to become the largest producer of cannabis in Nevada, capturing between 20 and 25% of the wholesale market. The operational transformation has not only facilitated record sales, but also lowered operating and corporate overhead compared with prior quarters. enabling the company to make significant progress towards achieving positive cash flow. This quarter's results begin to reflect the impact of the new management strategies in terms of product allocation, pricing, and updated SOPs, impacting the cost of cultivation, harvesting, and production. We continue to identify key opportunities for automation within our facilities, which will further enhance our ability to produce more at a lower all-in cost per gram. I'd now like to focus on some of the milestones and accomplishments achieved throughout the quarter. Both Cookies and our in-house brand, NLVO, were recognized as the top two selling flour brands in the state, according to BDS Analytics. In addition to holding the top two flour brands in Nevada, we are also the leading producer of distillate and all bulk and white label flour sales in the state. with our bulk and white label sales representing more volume than any of the leading brands, including Cookies and NLVO. We are also encouraged by the launch and growth potential of 22 Red, Lift Tickets, Heavy Hitters, and the continued success of Old Pal and Kiva. As the cannabis brand landscape continues to evolve, we look forward to partnering with more cannabis brands with purpose, such as our new partnership with Miss Grass. a female-founded, community-driven cannabis brand. Through this partnership, we will become the exclusive brand partner for Miss Grass in the state of Nevada, bringing various cannabis products to the state, including Miss Grass Minis, Miss Grass Flower, and Miss Grass To-Go's. Miss Grass houses an innovative platform focusing on cannabis education, culture, and science. Their passion for sharing cannabis is authentic, and their ability to connect with new consumers is a critical part of the consumer's discovery process. Another female-founded brand partnership we are proud to announce is with Altwell, co-founded by CPG and wellness titan Nikki Brown. Altwell was founded by the Pickett family, and the company leverages its sports nutrition and in-house R&D team to create best-in-class Altwell CBD and now low-dose THC products. This strategic partnership with Altwell will expand Flower One's diverse range of products with additional edibles and beverages. Additionally, Nikki will be joining Flower One as our first advisory board member. Her experience and network within the wellness and CPG industries is unmatched, and we are thrilled to add her to our advisory board. Nikki's involvement will enhance Flower One's capabilities in the edible and beverage space. enabling us to launch in-house edible and beverage brands and products in the future, as well as leverage her experience in large corporate M&A transactions. Flower One is proud to work with several of the most powerful brands in cannabis and will continue to select best-in-class companies to partner with that best align with our strategy. We work with companies that have significant brand recognition and are often top sellers, which enables them to drive strong margins, in part due to their intellectual property and or proprietary cultivation, production, and manufacturing methods. Flower One's collaborative approach towards working with brands has added tremendous value to our organization across multiple departments. One example of this is our partnership with Cookies, a globally recognized cannabis brand known throughout the cannabis market for producing some of the highest quality and most diverse cannabis cultivars in the world. We have had a partnership with cookies since November of 2019 and quickly helped catapult them to the top flower brand in the state. We are excited to further expand our partnership with the launch of the second cookie store in Las Vegas later this year. We believe that strong brand partnerships will continue to be integral to Flower One's success and the future of cannabis. In sum, we had the best quarter in the history of the company. and I am proud of how the team has worked together to drive significant improvements to the business and position Flower One for stronger and sustainable growth ahead. I will now hand it over to Richard to discuss the financial results in detail, after which I'll have some closing remarks.
