Flora Growth - Q1 2024

Transcript

Operator (participant)

Thank you for standing by. This is the conference Operator. Welcome to the Flora Growth Corp first quarter 2024 results and corporate update conference call. As a reminder, all participants are in listen-only mode. The conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then zero. I would now like to turn the conference over to Dany Vaiman, Chief Financial Officer. Please go ahead.

Dany Vaiman (CFO)

Thank you, Operator, and good morning, everyone. On behalf of the Flora team, welcome to our Q1 2024 and corporate update conference call. Before we begin, I wish to inform listeners that certain statements to be made today by the management team may contain forward-looking information. Today's call will include estimates and other forward-looking information and statements concerning future revenues, results from operations, financial position, market, economic conditions, partnerships, and any other statements that may be constructed as a prediction of future performance.

The information may involve known and unknown risks, uncertainties, and other factors which may cause actual results to differ materially from those expressed or implied by such statements. Factors that could cause or contribute to such differences are described in detail in the company's recent filings, available on EDGAR at www.sec.gov and SEDAR at www.sedar.com.

Any estimates or forward-looking information or statements provided are accurate only as of the date of this call, and the company undertakes no obligation to publicly update any forward-looking information or supply new information regarding the circumstances after the date of this call. On the call today, we have Clifford Starke, CEO, as well as Dany Vaiman, CFO. Following the presentation, Clifford and I will be available for the question and answer period.

The Q1 2024 results press release and the accompanying 10-Q have been filed on EDGAR and SEDAR. Please note that all amounts mentioned on this call are in United States dollars, unless otherwise stated. I'll now turn the call over to Clifford.

Operator (participant)

I'm sorry, Dany. Clifford's line has dropped. I'm just going to. We're just going to try to reconnect him.

Dany Vaiman (CFO)

No problem.

Clifford Starke (CEO)

Okay, good. My line just cut. Everything's okay?

Dany Vaiman (CFO)

Yep, all good. Clifford, please go ahead.

Clifford Starke (CEO)

Awesome. Thank you. Thank you. Dany, did you start off?

Dany Vaiman (CFO)

Yes, please go ahead.

Clifford Starke (CEO)

Okay, great. Okay, welcome to Flora Growth Q1 2024 conference call. Just to recap, in June 2023, we took over the company, and we've completely changed the company for the better. We're on track to focus on a few key initiatives and projects that should take this company to the next level and create significant shareholder value. Today, we're fully funded to execute on those business plans.

We recently closed a $3.23 million financing, and let me focus fully on Germany to start off, where half the revenues are generated. In March, the German government provided a final green light for the legislation of recreational cannabis, along with a state of liberalization amendments for medical cannabis access. Beginning April 1, 2024, cannabis was formally declassified to a non-narcotic status.

The new legislation, possession by adults for recreational purposes, allows individuals to grow up to three plants on their own. German adults will be allowed to join for-profit cannabis clubs with a maximum of 500 members, starting July 1, 2024. Obviously, we welcome this game-changing development in Germany, as many of our features remind us of legislation efforts in Canada. The German government has indicated that it intends to pursue a second phase of legislation, focusing on regional pilot projects with commercial supply chains.

We believe that in time, Germany will further enhance its regulatory over recreational cannabis to allow for profit commercialization. An immediate commercialization opportunity stemming from German rules relates to its medical side of cannabis. Medical cannabis will no longer require a narcotic prescription, which is expected to simplify and streamline the process for prescription. More patients could gain access for medical cannabis, not only as a last resort, but rather as an acceptable treatment option for a variety of ailments. It is important to note that Flora subsidiaries have operated in Germany since 2017.

We sold the first gram of legal medical cannabis in the country, and Flora's business is really prepared to take over in a driver's seat and be a leader in country. Phatebo, one of our sub-companies, is a prominent pharmaceutical distribution company that has an established medical cannabis sales team, and we've done very well over the past number of years. On the historic date, Germany's new rules came in, we announced the acquisition of TruHC Pharma GmbH.

While we are pleased with our positioning in Germany, we believe the addition of TruHC to the Flora family will set us apart. TruHC possesses key German licenses, including the EU-GMP processing, production, narcotics with certified storage and laboratory licenses. In addition, it holds certified customizable modules with flexibility to incorporate various production and packaging processes, and which enables license extension for future in-country cultivation, which would supply to cannabis social clubs and eventually dispensaries.

