Flora Growth - Q2 2024

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Flora Growth Corp Second Quarter 2024 Results Conference Call. As a reminder, all participants are in listen-only mode, and 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. If 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 Lehmann, Chief Financial Officer. Please go ahead.

Dany Lehmann (CFO)

Thank you, operator, and good morning, everyone. On behalf of the Flora team, welcome to our Q2 2024 results 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 other statements that may be construed as a prediction of future performance. The information may involve known and unknown risks, uncertainties, and other factors that 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 most recent filings available on EDGAR at sec.gov and SEDAR+ at sedarplus.ca.

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 providing the circumstances after the date of this call. On the call today, we have Clifford Starke, CEO, as well as Dany Lehmann, CFO. Following the presentation, Clifford and I will be available for the question and answer period. The Q2 2024 results press release and accompanying 10-Q have been filed on Edgar and SEDAR+. Also note that all amounts mentioned on this call are in U.S. dollars, unless stated otherwise. I'll now turn over the call to Clifford. Please go ahead.

Clifford Starke (CEO)

Thank you, Dany. Good morning, everyone, on the line. Welcome to the Flora Growth Q2 2024 results and corporate update conference call. Let me start by noting that in the second quarter, Flora made several accretive acquisitions and formed strategic partnerships to capitalize on the most robust market trends. These actions are designed to further diversify our activities and continue building inroads to areas where we see potential for growth. The first acquisition was TruHC and came in April at the time of Germany's legalization of cannabis. To date, we have seen meaningful integration with the TruHC team and have established key initiatives to stimulate our business activities in the country. With the largest population and the greatest purchasing power in Europe, Germany boasts Europe's fastest-growing cannabis market.

With the following two phases of German legalization expected in the coming 12-18 months, Germany is expected to become the largest federally legal adult-use cannabis market globally. The German government has indicated it intends to pursue a second phase of legalization, focusing on regional pilot programs with commercial supply chains. With approximately 230,000 medical cannabis patients today, Germany continues to lead the way in European medical cannabis as well. Moving on to the U.S. market, in May 2024, the U.S. administration announced that it's moving to reschedule cannabis under U.S. federal law. The Justice Department is expected to post its proposed rule to reclassify cannabis from Schedule I to Schedule III under the Controlled Substances Act in the Federal Register.

It is important to emphasize this is the first time in the history of the United States that all major party presidential candidates are open to initiating important cannabis reform. On the Democratic side, both Kamala Harris and Tim Walz are widely expected to take a progressive stance. Vice President Harris has expressed support for cannabis legalization, and Governor Walz legalized recreational cannabis in his home state of Minnesota. More recently, Former President Trump suggested he would be in favor of reform. As the U.S. continues to move towards progressive cannabis legislation, Flora intends to capture new opportunities and market trends. In the quarter, we established a joint venture with Althea Group Holdings to capitalize on the beverage market in the United States.

The joint venture will link our U.S.-based CPG team and Althea's Peak, which is recognized as a market leader in cannabis-infused beverages and operates its world-class infusion technology and vision. This partnership is positioned to facilitate market access in traditional channels like wine and liquor stores. We believe that these types of beverages is a real blossoming beverage market segment, currently representing a very small fraction between 1%-3% of all U.S. cannabis sales. Cannabis-infused beverages are beginning to overtake alcohol when it comes to first-time daily use. Another area where we want to leave a mark is in the global e-commerce space.

To this end, Flora acquired Australian Vaporizers in June. Australian Vaporizers was founded in 2010 and has become one of the largest online retailers of vaporizers, hardware, and accessories in Australia. Australian Vaporizers has the potential to drive synergies within Flora's remaining portfolio, including our high-end brand, Vessel. With that, I'll pass on to Dany, who's got the financial results for the quarter. Dany, please go ahead.

Dany Lehmann (CFO)

Thank you, Clifford. Let me start by noting that in addition to the acquisitions we made in the quarter, Flora launched several new products to stimulate organic growth. Vessel unveiled a second generation Compass Rise, which has a unique design and the ability to stand upright. JustCBD introduced a series of new gummies for sleep and relaxation, underscoring an already best-selling line of products. Revenues for the quarter, for the second quarter of 2024 were $15.7 million, compared to $21.5 million for the second quarter of 2023. Revenues for the six months ended, June thirtieth, 2024, were $33.7 million, compared to $40.8 million for the six months ended June thirtieth, 2023. These decreases are primarily due to the company's deliberate discontinuation of several unprofitable product lines, as well as increased competition.

