Flower One Holdings Inc

Q3 2021 Earnings Conference Call

11/30/2021

spk03: Greetings and welcome to Flower One Holdings third quarter 2021 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer 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, Mr. Phil Carlson. Thank you. You may begin.
spk04: Good morning, everyone, and welcome to Flower One's third quarter 2021 financial results conference call. With me today are Kellen O'Keefe, Flower One's president and CEO, and Aroxi Grant, Flower One's chief financial officer. 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.
spk06: Thank you, Phil, and welcome everyone to Flower One's third quarter 2021 conference call. I am delighted to host today's earnings call and share an update with you on our business. Please note all figures discussed today are in U.S. dollars and less noted otherwise. Before I start my discussion on the quarter's results, I want to take a moment to introduce Aroxi Grant, our new Chief Financial Officer. Aroxi is a distinguished financial executive with experience spanning over diverse industries, including professional sports, gaming, entertainment, and nonprofits. Most recently, Aroxi was the vice president controller for the Las Vegas Raiders football team, the chief financial officer to the Arena Football League, and previously a key financial executive at Las Vegas Sands Corporation, where she spent seven years building the company's finance department. We are very grateful to have Aroxi join our team and bring her extensive knowledge and experience to Flower One. Now I would like to discuss our third quarter's results and some updates on Flower One and the Nevada market. Throughout the second half of the year, Nevada experienced a market softening in statewide price compression that saw higher THC products selling at lower prices. Nevada tourism has also decreased due to COVID-19 and the limited number of conventions taking place that normally drive midweek traffic to the state. With that being said, we learned throughout the pandemic that the local market in Nevada was much stronger than originally estimated. Nevada is also preparing for licensed on-site consumption with lounges expected to open in the summer of 2022. Flower One remains the largest supplier of cannabis in the state of Nevada, and we are heavily focused on making the necessary improvements to our facility to defend our position. We reported Q3 revenue of $14.1 million, reflecting 18% year-over-year quarterly revenue growth. Following the completion of the second quarter, the company entered its most difficult season summer and faced many challenges directly related to its need for capital improvements in several key areas of the facility. As we have indicated since the restructuring, several aspects of the facility have required necessary improvements. In particular, our water systems, cutting cells, and dry cure and mother rooms. The greenhouse experienced challenges during the summer months directly related to each of those critical improvements. resulting in the loss or reduction in both the quality and volume of our flour production over the third quarter. Unfortunately, these production issues resulted in a significant loss of potential revenue and margin, reinforcing the critical nature of addressing these issues as quickly as possible. A number of these capital improvements are necessary to assure that the company is able to produce at the quality and consistency levels required to achieve our objectives. All of these improvements will bring the greenhouse closer to optimization and ultimately full capacity. To begin to address these concerns, In September, we announced the closing of an above-market priced non-brokered private placement, raising aggregate gross proceeds of $5 million. With the closing, we immediately began to implement improvements and introduce automation, all with the goals of increasing productivity and profitability. First, we were able to make several improvements to our cutting sales. introducing new state-of-the-art lighting and improved airflow, both resulting in immediately recognizable quality and yield improvements in the plant's early stages. Next, we began upgrading our water systems. Upgrading these systems will allow us to improve the quality of the water we feed our plants, as well as reduce our overall water usage, driving both production and quality increases, cost savings, and perhaps most importantly, environmental and sustainability benefits to the planet. Next, we began developing our new dry and cure rooms. Through improvements to the dry and cure, we will have the ability to better preserve the quality and potency of our cannabis and increase post-harvest capacity, therefore increasing total capacity of the facility. Lastly, we are reallocating new space for our mother rooms. This will serve to significantly improve the quality of our cuttings and help with the repopulating of the facility much faster and with healthier plants. This first phase and following phases of capital improvements will allow us to increase capacity and production and will further improve the quality and consistency of our product. The first phase of improvements are expected to be completed in early 2022. and will directly impact the company's operational performance and profitability upon completion, positioning us for a successful 2022 and beyond. Further, we continue to identify key opportunities to increase automation within our facilities, which will further enhance our ability to produce more at a lower cost. For example, we have implemented equipment to significantly increase our pre-roll production. Our new pre-roll system is applicable for most of our current SKUs in the category and can create upwards of 80,000 pre-rolls a week, both infused and non-infused. Turning to some of our more recent product and partnership