As part of the acquisition, TruHC's management team, led by Hendrik Knopp, has assumed leadership role within Flora's European operations. Hendrik is also responsible for winning the first tender for the cultivation in medical cannabis in Germany back in the day with Aphria. The German legal cannabis recreational market has the potential to reach $4.2 billion upon legalization, with a total European market forecast to achieve about $10 billion.

On the heels of the German legislation, but came reports of a potential reclassification of cannabis by the U.S. Drug Enforcement Administration from a Schedule I drug to Schedule III, following a recommendation from the U.S. Department of Health and Human Services. In 2022, President Joe Biden instructed HHS to conduct a review of cannabis as it relates to scheduling of the plant. In August 2022, the HHS recommended that cannabis be rescheduled to a Schedule III substance. Schedule III drugs are those with a moderate to low potential for abuse and currently accepted medical uses.

The DEA proposal, formalized, must still be reviewed by the White House Office of Management and Budget, after which the DEA will take public comments before publishing its final rule. The U.S. market presents strong opportunities for Flora's businesses. Flora has expanded the U.S. by offering complementary cannabis service consumer products through Just Brands and cannabis accessories through Vessel. Additionally, Flora has been active in developing partnerships to expand the reach of our portfolio.

In the quarter, we signed exclusive distribution agreements with Althea Group Holdings for Vessel brands in United Kingdom. It is estimated that the vape, pen and dry herb category represents multi-billion dollar industries, expected to grow over the next decade from $5 billion-$15 billion. In April 2024, we entered two strategic distribution agreements, one with IMCC, IM Cannabis Corp, for Vessel production in and distribution in Israel.

IMCC's brands are well known for premium Israeli cannabis market, facilitating the import and wholesale of medical cannabis through retail pharmacies, online platform, distribution center. Israel is one of the largest and most longest standing medical markets in the world, and we plan on obviously positioning ourselves for that market. Second, with Me Raw Trade Ltd., to distribute both Just and Vessel branded products in Poland and potentially other countries within the EU.

Me Raw is expected to represent these branch dispensaries, smoke shops, convenience stores, gas stations across Poland, and offer white label services to leading brands in the region. Overall, we're excited. I think we're making great strides and extremely excited over the next quarters to come when the business plan will really take shape and form. Dan, I'd like to hand over to you to go over more of this financial side of the business, and thank you.

Dany Vaiman (CFO)

Thank you, Clifford. Let me start by further elaborating that the momentum around cannabis reform could become a transformational moment for the sector and for Flora. We at Flora have been anticipating it and are ready to welcome it within an efficient, flexible, and fit-for-purpose public company vehicle. Our business focus has shifted to allocating resources where there is potential for explosive growth, particularly in Germany and the United States. Revenues for the first quarter of 2024 were $18 million, compared to $19.3 million for the first quarter of 2023.

The decrease is primarily due to the company's deliberate discontinuation of several unprofitable product lines. These decreases in sales were partially offset by improved performance in our German operations, where sales increased to $11.3 million in Q1 2024, compared to $8 million in Q1 2023. Total operating expenses were $6.3 million in Q1 2024, compared to $7.7 million in Q1 2023, a decrease of $1.4 million or 18%. Excluding non-cash impairment charges, the decrease in operating expenses quarter-over-quarter was $2.3 million or 30%.

Net cash used in operating activities was $1.3 million in Q1 2024, compared to $4.3 million in Q1 2023, a decrease and an improvement of $3 million or 70%. On a consolidated basis, the net loss for the quarter was $3.4 million, compared to $3.9 million in the comparable quarter, an improvement of $0.5 million or 13%. Before the impact of impairment and unrealized non-cash losses, the operating loss was $1.6 million, compared to $2.4 million in the comparable quarter, an improvement of $0.8 million or 33%.

Flora finished the quarter with $4.2 million in cash, $21.8 million of current assets, including $9.2 million of sellable inventory. Net working capital was $2.4 million. Each of our operating divisions has achieved results at or close to breakeven on income from continuing operations and adjusted EBITDA. JustCBD maintained a gross profit margin of 41% on sales of $5.4 million. Its top-selling products in the quarter included the Nighttime Bear, Peach, and CBD Plus Calming Gummies.

Approximately 36% of its revenues stemmed from direct-to-consumer sales, and the remaining 64% generated through business-to-business sales. In the quarter, JustCBD added 200 new wholesale customers to its network. Vessel achieved a gross profit margin of 39% on sales of $1.3 million. Core products represented 44.8% of sales, and Compass products contributed 31% to sales. The largest individual item sold was Core Black, representing 11% of Vessel sales. Vessel sales were evenly split between direct-to-consumer and business-to-business.