Total operating expenses were $6.7 million in Q2 2024, compared to $44 million in Q2 2023, a decrease of $37.3 million, or 85%. Excluding non-cash impairment charges, the decrease in operating expenses quarter-over-quarter was $2.5 million, or 28%. For the 2024 and 2023 year-to-date periods, total operating expenses were $13 million and $51.7 million respectively. This represents a decrease of $38.7 million, or 75%. Excluding non-cash impairment charges, the decrease in operating expenses year-over-year was $4.8 million or 29%.

The net cash used in operating activities was $1.6 million in the six months ended June 30, 2024, compared to $7.8 million for the six months ended June 30, 2023, a decrease and an improvement of $6.2 million, or 79%. On a consolidated basis, the net loss for the quarter was $2.7 million, compared to $44.6 million in the comparable quarter, a decrease of $41.9 million, or 94%. Flora finished the quarter with $6.1 million in cash and $21.4 million of current assets, including $6.7 million of available inventory. Net working capital was $3 million. In addition, we have set the stage for a wide array of financing alternatives to further fuel our business plan.

In terms of performance for each of our divisions, JustCBD maintained a gross profit margin of 34% on sales of $4.4 million. Its top-selling product and products in the quarter included the Bear, Nighttime Bear and Peach gummies. Approximately 41% of its revenues stemmed from direct-to-consumer sales, and the remaining 59% generated through business-to-business sales. In the quarter, JustCBD added 120 new wholesale customers to its network. Vessel maintained a gross profit margin of 53% on sales of $1.4 million. Core products represented 35% of sales, and Compass products contributed 41% to sales. The largest individual item sold was the Wood Slate, representing 11% of Vessel sales.

Vessel sales were 59% from direct-to-consumer and 41% on business-to-business. Vessel added 60 new wholesale customers, including several multi-state operators, in the quarter. Scythian earns $9.6 million in revenue, with gross margins of 8.4%. In the quarter, including income from continuing operations of $0.2 million. All sales were business-to-business and included brand name pharmaceuticals. I will now hand the call back to the operator for the question and answer session.

Operator (participant)

Thank you. We will now begin the question-and-answer session. 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. First question comes from Aaron Gray with Alliance Global Partners. Please go ahead.

Aaron Gray (Managing Director)

Hi, good morning, and thank you for the questions here. The first one for me, just in terms of the EBITDA and profitability, maybe you can tie in gross margin. So, I think you had a $700 inventory impairment there, so just as to think on board for gross margins, as you exited some low profit SKUs, you mentioned on the go forward there, how should we think about the evolution of gross margin and how that ties into you guys going back to EBITDA profitability? Thank you.

Clifford Starke (CEO)

Dany, do you want to handle that?

Dany Lehmann (CFO)

Yes, Sean, thank you so much for the question, and thank you for joining us on the call. Yes, this Q2, as we noted in our MD&A and our financial disclosures, was a bit unusual in the sense that we had a fairly large inventory impairment charge of $700,000 in the quarter, which drove down the gross margin. If we look at it on a go-forward basis, I think on a consolidated level, we're probably looking at in the mid-thirties, in that range, from a gross margin perspective.

Clifford Starke (CEO)

And, as we grow and add more profitable lines to our portfolio, we expect that number to gradually increase.

Aaron Gray (Managing Director)

Okay, all right. Thanks for that. Second question for me. You guys have a, you know, couple different irons in the fire there on some initiatives that, that could heat up and drive some revenue. So just as we think about the near-term opportunities to drive revenue growth, what are you seeing as what could be the biggest impact to the PNL in, in the next six months here?

Clifford Starke (CEO)

Like a specific focus on the company?

Aaron Gray (Managing Director)

Like, would it be more Germany? Do you think it's more just CBD with some different issues that you have there? I know you guys have a number of couple of irons in the fire. I'm just trying to see what we should think of as what are the most near-term growth ups versus what be more longer term in terms of when it impacts PNL.

Clifford Starke (CEO)

I think the U.S. team is very dedicated and focused on becoming a real brand in the beverage sector. We've picked up distribution in several states. As we go into the fall, continue to, you know, we see ourselves getting to some state rates relatively quickly here. On the U.S. side, that's where the growth is gonna come from. Germany, the business plan is coming together quite nicely. We also have some partnerships we're working on that would really put our SKUs in the proper place. So what's happening in Germany, we're realizing it's very e-commerce heavy. We have a great partnership, which we can't really get into right now.

