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.
spk05: 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.
spk01: 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.
spk02: 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.
spk03: Thank you, Kellen, and good morning, everyone. We appreciate your patience as we worked with our auditors in preparation for the 2021 filing. Today, I am pleased to share our results for the year-ended 2021. We reported total revenue for 2021 of $58.4 million, an increase of 70% over 2020. This improvement was driven by increased production and sales volume and was due in large part to our ability to produce higher quality products as well as a more efficient product allocation strategy. Cost of sales for 2021 was $33.5 million compared to $25 million for 2020, an increase of 34%. As a result of the company's cost-saving initiatives, the increase in cost of sales was significantly less than the increase in revenue. Payroll expense as a percentage of revenue was 18% in 2021 compared to 34% in 2020, a decrease of 16%. Lab testing expense as a percentage of revenue was 7% in 2021 compared to 10% in 2020, a decrease of 3%. Pathogen cost as a percentage of revenue was 6% in 2021 compared to 8% in 2020. a decrease of 2%. These incremental improvements would be even more substantial if not for the fact that supply chain costs increased considerably over the past year as a result of the COVID-19 pandemic and related consequences. Gross profit for the full year 2021 was $21.4 million as compared to a gross loss of $40.3 million in 2020. 2021's gross margin before the impact of biological assets was 43%, up from 27% in 2020. This increase was a direct result of the improved product quality and premium brand partnerships, resulting in higher average selling prices and enhanced profitability. Although we are pleased with the margin improvement we saw for the full year, we are committed to even further expanding margins. This will be driven by operating efficiency, automation, skew rationalization, and additional improvements to the quality of our products, resulting in higher selling prices. We reported general and administrative expenses of $29 million in 2021 compared to $25.3 million in 2020. This was largely attributable to an increase of $3.9 million in cannabis taxes and selling costs. driven by both increased sales volume in addition to further increases in the state of Nevada's wholesale cannabis tax. These increases were partially offset by decreases in insurance, rent, and security, which were a result of the company's cost-saving initiatives in these areas. We reported a net loss of $24.4 million in 2021 as compared to a net loss of $117 million in 2020, representing a 79% decrease. The decrease in net loss is primarily attributable to a decrease in required write downs and impairments in 2021 versus 2020, including one, a year over year decrease of 18.6 million on the write down of cannabis and oil based cannabis inventory. Secondly, a non-recurring impairment of $27.2 million for property, plants, and equipment recognized in 2020. And third, a non-recurring write-down of $12.6 million for intangible assets and goodwill, also recognized in 2020. Now, moving on to our balance sheet. Our balance sheet continues to improve, but is still being affected by the ongoing restructuring and its associated fees and legacy costs. As of December 31st, 2021, the company had cash and cash equivalents of 0.9 million compared with 1.1 million as of December 31st, 2020. Our current versus non-current liabilities decreased by 49.9 million year over year, while our overall liability balance also decreased by 25.1 million. To conclude today's call, we are working to continue to improve our balance sheet through the implementation of an enhanced level of best practices and financial discipline. We are extremely focused on our mission to achieve positive cash flow as quickly as possible and will continue to explore all options with regards to decreasing the company's cost of capital and operating expenses. Before we turn the call to the operator for any questions, Selphie Boyajian, our Executive Vice President and Board Chairman, will provide our closing remarks.
spk04: Thank you, Adoxie. Hello, everybody. Thank you for your patience and support and for joining today's year-end call. To conclude today's call, I would like to state that our mission to share cannabis with the world has never been more important than it is today. We know that cannabis has the ability to make the world a better place through the many ways it adds value to our lives, ranging from physical and mental health to our communities and to our economy. As time goes on, we learn more and more about the extraordinary ways cannabis can and will continue to improve our lives and overall well-being. Our mission and vision combined with our commitment to providing quality cannabis at an affordable price is behind everything we do as a company. We are confident that a customer-centric approach supported by the long-term fundamental strengths of our business will prevail over time. This concludes our prepared remarks. We would like to thank everyone for joining us on today's call and would now like to open the line for questions. Operator, please open the line for questions.
spk05: Thank you. If you would 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 would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Scott Fortune with Roth Capital Partners. Please proceed.
