Flower One Holdings Inc

Greetings. Welcome to the Flower One Holdings Incorporated Full Year 2021 Earnings Call. At this time, all participants are in a 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. Please note this conference is being recorded. I will now turn the conference over to Phil Carlson, Head of Investor Relations, for KCSA. Thank you. You may begin.

Good morning, everyone, and welcome to Flower One's 2021 Financial Results Earnings Conference Call. With me on the call today are Kellan O'Keefe, Flower One's President and Chief Executive Officer, Roxy Grant, Flower One's Chief Financial Officer, and Selty Boyajian, Flower One's Executive Vice President and Board Chairman. 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. They 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 statement 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. All figures discussed today are in U.S. dollars unless otherwise noted. Now I'd like to turn the call over to Kellen. Kellen, please go ahead.

Thank you, Phil, and welcome everyone. I've been looking forward to the opportunity to share last year's results, as well as updates on our business, our facilities, and our ongoing restructuring efforts. On behalf of the entire Flower One team, we want to extend our gratitude and appreciation to every single one of our shareholders for your patience and commitment to Flower One throughout a challenging year. 2021 was a year filled with both highs and lows for our business and communities as the world began to recover from the pandemic and its many unforeseen consequences. In our first year since the beginning of the restructuring, we achieved record annual revenues of 58.4 million, including record weekly sales above 1.8 million during our record-setting second quarter. Nevada was beginning to bounce back quite strong as we headed into the summer, when annualized retail cannabis sales in Nevada surpassed $1 billion as monthly visitors began to approach pre-pandemic levels. Unfortunately, the pandemic was not over, and Nevada was hit particularly hard by multiple COVID variants, travel restrictions, and limitations on conferences, corporate, and international travel. With annual tourism down over 30% from pre-COVID levels, Nevada's cannabis sales struggled during the second half of 2021, ending the year with five consecutive months of top-line revenue decline directly correlated to the decline in visitors to the state. To make matters worse, we were simultaneously hit with critical systems failures inside our facility, as well as additional market competition and pricing pressure, driven by the reduced demand as a result of the decline in visitors. As the largest producer of cannabis in Nevada, we were significantly impacted by several unfortunate events, many of which were outside of our control. During these times, it was critical that we remained focused, and I am incredibly proud of the entire team at Flower One that did just that. Our team worked tirelessly to drive our business forward and position the company for long-term success despite facing numerous headwinds. As a team, we are grateful for these experiences and the numerous obstacles we have overcome as they have strengthened our team, our capabilities, and our resolve. Despite 2021 being a challenging year for the entire cannabis industry and Nevada in particular, we were still able to deliver year-over-year revenue growth of 70%, with significant gross margin expansion. In addition to our revenue growth, our gross profit also increased 153% year-over-year, representing a 37% margin for 2021, a significant improvement from the negative gross profit margin from the year prior. The majority of these gains were driven by vast improvements to the quality of our products, resulting in higher wholesale selling prices. With that being said, I cannot emphasize enough how imperative it is that we are able to produce quality products on a consistent basis all year round, regardless of seasonal challenges. After our record-breaking Q2, we experienced a difficult summer season highlighted by many challenges directly related to the need for capital improvements in key areas of the greenhouse. Specifically, our water systems, cutting cells, dry and cure rooms, and the lack of dedicated mother space. Upon receipt of funds from a private placement in the third quarter, we began to implement improvements and introduce automation to the facility. This first phase and following phases of capital improvements will further improve the quality and consistency of our product and ultimately allow us to increase capacity and overall production. We have made significant progress to date and remain highly focused on completing the first phase of improvements as quickly as possible. Throughout the year, we continued to build partnerships with industry-leading brands and retailers. to assure that our brand and product portfolios remain relevant and competitive. Throughout the year, we saw many of our brand partners reach top sales recognition in their respective categories, most notably Cookies and our in-house brand, NLVO, as they were repeatedly two of the top-performing flour brands in the state. Over the course of the year, we launched two new brand partnerships, one with the female-founded brand, Miss Grasp, and two, an