highlights. FlowerOne has continued to build partnerships with industry-leading brands and retailers, increasing our distribution and sales network by leveraging the many formats FlowerOne produces. from our bulk and wholesale offerings to prepackaged products. We continue to partner with innovative industry leaders to assure that Flower One's brand portfolio remains relevant and competitive. To speak to a few. In July, we announced an exclusive brand partnership with Miss Grass, a female-focused and founded brand that serves as an innovative platform focused on cannabis education, culture, and science. In August, we announced a strategic brand partnership with Altwell, a leading California health and wellness cannabinoid-based brand founded by the Ticket family. In addition, we announced the appointment of Altwell's co-founder, Nikki Brown, to our advisory board. Nikki Brown is the first member of the company's advisory board, bringing her CPG and wellness industry experience to flower one. Additionally, subsequent to quarter end, Flower One and Mammoth Brands launched heavy hitters in Nevada, exclusively bringing California's top-selling vape products to the state, as well as announcing our partnership with Justin Bieber and current brand partner, Palms, to launch the limited edition Peaches pre-rolls, which can be found at leading dispensaries such as Planet 13, MedMen, and Cookies. Flower One is the exclusive producer of palms and the peaches line in the state of Nevada. Before I hand the call over to Aroxi, I want to reiterate that while we are proud of the progress we have made, we recognize we still have a tremendous amount of work left to do. We are eager for our facility improvements to be completed and remain focused on the financial discipline and operational excellence required to meet or exceed projections achieve positive cash flow, and position us for sustainable growth. I would now like to introduce you to our new CFO, Aroxi Grant. In a very short period of time, Aroxi has been able to bring aboard a talented new finance team that has improved our financial processes and procedures, better positioning the company for long-term success. We would like to thank Aroxi and her team for preparing these statements and results. I would now like to turn the call over to Aroxi to present our financial results for the quarter.
spk00: Thank you, Kellen, and good morning, everyone. I would like to express that although I have only been with the company for a little over a month, I am pleased with the improvements we have implemented in such a short period of time. We appreciate your patience and can assure you that we are taking all the necessary steps to achieve our company's goals. Now I would like to share our results for the third quarter. As a reminder, all figures discussed today are in U.S. dollars unless noted otherwise. Please note that the following contains certain adjustments to the third quarter numbers to properly reflect the year-to-date figures. As Kellen mentioned, we have reported year-over-year quarterly revenue growth of 18% for the third quarter 2021 with revenue at $14.1 million versus our third quarter 2020 revenues at $11.9 million. As a result of the adjustments, The reported cost of sales for the third quarter 2021 was $14.8 million. Cost of sales for the nine-month period ending September 2021 was $33.5 million, resulting in a gross margin of 27%. Our cost of sales is primarily impacted by increased sales volume in the third quarter, the impacts of seasonally higher utility costs, and COVID-19-related supply pricing increases and labor shortages. resulting from hiring competition within Las Vegas. As a result of the adjustments, growth loss for the three-month period ending September 2021 was 2.3 million compared to a loss of 10.4 million in the same period of the prior year. For the nine-month period ending September 2021, our gross profit was $15.2 million compared to a gross loss of $14.6 million in the nine-month period ending September 2020. Cost of goods sold and gross profit both include various non-cash charges related to changes and fair value adjustments of biological assets and inventory, both of which reflect year-to-date variances in cultivation, harvesting times, and yields. As a result of the adjustments, we reported general and administrative expenses of 5 million during the third quarter of 2021. For the nine-month period ending September 2021, GNA expenses were 20.2 million versus 17.6 million for the nine-month period ending September 2020. The increase in GNA expenses is mainly due to the ongoing restructuring its associated costs and other considerations, the ongoing capital improvements to the facility, and increased cannabis taxes and selling costs. Moving to EBITDA, EBITDA was reported at a net loss of $4 million in the nine-month period ending September 2021, compared with a net loss of $24.7 million in the same period of the prior year. Now moving to our balance sheet. As indicated, our quarterly results are still being affected by the ongoing restructuring and its associated fees and legacy costs. As of September 30, 2021, we had cash and cash equivalents of $4.9 million, compared with $2.2 million as of June 30, 2021, and $1.1 million as of December 31, 2020. To conclude my portion of the call, I would like to note that moving forward, we will continue to improve our balance sheet through the implementation of an enhanced level of best practices and financial discipline. My team is extremely focused on our mission to achieve positive cash flow as quickly as possible, and we will continue to explore all options with regards to decreasing the company's cost of capital and operating expenses. I am excited for the future of Flower One and look forward to discussing our next quarter with you all. I am now going to turn the call back to Kellen for his closing remarks.