spk00: Yeah, good morning and thank you for the questions. You've done a lot of work, really progressing forward here, but just a little bit more color if you can provide. on the timing of kind of the corporate restructuring here, the addition of the execs that you've mentioned on the cultivation side, but really providing an update on the facility improvements and automation that you've looked to put in place in completing that phase one of the enhancement and optimization of the facility. And with that said, kind of focus on the delivering of quality and consistency of THC potency products there. Where are you at as far as producing high-quality, higher-priced flour? Can you provide a little more color on the execution of that, increasing that and the percentage of your high-quality flour that's really coming out of that facility now? Please kind of talk about those improvements and completion of those. That'd be great.
spk02: Sure. Thank you, Scott. You know, I'll start with, first and foremost, We are producing higher quality product out of our facility today than we ever have in the company's history. So I'm very proud of the team and the work and the progress that have gone into the quality that we're producing from the facility today. With that being said, the critical improvements that I've mentioned throughout the call are very important to delivering the consistency that we need and to also reduce the impact of seasonality. So as I mentioned, you know, the water systems, our cutting cells, our dry and cure rooms, and dedicated mother space are all very critical improvements that we've started and are underway. We expect that all of them will be complete by next year at the beginning of the year. We do expect them to be completed at different times throughout the year, so we should continue to see incremental improvements as each of the systems comes online. Hopefully that better answers the questions. And if I didn't cover all of it, please let me know, Scott, because I think there might have been something else in there in the beginning.
spk00: No, that's helpful. Just kind of wanted to get a better sense of the timing of these improvements going forward here from that standpoint. And then just maybe a little bit color, providing that they, you know, obviously the Nevada market's been very difficult, overall pricing pressure. versus a lot of the Western states we saw pick up in March and April sales for them where Nevada continues to fall off. You mentioned tourism and visitor growth is still down 30% below 2019 levels. And can you just provide a little kind of outlook for conventions and tourism, kind of what you're seeing in the first half and potential second half here from From that, and then also coupled in with the supply and the competition pressure you're seeing, you know, not only from California brands, from other competitors and from the Indians, the things to kind of layer that in, that'd be great.
spk02: Sure. You know, as far as the return to pre-COVID level tourism, it's difficult to predict. We have seen some increase in the beginning of 2022, but nowhere near to pre-pandemic levels. When I was referring to 30%, I was referring to the 2021 number from last year. But again, we are still down considerably from pre-pandemic levels. And I believe that is directly correlated to the lack of both conferences and corporate travel, as well as international travel, which have both been slow to return as a result of the pandemic. So I do expect that those will continue to pick up throughout the year and should hopefully bring us back to pre-pandemic levels by the fall. But we have not seen, again, the tourism numbers where we would like to in the first part of this year. The impact that has on the cannabis market is substantial because the number of visitors is directly correlated to the number of available customers in the market. And due to the fact that the market has compressed, there is a significant or adequate supply that, again, puts pressure on pricing. So we are, again, still feeling that pricing pressure, which I believe is all the more reason why we need to focus on quality. Because oftentimes the pricing pressure hits lower quality or biomass supply and wholesale much harder than it does high quality or premium product. So again, the focus for us on delivering quality and consistency is key. And again, hopefully we will see things ramp back up as the summer, as we enter into the summer. And we also have some exciting things to look forward to, such as the launch of cannabis consumption lounges here in Nevada, which we're expecting to open here in the next month or two and should also add a considerable number of distribution points for us, you know, here in the market.
spk00: I appreciate that. And the last one for me, really housekeeping on the filing of 1Q22 results. You mentioned targeted before or on July 22nd. Is that contingent upon the number of accounting adjustments you need to kind of report to restate the first three quarters for 2021 here, basically getting that finished from a timing standpoint?
spk03: Yep, I'll take that one. Good morning, Scott. So yes, we will certainly be filing our quarter 1, 2022 financials by July 22nd. That will include adjustments at that point through quarter 1, 2021, and we anticipate having the remainder of the adjustments completed for our quarter 2, 2022 filing, which we do not anticipate to have to be delayed.
spk00: Perfect. I appreciate that. I will jump off, and thanks for all the cover.
spk03: Thank you so much.
spk05: As a reminder, this is our one on your telephone keypad if you would like to ask a question, and we will just pause for a brief moment to see if there's any final questions.
spk04: There are no more questions at this time, so this will conclude today's conference.
spk05: Thank you for your participation. Have a wonderful day.
Disclaimer