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spk06: Greetings and welcome to Flowerland Holdings Inc. Q122 Earnings Call. At this time, all participants are in 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 and zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Phil Carlson.
spk03: Good morning, everyone, and welcome to Flower One's first quarter 2022 financial results earnings conference call. With me today are Kellen O'Keefe, Flower One's president and chief executive officer, and Roxy 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 factors 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 US dollars unless otherwise noted. Now I'd like to turn the call over to Kellen.
spk04: Kellen, please go ahead. Thank you, Phil. And thank you everyone for joining us today for our first quarter 2022 conference call. I look forward to reviewing our Q1 results and financial and operational highlights, as well as discussing our most recent announcements related to our ongoing restructuring. After my portion of the call, Aroxi Grant, our Chief Financial Officer, will then discuss our financial results in greater detail prior to my closing remarks and Q&A. Before I comment on our Q1 results, I want to make it very clear that we are in no way satisfied with these results and recognize the significant market pressures we are facing. Nevada's cannabis market continues to be harshly affected by the ongoing impact of the pandemic and a thriving black market, which has resulted in price compression and decreased statewide cannabis sales. While tourism has continued to slowly rebound, visitor counts still remain far below pre-pandemic levels and 2022 expectations as a direct result of the reduction in conferences, corporate, and international travel. Nevada's first quarter 2022 retail cannabis sales decreased by over 21% as compared to first quarter 2021. The legal cannabis market faces substantial pressure from the black market as regulations, taxes, and restricted or limited distribution continues to unfairly punish legal operators and consumers alike. Under these circumstances, legal cannabis remains far more expensive and often more difficult to access for most consumers. As the largest producer of legal cannabis in Nevada, we continue to do everything in our power to lobby local, state, and federal regulators on the importance of federal legalization, fair taxation, and sustainable regulations. Now, I would like to speak about Flower One's first quarter 2022 results. Our first quarter of 2022 revenue was $8.9 million, representing approximately 10 to 15% of the state's wholesale cannabis market, in line with our position over the course of the previous year. Consistent with cannabis markets across the country, Nevada experienced a decline in the selling price of flour as supply outpaced demand as a result of the overall reduction in total market size. This decline was driven by multiple factors, including a reduction in total addressable market as a result of the reduction in total visitors to the state of Nevada. In addition to other outside variables, such as the black market and the potential impact of COVID-related stimulus on the economy. Due to the decline in the average selling price of flour, we have pivoted our production to more profitable SKUs. We have increased sales in vape edible, and pre-rolls 12% year over year with the intent of continuing to expand these categories significantly over 2022 as our production capabilities catch up with the demand in place for these products. FlowerOne has partnered with industry-leading brands such as Heavy Hitters in vape, Kiva in edibles, and Lift Tickets in pre-roll and are working closely with their teams to replicate the quality, consistency, and scale required to support their growth in Nevada. We saw significant growth from all of these brands in the first quarter and expect considerable growth throughout the rest of 2022 and beyond. The wholesale market in Nevada continues to be extremely challenging as the supply and demand remains out of balance with often too much flour for the number of licensed dispensaries and too many brands competing for shelf space. The key to surviving in a difficult pricing environment is our ability to remain the high quality, low cost producer. Over the first quarter, our cost of flour production decreased 35% year over year, while simultaneously producing the best quality flour in our company's history. We are extremely proud of the team's focus and discipline while successfully executing on the company's cost saving initiatives. FlowerOne's market and industry leading production costs will allow us to remain competitive and profitable as natural commoditization and increased competition enter the market. As we have emphasized in the past, Delivering quality and consistency at scale is our core value proposition and the foundation of our business. Our ability to remain the high-quality, low-cost producer requires the completion of several critical improvements to our facilities. These improvements will further enhance the quality and consistency of our product and ultimately allow us to maximize overall production. Our first phase of improvements are currently underway and are expected to be completed by the end of 2022. One of the improvements that I am most excited about is our new solventless division. We are in the process of building out our cold rooms and have introduced new equipment to bring a variety of premium solventless products to the market. Solventless products are among the fastest growing in several categories, including concentrates, vape pens, edibles, and pre-rolls. We look forward to launching solventless products later this year and believe the form factor will represent a large portion of cannabis-derived product sales in the future. Now, moving to our most recent updates related to our ongoing restructuring efforts. Subsequent to the first quarter, we announced significant progress with our ongoing restructuring through debt modifications and maturity extensions to our term debt and master equipment lease. The modifications in this most recent phase of our restructuring will strengthen our cash flow through reduced and deferred financial payment commitments, in turn allowing the company to preserve capital while we work towards completing our critical improvements to the facility. We are grateful for the support we have received from our term lenders and loan participants as we work towards achieving positive cash flow. One of the biggest obstacles our company faces in achieving positive cash flow is the state of Nevada's wholesale marijuana tax. We continue to plead with state agencies, regulators, and elected officials for support and any form