spk02: Thank you, Kellen, and good morning, everyone. I look forward to sharing Flower One's many improvements and accomplishments thus far. With that, I'll speak to our results for the second quarter. As a reminder, all figures discussed today are in US dollars unless noted otherwise. With new board and management in place, the company was able to successfully restructure a significant amount of its debt, stabilize operating expenses, and achieve two consecutive quarters of record revenue. As a reminder, the new management didn't assume full control until the end of January 2021. Thus, we believe we have not yet seen the full benefit of our new strategies in terms of yield or cost. The quarter was also characterized by a number of one-time events of both the cash and non-cash nature, which I will explain in more detail later in the call. As Kellen noted, we reported another record revenue quarter at Flower One with 18.3 million, surpassing our preliminary guidance of 16 to 18 million. This represents a 32 percent increase over the previous record quarter from our Q1 2021 revenues. Comparing Q2 2021 to Q2 2020, we saw a sequential increase of 373 percent or 14.4 million in revenues, reflecting increased volume from both of our facilities. The increases were due in large part to our ability to produce more and higher quality products and better product allocation amongst our branded and private label products. As a result, we sold more grams of product at a higher average price per gram in Q2 versus Q1 and versus the same quarter last year. Cost of goods sold for the second quarter was $11.1 million, 45 percent higher than Q1 of 2021, and an increase from $9.2 million for the second quarter of 2020. These increases were driven principally by the higher revenues as well as seasonally higher utility costs, increased costs to some of our supplies and packaging resulting from COVID-19 supply chain issues, and increased labor costs resulting from the recent hiring competition within Las Vegas. Like many businesses, we have been impacted by the effects of COVID-19 on our economy, not in terms of demand for our products, but in terms of labor and supply costs. The cash component of cost of goods sold increased from 43 percent in the first quarter of 2021 to 46 percent in the second quarter, also reflecting these issues. Moving to gross profit, Q2 gross profit was $6.2 million compared to $500,000 in the same quarter last year. However, this was down compared with the $11.3 million we reported in Q1 of 2021. Cost of goods sold and also gross profit both include various non-cash charges related to changes in fair value adjustments of biological assets in inventory, both of which are affected by quarter-to-quarter variances in cultivation and harvesting times and yields. Our gross profit prior to these fair value adjustments was $7.2 million in the quarter, up from $1.8 million in Q2 of 2020 and $6.2 million in the first quarter of this year. These improvements reflected the company's improving yields and selling prices, and other than as already noted with regard to labor, utilities, and supplies, reduced costs of cultivation, harvesting, drying, and production. We reported general administrative expenses of $7.7 million during the second quarter of 2021, compared with $5.1 million during the same period of the prior year, and $7.5 million during the first quarter of this year. The increase in G&A was mainly due to the fact that we were operating at full capacity and generating significantly higher revenues, which resulted in significantly higher cannabis taxes and selling costs, also due to higher insurance costs, higher rent and security costs, and more than $500,000 of additional audit and tax-related expenses in the quarter all of which were required to expense in the quarter versus accruing throughout the year. It's important to note the G&A expenses in the second quarter were essentially unchanged from the first quarter, even though revenues grew significantly. We anticipate this trend to continue. Other expenses in the quarter included non-recurring and mostly non-cash expenses related to the debt and lease restructures, totaling $14 million, and the write-downs of assets disposed of by the company that were purchased by prior management and no longer utilized by the company totaling $7 million. The EBITDA loss in the second quarter of 2021 was $12.5 million to pair with a loss of $21.3 million in the same period of the prior year and a loss of $11.3 million in the first quarter of this year. The second quarter EBITDA loss included the non-recurring costs I just discussed. On an adjusted EBITDA basis, the company reported a loss of under $600,000 in the second quarter of 2021 compared to an adjusted EBITDA loss of $1.8 million in the second quarter of last year and an adjusted EBITDA loss of $1.9 million in the first quarter of this year. As I've already mentioned, operating expenses in the second quarter of this year included more than $500,000 of expenses related to the audit and tax filings. Those expenses will not repeat until next year. The year-over-year improvement versus Q1 and versus last year were due to a higher revenue and a corporate culture based on doing more with less. The net loss for the quarter was $15.2 million compared with a net loss of $21.3 million in the second quarter of last year and a net loss of $11.3 million in the first quarter of this year. including the one-time cash and non-cash items in both periods, the net loss would have been $552,000 in Q2 of this year and $1.9 million in Q1 of this year. As of June 30th, 2021, we had cash and cash equivalents of $2.2 million compared with $1.1 million as of December 31st, 2020. We've been working diligently to reduce our debt and improve the capital structure of the company. During the first half of the year, we raised a net amount of $16 million from financings, repaid $2.3 million in financing principal, and converted more than $6 million of debt to equity. Also, in April, we consummated the restructure process of our convertible debentures, which reduced that debt from approximately $40.7 million to $16.3 million. The debt restructuring allowed FlowerOne to right-size its capital structure by reducing the debt service burdens on our business and, of course, improving cash flow. With this stronger platform and more efficient production capabilities, we expect to continue to drive improved top-line and bottom-line results in the second half of the year. I'm now going to turn the call back to Kellen for closing remarks.