You're gonna see the size we talked about before, our, our seeds, clones, flower, accessories, Vessel, adjuster and so forth, will all be established on this one platform that has, I would say, probably 2.5 million viewers on a monthly basis in Germany. It's by far the lead, the leading, leading source for consumer to be able to actually identify what they want to actually purchase within this medical cannabis market and recreational market in Germany. So I'll keep a strong U.S. on beverages, and Germany, we're touching as fast as we possibly can within the European market.

Aaron Gray (Managing Director)

Okay, great. Thanks. Thank you.

Clifford Starke (CEO)

Thanks, John.

Operator (participant)

The next question comes from Shawn Long with Haywood Securities. Please go ahead.

Sean Long (Managing Director)

Hey, guys. Thanks for taking the time. Just wanted to kind of look at the recently completed Australian Vaporizers acquisition, and want to kind of touch around what's left in terms of the integration process and what does that look like from a capital perspective?

Clifford Starke (CEO)

Okay. So Australian Vaporizers, personally, I'm very familiar with it. When I was one of the largest shareholders of Namaste back in the day, that was the main asset. When it came back to us recently, obviously, we had some short-term struggles in actually closing the transaction, which we ended up doing relatively quickly, recently. Instead of the integration, it's more that the business plan has actually changed. So, a retail individual doesn't have the actual ability to actually order a battery, a vaporizer, even nicotine on the e-commerce platform. Everything's being driven through the doctors and pharmacists, which short-term is a little bit confusing, long-term, I think it's going to be a huge success for a couple reasons. A lot of the smaller players are gone.

And second is a lot of, for example, the Puffcos of the world are not registering their products properly in the marketplace. Vessel, which is our hardware component, which is also going to kind of grow, significant growth for us, is doing extremely, extremely well in the Australian market. After U.S., the second largest market for us. So it's not really integration or cost. Those guys really bought that. They had cash in the balance sheet, plenty of inventory. The first shipment of Vessel came, I think, two weeks ago, and everything's been integrated properly on that aspect. But I would say there's not really bumps or issues. It's more just integrating the product and offer more, more selections to, to consumers, through the pharmacists and doctors.

Sean Long (Managing Director)

Awesome. Thank you. And my next question is kind of turning back to Germany and the adult use market there. And it's kind of the first full quarter that we're seeing in the early phase. I'm just wondering what you guys are seeing there, and basically, how you guys are expecting that to develop over the coming months and what's the preparation required?

Clifford Starke (CEO)

Two questions. So Germany, obviously, since April, has had a big influx in prescriptions, just way easier access, ability to access scripts even outside of you know, German medical systems throughout EU. So it's in that influx, what's interesting is high-quality products as well as low quality products, price dependent, are all selling within the marketplace. For us, unfortunately, we and many others ran out of a lot of our SKUs relatively quickly. What we're doing is we've sourced high quality, low quality flower, which should be arriving in the next couple of months, and just integrating it to do form one into our current pharmacy market, which is traditional for us. The second is this e-commerce relationship one referring to, which is not public yet, but that's really what we're focused on integration wise.

And Germany, we continue to keep on growing, and we're trying to focus really on just finding opportunities that we didn't realize. I never really envisioned it going so e-commerce driven, versus traditional. So we've adapted really quickly to that. I think we've done a good job, and the growth really going to come from just getting honestly, more SKUs onto certain platforms and feeding our pharmacies, because a lot of people on certain quality strains are basically sold out. Awesome. Thank you so much, that's very helpful.

Operator (participant)

The next question comes from Bill Kirk with Roth MKM. Please go ahead.

Bill Kirk (Senior Equity Analyst)

Hey, Cliff. Hey, Dany. Good morning.

Clifford Starke (CEO)

Hey, Bill.

Dany Lehmann (CFO)

Good morning.

Bill Kirk (Senior Equity Analyst)

Hey, so, Dany, you mentioned, 120 new wholesalers for JustCBD. I think the number was 60 for wholesale. How many wholesalers are in, like, the base number that you're adding the 120 and 60 to? And what kind of bump from new wholesalers, you know, in terms of your sales per division, what kind of bump would you expect?