spk06: Thanks, Araxi. In closing, I am very proud of the Flower One team and what we have achieved so far in 2021. I would also like to thank our shareholders for your patience and your support while we continue to work through many of the legacy issues associated with the restructuring. We remain highly focused on our goal to create value for shareholders and achieve sustainable growth. This concludes our prepared remarks. We would like to thank everyone for joining us on today's call, and we would now like to open the line for questions. Operator, please open the line for questions.
spk03: 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 key.
spk02: One moment, please, while we poll for questions. Our first question comes from Bobby Burleson with Canaccord Genuity.
spk03: Please proceed with your question.
spk07: Yeah, good morning. So just curious with the capital improvements and some of the issues you guys had in Q3, what's the cash runway as we look out a few quarters from now? How well capitalized are you guys to execute?
spk05: Thank you, Bobby. As we indicated when we moved forward with the private placement, that we would be breaking the CapEx project up into phases to allow us to strategically manage our cash flow while we identify the best possible financing solutions, you know, between both debt and equity to solve for all of the improvements we need to make in the facility. We have already started and begun these improvements in the first phase and expect the first phase to be completed, again, in early 2022. We have a number of other improvements to the facility that we would like to make, but we will have to time out based on our available cash flow and cash position. So, again, hopefully that answers your question, but we're taking a very thoughtful and strategic approach to phasing out the improvements so that we can make them with the available cash and on a more conservative basis moving forward.
spk07: Great. And then just on the... demand environment in Nevada. I understand you guys and others have pivoted more to local customers, but curious what the current COVID outlook is, what you're hearing, what you're seeing as it relates to this recent resurgence in COVID. Any other thoughts COVID-related to Nevada? Thanks.
spk05: Sure, thank you, Bobby. As I mentioned on the call, one of the biggest impacts we're seeing from COVID or the remnants of COVID are the impacts on conventions and midweek traffic to the city. The weekend traffic from tourists has been very steady and healthy throughout the pandemic, but because of the limitations and or hesitance for corporations to return to large events, and some of the limitations still being placed on such, we have seen a slower return midweek than we would like to see. So I think for those reasons, we are keeping a very close eye on any COVID variants and the impacts that they might have on tourism moving forward. To your point, the local market in Nevada has been extremely strong. As I mentioned before, Total sales number for the state of Nevada actually went up year over year from 2020 to 2019 throughout the COVID pandemic. So very strong evidence that the local market here is quite strong and will continue to grow. But we, again, recognize the importance of tourism on the overall market and are keeping a close eye on the variants and how we expect them to impact tourism moving forward.
spk02: Great, thank you.
spk03: 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. Our next question comes from Scott Fortune with Roth Capital Markets. Please proceed with your question.
spk01: Hey, good morning. This is Nick stepping in for Scott. Just a question on the pricing side. You mentioned seeing some pressure in Nevada. I was just wondering if you're seeing similar pressure on the 2.0 product side and how that's held up during the same period here. Thanks.
spk05: Sure. Yes. You know, typically with price compression in the markets, we see an impact on biomass or lower quality or testing material first with, you know, product that has higher quality or higher potency preserving and holding its price much stronger. That resulting impact in biomass does have or tends to bleed into 2.0 products, such as vapes and edibles that utilize distillate and biomass as an ingredient. So we have seen that price compression consistent across all products throughout the market. Again, emphasizing the importance for us on assuring that we are able to deliver the quality and consistency that we need to hit our specifications and deliver a product, again, at the potency and purity and quality level required to meet our selling price goals.
spk01: Okay, great. I appreciate that, Collar. And then? Just looking for some additional color on the gross margin side. There are some seasonal increases in there, but can you dimensionalize the other mentioned components, working through higher-cost inventory, COVID-related pricing increases, and some labor shortages there? And where do you expect the majority of the near-term improvement to come from? Thanks.
spk00: Hi, this is Rassi. So as far as on our cost of sales for the current quarter, as mentioned, our numbers were – they were made subject to a series of adjustments in order to get our year-to-date numbers more in line with what the actual is. So reporting in at a gross margin of 27%. We expect to improve on that via our automation we're implementing, all of our increased policy and procedures, financial discipline, taking a really hard look at what we're spending, few rationalizations. So, from a number of areas, we will look to definitely lower our costs more than we're even seeing here as reported.
spk02: Okay, great. That's it for me. I'll jump back in the queue. We've reached the end of the question and answer session. I'd now like to turn the call back over to Kellen O'Keefe for closing comments.
spk05: Thank you very much, everyone, for your time today. This concludes our call. We appreciate you taking the time to join us. And as always, we welcome you to come see us in Las Vegas if you get the opportunity. Thank you very much. Appreciate you all.
spk03: This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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