exclusive launch of Justin Bieber's Palms, Peaches pre-rolls, based on the hit song of the same name. Our success as a brand fulfillment partner relies on our ability to replicate the quality, consistency, and scale of our partner's California operations. Given the many challenges associated with creating supply chains, including an agricultural crop grown in a different environment, cannabis licensing is often more difficult, and requires far more time, resources, and direct hands-on training and implementation on behalf of the licensee. For this reason, we have focused our efforts on the partners willing to invest in our mutual success. In many cases, our brand partners are category leaders with proprietary IP and production methods that require a hands-on approach to their implementation and onboarding. to ensure that we are able to replicate the quality, consistency, and scale required to achieve our mutual objectives in Nevada. Over the past year, we have been working hand in hand with several of our brand partners to improve multiple aspects of our production, ranging from cultivation, to extraction, to vape filling, pre-roll production, and edible manufacturing. We are very fortunate to have the relationship capital, patience, and support from our brand partners as we work together to dial in our production capabilities. Now, I would like to take a moment to shift from our operations to our ongoing restructuring efforts. More specifically, several of the steps taken over the last year to right-size our balance sheet and position FlowerOne for long-term success. At the beginning of 2021, we began our comprehensive restructuring, which updated our board of directors, appointing Salpi Boyajian to executive vice president and chairman of the board, and myself as a director, president, and CEO, as well as two new independent directors, Eliza Gerard and Mitch Kahn. We successfully closed a round of convertible to venture financing over three tranches, between January and March of 2021, raising approximately 19 million. We also successfully restructured our March and November of 2019 convertible debentures, which reduced those debts from approximately 41.2 million to 16.7 million. We further reduced our debt through a debt-to-equity conversion of our short-term financing of 5.9 million. which reduced our debt service obligations and lowered our overall cost of capital. We also successfully modified our senior secured debt through multiple modifications with our lending group, resulting in considerable savings for the company. And finally, we hired Aroxi Grant as our new chief financial officer. Aroxi has been an excellent addition to the FlowerOne executive team, bringing enhanced financial and accounting processes systems, and procedures to the organization. Collectively, these actions have all contributed to rightsizing the company's capital structure, reducing debt service obligations, and positioning the company for future success. Considering where we are in 2022, we have a number of subsequent events that have taken place this year that I would like to touch on. At the beginning of the year, we announced the closing of a $10.1 million financing, along with a successful modification to our term debt, further advancing our ongoing debt restructuring and providing working capital to the company. Earlier this month, we announced the receipt of a $5 million loan from our term lender, which will go towards completing the first phase and future phases of capital expenditures required for the greenhouse. We also recently announced the launch of Kuno, our in-house veteran-created and inspired brand. Kuno will provide products to veterans at a discounted price while also donating a portion of sales to veteran-focused charity organizations. And as the most recent update, yesterday we also announced the hiring of Tim Shoemake as our new Chief Operating Officer. Tim brings over 25 years of experience in global agriculture and food and beverage manufacturing for some of the world's largest brands and retailers. We are very excited to have Tim on board as he brings a unique combination of experience both inside and outside of cannabis to the table. Tim's expertise in large-scale, highly competitive perishable goods manufacturing makes him a valuable asset to Flower One. Overall, we delivered strong year-over-year revenue growth with gross margin expansion. Upgrades to our facility are underway, and we are seeing an overall increase in quality and efficiency, which improves our position in a more competitive market. The competitive advantage of a high-tech greenhouse is the ability to continue to increase quality while significantly reducing our cost of production. By utilizing the power of the sun and considerable economies of scale, our facility can produce premium quality product at a fraction of the cost of indoor producers. Flower One continues to be the largest supplier of cannabis in the state of Nevada, and we remain determined on making the necessary improvements to our facility and operations to defend our position. While we are proud of the progress we have made to date, 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 achieve positive cash flow and position us for sustainable growth. With that, I would now like to turn the call over to our CFO, Aroxi Grant.