Dany Lehmann (CFO)

Yeah, I think that's a good question. Thank you for that, Bill, and good morning. I think if we look at it from a grand scheme of things, there are, you know, close to 20,000 points of distribution overall for the business and the company. But you're looking at a dollar value, and not all of them are material, obviously. From a buying and sales perspective, I think that particular increase we would expect it to be between 2%-3% in the immediate to short term. So that would be the number that best reflects that increase in the number of wholesale distribution for JustCBD.

Bill Kirk (Senior Equity Analyst)

Okay. And then, Cliff, I have a, you know, broader question on CBD or intoxicating hemp versus THC. It seems like some of the hemp groups are at odds with some of the proposed THC legislation that's out there. Can you talk about that conflict a little bit and maybe how the success and opportunities for hemp and just CBD differ from THC in the US?

Clifford Starke (CEO)

Yeah. I think there's a couple bad seeds out there that are creating negative atmosphere for everyone within the hemp space, psychoactive or not. You know, the way we operate our business is you know, on credibility and building trust with our consumers, both direct and through the wholesale channels. And, you know, there's real opportunities for growth. I just... There's a lot of people out there that are selling psychoactive hemp that are not falling within the limits, and it's causing real issues for other people trying to build real businesses. So for us, it's more or less now focused on our traditional lines of gummies, tinctures, so on and so on, 300 different SKUs. And really the team, like I said, of course, we need to double on the beverage front.

So everyone's really, really focused on developing that, and we see that as a huge, huge growth opportunity versus just selling another gummy. I'm going to the White House September 25th. I don't... I think there's a lot of political noise on the synthetics, obviously, besides the bad seeds in terms of companies and people. There's, you know, there's a real risk on the synthetic side, which we understand. The rest, I think we'll be perfectly fine on. And again, I don't think we have to worry about it in 2024 anyways. Throughout the fall and, you know, running into the political movement here, I think we'll learn a lot more. But it's tough to comment on polls. I certainly feel comfortable overall.

Bill Kirk (Senior Equity Analyst)

Sure. And I, Dany, I think you mentioned increased competition. Is that sort of what you're referring to with some of the folks pushing some of the psychoactive products maybe a little haphazardly? Is that where the competition is coming from?

Clifford Starke (CEO)

Yeah, just often I really think, I really think that this whole... You know, a lot of the major players are moving into the benign space on the beverage front, and very credible. There's other groups that are, you know, running smoke shops that, you know, children shouldn't be going into and buying and leaving, and I understand that. So how do we actually govern this properly? So it's very similar to alcohol. How is it going to unfold? And it's a really political, awkward situation for everyone, from MSOs to us to, you know, even the private prisons, of everyone has an angle and an issue. And I understand the political standpoint. I mean, people were in jail for cannabis and still are for, you know, extremely small amounts.

We're given a situation now where there's synthetic, and MSOs don't feel comfortable with that, with all given CapEx profits we put into actually going into, you know, states and following laws. And you know, obviously in New York, kind of switching over finally. I was with Aaron in New York a while ago after a dinner, walked around. It's extremely uncomfortable walking into the stores; they're selling illegal, you know, cannabis derivatives, hemp derivatives, mushroom derivatives, so on and so forth. While it's, you know, we're just trying to build a real credible and trustworthy business. So everyone can be on the same page and get governed properly to protect children and everyone else, that's what we're trying to do. And I think that will be implemented. I don't think it's a scare of our business.

I don't think CBD, anything that's going the opposite way. Some CBD retailers or, you know, big box stores are starting to feel very uncomfortable, obviously. On the beverage side, you're seeing, you know, big alcohol distributors feeling very comfortable in the total wine, so on and so forth. And they're fighting anyone who actually is getting a notice that they're doing anything wrong. So it's all moving in the right direction. But in this political environment, which is very tricky and confusing for everyone, I think we just have to get to November and then, you know, stay close to what's happening day to day. I just think, you know, there has to be a better job for kids as well as make sure the right companies are actually operational in certain states.

Bill Kirk (Senior Equity Analyst)

That's perfect. Thank you, Cliff.

Clifford Starke (CEO)

Thank you, Danny.

Operator (participant)

Once again, if you have a question, please press star then one. If there are no more questions, 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)

Thank you for all, stakeholders who joined today. We're working hard to build the company. I think also you're going to see some macro trends coming into effect in a positive manner on both sides politically, and we're very, very excited for it. And if anyone needs more information, we're happy to provide it and show the data. Thank you very much, and have a great day.

Operator (participant)

This brings to a close today's conference call. You may disconnect your lines.