In the quarter, Vessel added 35 new wholesale customers, including several multi-state operators. Phatebo sales consisted of business-to-business sales of branded pharmaceuticals, including medications from Merck, Vertex, Novartis, MSD, Novo Nordisk, AstraZeneca, Janssen, and Gilead Sciences. All in all, what we see in the capital markets is the beginning of a renewed sense of optimism around cannabis.

Investors are beginning to appreciate the situation at hand, with two of the most sought after global markets in Germany and the United States on the verge of ushering a new era in cannabis. This is precisely what our business was built for. I will now hand the call over back to the operator for the question and answer period.

Operator (participant)

Thank you. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. The first question comes from Bill Kirk with Roth MKM. Please go ahead.

Bill Kirk (Managing Director and Senior Research Analyst)

Hey, good morning, everybody. Thank you for taking the questions, and thank you for the update. So there's obviously been a lot of changes over the last nine months or so, over the last year. Can you give us a sense of what you're thinking the business will look like sales mix wise by, like, division going forward? And if you can, also by geography. I think, Clifford, I think you said 50% Germany. But can you give us a sense of the division breakdown sales mix that you're expecting going forward?

Clifford Starke (CEO)

Yeah. So right now, quarter-over-quarter, Germany's between, I would say, 50-55%. I think over the... I don't feel comfortable telling you exactly, you know, what we're forecasting so on and so forth future wise, but I think you're gonna see an increase both on the German side, and the German side is gonna be really on the medical cannabis launch, which we're already seeing. Like, I don't know, I'm sure you guys are following, but supply is extremely tight in Germany again. Within the first two to three weeks, everything went bonkers, more or less, on simple flower product, high THC, good, good, good high-level strains.

Now, on the U.S. side, we're extremely excited on Vessel and Vessel's growth. I think that's gonna have a tremendous trajectory over the next probably two quarters. Then something we're working on, which we haven't announced yet, is what we're really, really focused on the U.S. side. In coming weeks, we'll give more of a, you know, a focal point and what we're trying to achieve. But I would say at this point, I don't feel comfortable giving you exactly the breakdown. When we put out guidance, if we do, then I think we'll be able to give you some more information, obviously.

Bill Kirk (Managing Director and Senior Research Analyst)

Okay, appreciate that. And then one on JustCBD, you know, there are some big changes to the product lineup there. Can you walk us through a little bit more of those changes? And I guess what I wanna get at is, year over year, the profitability of JustCBD was about unchanged, but I think some of those product lines you took out were maybe unprofitable. So is it fair to expect the profitability of JustCBD as a segment to get better after those changes in the first quarter?

Clifford Starke (CEO)

I think Just is positioned extremely well now to have a significant relaunch. Besides obviously cutting non-profitable or very low margin businesses, we've also had, unfortunately, some issues with regulators in Florida, which is now solved, but that definitely hurt the top line and bottom line of the business for the quarter. So I would say from this point forth, you'll probably see quite a bit of growth on not necessarily the gummy business or the tincture business, which are mature, but more new things that we're in the process of launching and focus on from a team perspective.

Bill Kirk (Managing Director and Senior Research Analyst)

Awesome. Thank you. I appreciate it.

Operator (participant)

Once again, if you have a question, please press star then one. The next question comes from Aaron Gray with Alliance Global Partners. Please go ahead.

Aaron Gray (Managing Director and Head of Consumer Research)

Hi, and thanks for the questions. So first one for me, just on Germany. Obviously, early days of cannabis reform that took effect April first. So wanted to speak more in terms of your expectations, what you're seeing early days in the market, how you look to capitalize specifically, you know, distribution, is that now something that's easier for you to utilize for cannabis now that's non-narcotics versus before it being traditional pharma? And then any other ways that you're looking to capitalize on the opportunity there? Thanks.

Clifford Starke (CEO)

Yeah, thanks. Hope all is well, Aaron. First off, Germany is obviously, obviously a big focal point for the company. We've been there for a long time. The short-term effects of April first were really on the medical side in terms of literally strains just getting sold out just because people are getting scripts far easier than before. It is still quite confusing where we are in the cycle in Germany, because as social clubs come in effect, what does that mean for us and others?