of relief possible. We are hopeful that the recent developments in California could persuade Nevada to take similar actions. To speak to this, California just recently eliminated its cultivation tax, which will allow California-based cultivators to see notable relief from the previously subjected high tax rate. For reference, the state of Nevada's cannabis cultivation tax is $369 per pound. With Flower One being the largest cannabis cultivator in the state, any reform would be transformational to our business. Despite the current challenging market conditions, we remain optimistic about the future of cannabis in Nevada. Although tourism is nowhere near pre-pandemic levels, Las Vegas visitor numbers have consistently increased since January. Additionally, last month the Cannabis Compliance Board approved regulations governing on-site consumption lounges, which are now scheduled to open in the fall. On-site consumption lounges are expected to thrive in Las Vegas as they will be among the first establishments where consumers can safely and comfortably purchase and consume cannabis without the fear of being harassed or asked to leave. Unfortunately, this is still a far too familiar occasion for cannabis consumers across the country, where cannabis has been partially legalized but not normalized or accepted along the same lines as far more dangerous drugs such as alcohol or tobacco. The addition of on-site consumption lounges is a huge step forward for the entire industry, and we are excited to supply these lounges as well as activate brand and product promotions, enabling us to connect with consumers on an entirely new level as part of their cannabis experience. In closing, Flower One continues to be the largest supplier of cannabis in the state of Nevada. and we remain focused on making the necessary improvements to our facility and operations as quickly as possible in order to defend our position. To complement our operational improvements, we have recently announced the hiring of our new Chief Operating Officer, Tim Shoemake. 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. In short time, Tim has proven to be an excellent addition to the Flower One management team, and we look forward to seeing the results of his work in the future. The unique competitive advantage of a high-tech greenhouse is the ability to control the environment to increase quality while significantly reducing your cost of production by utilizing the power of the sun and the considerable economies of scale the greenhouse provides. Our facility can produce premium quality product at a fraction of the cost of indoor producers, and our recent improvements in quality while simultaneously reducing costs is a solid indicator of the company's progress towards becoming an industry-leading, high-quality, low-cost producer. With that, I would now like to turn the call over to our CFO, Aroxi Grant.
spk02: Thank you, Kellen, and good morning, everyone. We appreciate your patience as we prepared our first quarter 2022 results. To begin, we reported total revenue for the first quarter 2022 of $8.9 million. Our revenues were impacted throughout 2021 and 2022 due to COVID's ongoing impact on tourism and conferences in Nevada, along with the ongoing price compression, overall market softening, and the increased product supply in the market. Cost of sales for first quarter 2022, excluding any adjustments to the fair value of biological assets, was $5 million compared to $5 million for the first quarter 2021. Gross margin before the impact of biological assets was 44% for first quarter 2022 compared to 64% in 2021. To minimize the decrease in gross margin, the company has established a number of cost-saving initiatives, including within its cost of flower production. Gross profit for first quarter 2022 was $1.5 million as compared to a gross profit of $12.1 million in the same period for 2021. The decrease in gross profit is directly attributable to the decline in top-line revenue as well as the fair value adjustments recorded on biological asset transformation. We reported general and administrative expenses of $6.4 million in the first quarter 2022 compared to $6.2 million from first quarter 2021, representing a 3% increase. The year-over-year increase was primarily the result of an allowance for bad debt expense which was estimated based on management's assessment of the current economic environment and the softening of the cannabis market. When removing the effect of this allowance for bad debt, our general and administrative expenses decreased by 3% year over year, representing savings in nearly every category of expense. We reported a net loss of $10.2 million in first quarter 2022, compared with a net loss of $15.8 million in the same quarter of the prior year, representing a decrease in loss of 79%. The company's finance costs were reduced by approximately 40%, including a 37% decrease to its interest expense year over year. We continue to reduce our cost of capital and interest expense, and we are pleased with the implementation of a variety of measures within the organization that have further reduced our operating costs, cost of sales, and general and administrative expenses. Controlling our costs during these times is a testament to our team's financial discipline and represents significant progress towards achieving positive cash flow. Our finance department's ability to provide precise and insightful data continues to improve and enables us to make better strategic decisions and create shareholder value. While our balance sheet continues to improve, it is still being affected by the ongoing restructuring and its associated fees and legacy costs. We continue to explore every possible option in order to continue to lower our cost of capital and debt-related expenses. As of March 31st, 2022, the company had cash and cash equivalents of 4.7 million compared with 4.9 million as of March 31st, 2021. In addition, our overall liability balance has decreased by 28.2 million year over year. To conclude my portion of today's call, I would like to briefly discuss our most recent restructuring update, which was announced in late June. This update included significant debt modifications and maturity extensions facilitated by our term lender, which provided us with the crucial ability to preserve capital by way of deferred cash interest payments. The effects of these modifications and extensions have decreased our required cash interest payments by 38%. To echo Kellen, I am very pleased with the efforts and initiatives we have put forward in 2022. as we continue our restructuring and work towards our mission of achieving positive cash flow. I would now like to turn the call back to Kellen for closing remarks.