spk04: Thanks, Richard. And now I'd like to take a moment to thank the entire FlowerOne team. as these record-breaking results required tremendous dedication and commitment from every level of the organization. We have built a culture around our team's shared mission to share cannabis with the world. We believe that everyone should have access to quality cannabis at an approachable price and know that our greenhouse provides us with a distinct competitive advantage in filling that void. We are excited to continue to grow and lead the industry as the top producer in Nevada and one of the top yielding producers in North America. In closing, we are extremely proud of the progress we have made, while recognizing we still have a tremendous amount of work left to do. This concludes our prepared remarks. We would like to thank everybody for their time, for listening in to today's call, and would now like to open the line for questions.
spk00: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Scott Fortune with Roth Capital Partners. Please proceed with your question.
spk01: Good morning and congratulations on the quarter. Just really quick, you're fully operational now. Can you provide color or kind of step through on continuing operations and efficiencies to continue to improve the yields and how much more room can you step through to really optimize your facilities there going forward here?
spk04: Yes, absolutely. Thank you, Scott. You know, we are constantly looking to for ways to automate our facility and make improvements that allow us to gain efficiencies throughout the facility. We are also still working to finalize our new dry and cure plans that will allow us to free up additional flowering space within the facility. So we have a number of improvements that we have scheduled and will continue to make that will allow us to process more cannabis and therefore work and focus on improving our yields given that we will have improved the processing capacity that will allow us to bring that cannabis to market.
spk01: I appreciate that, Collar. And then just looking at big picture in Nevada, as far as supply coming on board, we're seeing some indoor grow capacity expanding. But what is your sense of the overall cultivation capacity supply in the state from a pricing perspective as we look out? And put in reference of the new stores that are being licensed in the state needing supply as far as market share opportunity for Flower One in Nevada. And then how many stores are you currently serving within Nevada and the opportunity to continue to expand that into these new stores?
spk04: Absolutely. Well, the good news is that our demand in Nevada currently far exceeds the supply for the market, even with the existing footprint. As Nevada is now continuously or constantly licensing new stores, as well as getting ready to welcome consumption lounges, we believe that the demand will far outpace the supply for several years to come in the market. We have been able to raise prices consistently above and beyond the price increases that are taking place market-wide. But again, the fact of the matter is that as more and more retail locations come online, there continues to be a shortage of supply amongst the major retailers. And as an organization, we have a number of standing orders and commitments that we are unable to fill due to so we are constantly working to improve our capacity and process more cannabis to meet that demand.
spk01: Okay, I appreciate that. And last thing for me, just kind of color on, you know, the return of tourism there, obviously, in Las Vegas, kind of what we're seeing in third quarter. And then can you share, you know, cookies on the strip, had an opening there, but kind of the cookies sell through as you see it, kind of providing a little bit of color of where you are from the third quarter standpoint with tourism returning ahead of potentially COVID-19. Are there additional issues with COVID going forward here? Just a little bit of color on the third quarter if you can.
spk04: Sure. Tourism in Nevada has been incredibly strong, even beyond and above what was expected considering the situation with COVID. Nevada hotels are back to what we believe are almost pre-COVID capacity levels. We've seen, again, that impact on demand throughout the market. So we feel that we're very excited about the momentum continuing into the third quarter and beyond and believe that the Las Vegas market will be thriving for quite some time to come.
spk01: Appreciate it. Thanks. I'll jump back in the queue.
spk04: Thank you, Scott.
spk00: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. It appears there are no further questions. At this time, I'd like to turn the call back over to Kellen O'Keefe for closing comments.
spk04: Thank you. To conclude, the quarter's results demonstrate that the steps taken to turn around the business are working, and we are very pleased with the progress we have made to date. Flower One is the largest producer of cannabis in Nevada, and we are focused on positioning the business for long-term success. Thank you again for taking the time to listen in on today's call, and I look forward to updating you again next quarter.
spk00: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
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