But really what we're playing this game for is when does it turn where that next cycle is or phase II is ready to go, which is this quasi-real rec space where Aaron walks in, for-profit, buys cannabis and leaves, and that's what we're positioned for. That facility and team are the right fit to execute our business plans, both short term and long term.

Short term, I think we're going to be very focused on medical distribution of the strains we currently move, as well as, as July rolls in, we're going to make sure that if the not-for-profits or social clubs, great, but for-profit, we can work all around that, whether it's supplying them genetics, whether it's supplying them third-party services for testing, whether it's growing on their behalf. Obviously, we'll have our own club, but it's just to be part of it. But really what we're positioning for, getting ready for is that phase II. And short term, I think you're going to see the rip happen purely on medical flower.

It's a little bit confusing as well, because, you know, being in the U.S., where almost everyone on this call is, and Canada, it's, it's so far ahead of Germany in terms of products, while right now we're talking about flower. And the reality is, I can't really introduce, for example, a cart to Germany legally. The reason is, the pharmacist at the end is the one actually dispensing and is in control of actually releasing that to the patient and actually filling it today. Okay?

So there seems to be this whole new momentum of, of when things evolve and change, we're, we're really right there to touch every vertical to make money. But still, today, it's still the same folks it's been for years. It's just a lot easier and easier access, and the margins are still sitting there, which is great.

Aaron Gray (Managing Director and Head of Consumer Research)

Okay, great. Appreciate that color. The second one for me on JustCBD. A lot of conversations lately around the hemp-derived beverage space and edibles as well, but really in some of the minor cannabinoids, delta-9 THC as well, from public companies listed on the Nasdaq and otherwise. So wondering if you're seeing additional opportunities through more traditional distribution channels. Obviously, a lot of patchwork in terms of the state regulations, some allowing it, some limiting milligrams and otherwise.

But would love you guys' perspective just in terms of what opportunities you see in the beverage channel for hemp-derived products, for JustCBD and the distribution opportunities out there. Thanks.

Clifford Starke (CEO)

I think beverages is an unbelievable category. Obviously, yourself and Bill, prior to you, obviously understand the beverage category very well outside of cannabis as well. And the way it's being positioned, it's not really a cannabis play, it's actually an alcohol distribution play or an alternative to alcohol distribution or alcohol. And what we're seeing is, there's no national brand that exists today. There's unbelievable case studies done in various markets, but the Total Wines of the world are coming in and really starting to gear up.

And, you know, when the category in the United States represents 2-3%, there's a tremendous amount of growth. And the person who, you know, traditionally smokes cannabis and rolls a joint and smokes opposites, probably a different market. I think this is a new consumer who doesn't feel comfortable smoking or has different alternatives, or wants to try cannabis, or feels more comfortable with taboos over legally with it. And we see huge explosion. In the past 60, 90 days, it's already exploded with tremendous amount of, you know, people trying to create brands.

I think our team is extremely well positioned. I don't want to get into too much on this call, but I think our team is extremely well positioned to actually be a leader in the category, just like we were early days gummies. You know, a period of time, we probably sold more gummies than most in the United States. In beverages, I think it's really, really important to be able to produce ultra great quality, and I think what's on the shelves today is not.

So I wouldn't be surprised if you go and start ripping off cans from the shelves of Total and start testing them, and you're going to see the contents are far different than what you think from a MG standpoint, ML standpoint. And I think quality is going to win at the end of the day. I think having proper stability in place, where the consumer is actually 30 days out, drinking what they're supposed to, is going to win. You know, fly by night, I don't think it's gonna last much longer. So that's definitely, I would say, probably the most exciting opportunity in this whole Delta-9 space.

Aaron, you mentioned it to me, and it's been to me a while ago, when you see Tilray finally talking about it, obviously something's happening there. At the same time, again, I don't want to get too involved in plans, but we're potentially looking at the beverage category for sure. And then also, on the... like, I don't want- I don't think you're going to see over a five MG be able to move around nationwide, but I'm not sure.

I'm sure there are states like Tennessee, where you could put in a 50 and there's no issues, but there's other states that obviously, like a Florida, which is a little bit more difficult. And then we're seeing some states even do four caps. So I don't know, I'm more curious also to hear what you have to say on that, but I'm sure five, at the end of the day, will probably be the threshold.

Aaron Gray (Managing Director and Head of Consumer Research)

Yeah. Yeah, no, definitely appreciate that comment. Obviously, seeing a lot of patchwork there at the state level, with some even lower milligram limits than five. But, appreciate the color then. I'll go and jump back to you.