spk04: Thank you, Aroxi. 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 continue to explore all viable paths in our restructuring to ensure the company is positioned for sustainable growth. As both the cannabis markets and world economy continue to show their unpredictability, we remain focused on the elements of the business that we can control. We are eager for our facility improvements to be completed and will continue to demonstrate the financial discipline and operational excellence required to be successful in the next chapter of the cannabis industry. This concludes our prepared remarks. We would like to thank everyone for joining us on today's call.
spk05: and would now like to open up the line for questions. Thank you. At this time, we will be conducting a question and answer session.
spk06: If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would 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.
spk05: One moment, please, while we poll for questions.
spk06: The first question comes from Scott Fortune from Roth Capital Partners. Please proceed with your question, Scott.
spk01: Hey, good morning. This is Nick on for Scott. Just looking for some color on the consumer with inflationary pressure potentially impacting cannabis spend here. Just curious to what you're seeing in terms of the average basket in Nevada. Is there a trade down kind of going on to lower cost products occurring or is the premium segment continuing to hold up here? Thank you.
spk04: Hi, Nick. Thank you. Well, as you guys know, we don't operate any retail. So we have to take, you know, third party information and some of the information that some of our better preferred partners share with us. But we have heard and seen in general that the average ticket price is down considerably, and that one of the reasons for that is exactly what you mentioned, that people are preferring or choosing more affordable products to try to get more value out of their purchase. I think this goes back to the taxation and regulations on cannabis that are continuing to keep pricing too high, and in particular, when you take taxes into account. This is actually a good thing for FlowerOne because as a value producer that produces a high-quality, low-cost product, we believe that our product will be a product that people gravitate towards during these times in order to get more value. And we are working very closely with retailers, in particular a chosen few, to try to really preserve MSRP so that we can deliver that value back to consumers. Because today, a number of our products are sold into dispensaries, and then those dispensaries sell those products for three and four times what they buy them from us for. And so our goal is to really work to make sure that the value that we're producing is delivered to consumers, you know, through retailers that are willing to partner with us and preserve that MSRP. But you are very correct in the fact that there is a choice to gravitate towards more affordable products during this type of economy.
spk01: Grant, I appreciate that color. And then if I can get just an update on the market share side. You mentioned holding about 10% to 15% of the Nevada wholesale market, despite the facility still being underutilized here. Is there an updated kind of end target for you in terms of long-term Nevada share once these improvements come online? And just how you're looking at recapturing incremental share here as utilization ramps would be helpful. Thank you.
spk04: Absolutely. So, you know, it is difficult to calculate market share because, again, we have to take an estimate on the retail margin relative to the total market size, which again is, you know, a rough estimate. But under those, you know, utilizing about a 60% margin for retailers, you know, the total market size for wholesale would put us somewhere in about that 10 to 15% range. We are expecting to be able to hopefully over time double our position as a result of the premium brand partners we are working with being able to scale their products and reach their goals within the market. So we have several brand partners capable of doing, I would say, multiples or magnitudes more volume than we are currently doing with them and are working very hard to ramp up production for those SKUs. So I do believe that by taking leadership positions or, again, as close thereto as possible with several of our brands in pre-roll, vape, and edible. That will allow us to improve our position. We also believe that, again, the improvements we're making to the facility will have a dramatic impact on the selling price of our flour and its ability to secure shelf space. So we believe that the improvements we're making on the flour side should also lead to additional market share gains.
spk01: Got it. I appreciate the color. That's it for me. I'll jump back in the queue.
spk05: Thank you, Nick.
spk06: Thank you. Ladies and gentlemen, just another reminder, if you'd like to ask a question, please press star, then 1. If you'd like to ask a question or a follow-up question, please press star, then 1. We will pause to see if there are any further questions before we conclude.
spk05: At this time, we have no further questions.
spk06: Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Kellen for closing remarks. Thank you.
spk04: Thank you, everyone, for joining us this morning. Again, we appreciate you taking the time to listen about Flower One results. We are here and remain focused on our mission at Flower One, and we'll continue to get better every day, as that is what we continue to focus on as an organization, and believe that that will lead to our long-term success. So thank you, everyone, for joining us, and feel free to reach out to us at any time as we are available and accessible. Thank you very much.
spk06: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation.
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