Clifford Starke (CEO)

Got it.

Operator (participant)

The next question comes from Colin George with Haywood Securities. Please go ahead.

Colin George (Director of Institutional Sales)

.Yeah, thanks for taking my question. Maybe if we could just turn back to Germany for a bit here, and any sort of trends or data that you're able to share with regards to new patient signups or doctors, number of doctors issuing prescriptions. I know it's only been six weeks, but I think there was an article out there that suggested that total patient signups since the launch or since the change in the regulations on April 1 have nearly doubled the patient count. So any color you can provide on that or sort of trends you've seen in the first six weeks would be great.

Clifford Starke (CEO)

Yeah, I don't want to come in and stamp a number per se, but I think what you're saying is probably pretty accurate. I think there's been a huge explosion. You see that in the shortage supply. At the same time, there's a lot of, you know, poor quality strains that aren't getting that. I think there's two things that are happening. There's the consumer either is extremely price dependent, i.e., very, very low, or wants extremely high quality of cannabis, which obviously for a higher price, there's no middle ground, it seems. So we're seeing a lot of low quality and high quality cannabis move, nowhere in between.

And for us, obviously, we're you know, the business is picking up clearly in Germany, but I really think, again, it's our plans more for future development. That's why we've done our acquisition, that's what we're getting lined for. And the medical sales and the rip in medical sales is great. We're obviously getting an extreme amount of calls and orders that we can't fulfill yet for items like genetics and potentially clones down the line, which we're trying to get organized on to actually meet the demand. But we're seeing...

It really reminds us, like we said earlier, it really reminds us of Canada early days, where everything was kind of ripping early on and even the home grows were doing, you know, quite well. And the ironic part is, you probably remember back in Canada when we were talking about, like, supply issues. And it's nice that supply issues on certain strains are actually real in the German market today. It's a blessing, and it's great. So I think phase I, we're doing well on the medical side, but really, we're trying to build out a bigger game plan, obviously, for the market.

Colin George (Director of Institutional Sales)

Okay, great. Thanks. That's helpful. And then maybe more of a crystal ball question here. With the changes in Germany, it looks like they're trying to move forward expeditiously with the commercial market. Some of the news out of the U.S. with potential rescheduling, two major global players that I would think will create a tailwind, for some new countries and markets to sort of look down the road of legalization or some sort of cannabis reform.

Are there any other countries internationally that you think could be, one of the leaders following on Germany, or ones that you're keeping a close eye on as maybe the next to switch?

Clifford Starke (CEO)

I mean, I have my hopes, which is not actually a great word, but I would love to see the U.K. go. I think that could be a great, great market. It's still in kind of education, but if that could go, that would be unbelievable. Very conservative country, moving, you know, at a slower pace. And then obviously, it'd be interesting to see over time what happens in France. The smaller markets in Europe, I expect, will just surely follow Germany's lead, but really, the big markets, it'll be interesting to see. It'd be interesting at how they, how they roll out their, their policy and how we could play around it.

But there are certain markets that are obviously quite big, that need to get attached at the right time. If it could be, you know, years ago, everyone was talking about how Australia was such a bad market, and it's never gonna take off, and then blah, blah, blah, and suddenly it explodes, right? And everything kind of comes together, and now it's, it's actually feeling another effect a little bit. But it had a really good 18 months of patient growth and real businesses and real distribution channels and so on and so forth. So if that could happen in, in the U.K. and France eventually, that would be, that would be unbelievable.

But this side of the world, I mean, you know, this is, this is, I think, the next opportunity in the frontier to focus on, is, is Europe. Even our just investment businesses, I mean, you know, there's plenty of competition in the U.S., a very different market and very different positioning in, in this part of the world.

Colin George (Director of Institutional Sales)

Okay, yeah. Thanks, that's helpful. Yeah, the U.K., I agree, would be incredibly exciting if they could move forward.

Clifford Starke (CEO)

That would be awesome.

Colin George (Director of Institutional Sales)

Yeah, that's all for me. I'll jump back in the queue here and pass the line.

Clifford Starke (CEO)

Thank you.

Operator (participant)

This concludes the question and answer session. I would like to turn the conference back over to Clifford Starke for any closing remarks. Please go ahead.

Clifford Starke (CEO)

I just want to thank everyone for coming on today. I appreciate everyone's time, and we're really looking forward to report quarter and quarter out, and we're very optimistic to build a real company and create great shareholder value for everyone. Thank you.

Operator (participant)

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.