Flora Growth Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 15, 2024

There are 6 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Fluorogors Corp. 1st Quarter 2024 Results and Corporate Update Conference Call. As a reminder, all participants are in listen only mode.

Operator

The conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Danny Wayman, Chief Financial Officer. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. On behalf of the Fluora 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.

Speaker 1

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.govandsedar@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 Stark, CEO as well as Danny Wehman, CFO. Following the presentation, Clifford and I will be available for the question and answer period.

Speaker 1

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

Operator

Sorry, Danny. Clifford's line has dropped. I'm just going to we're just going to try to reconnect him.

Speaker 1

No problem.

Speaker 2

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

Speaker 1

Yes, all good. Clifford, please.

Speaker 2

Thank you. Thank you. Danny, do you start off?

Speaker 1

Yes, please go ahead.

Speaker 2

Okay, great. Okay, welcome to Fluorogrowth 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.

Speaker 2

We recently closed a $3,230,000 financing. And let me focus fully on Germany to start off, where half of revenue are generated. In March, the German government provided the final green light for the legislation on recreational cannabis, along with the state of liberalization amendments for medical cannabis access. Beginning April 1, 2024, cannabis was formally declassified to a non narcotic status. The new law legislation possession by adults for recreational purposes allows individuals to grow up to 3 plants on their own.

Speaker 2

German adults will not be allowed to join 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 teachers 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, Jeremy will further enhance its regulatory over recreational cannabis to allow for profit commercialization. On immediate commercialization opportunity, Centrum Germany rules relates to its medical side of cannabis.

Speaker 2

Metal cannabis will no longer require an narcotic prescription, which is expected to simplify and streamline the process for its prescription. More patients could gain access for medical cannabis not only as a last resort, but rather as a susceptible treatment option for a variety of ailments. It is important to note that for our subsidiaries have operated in Germany since 2017. We sold the 1st 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.

Speaker 2

Fortiva, 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 historic day, Germany's new rules came in. We announced acquisition of Tru HC Pharma GmbH. While we are pleased with our positioning in Germany, we believe the addition of Tru HC to the Flora family will set us apart. TRU possesses key German licenses, including the EU GMP processing, production, narcotics with certified storage and laboratory licenses.

Speaker 2

In addition, it holds certified customizable modules with flexibility incorporate various production and packaging processes and which enables license extension for future in country cultivation, which will supply to cannabis, social clubs and eventually dispensaries. As part of acquisition, TRHC's management team led by Hendrik Knopf has assumed leadership role within Core's European operations. Hendrik is also responsible for the 1st tender for the cultivation in medical cannabis in Germany back in the day with Aphria. The German legal cannabis recreational market has potential to reach 4,200,000,000 of polymerization with a total European market forecast to achieve about $10,000,000,000 On the heels of the German legislation push came reports of a potential reclassification of cannabis by the United States Drug Enforcement Administration from a social Schedule 1 drug, Schedule 3 following a recommendation from the Federal Health and Human Services Department. In 2022, President Joe Biden instructed HHS to conduct a review of cannabis as it relates to scheduling of the plant.

Speaker 2

In August 2020, HHS recommended that cannabis be rescheduled to a Schedule III substance. Schedule III drugs are those with moderate to low for abuse and currently accepted medical uses. The DEA proposal formalized must be still reviewed by the White House Office of Budget and Management, after which GA will take public comments before publishing its final rule. The U. S.

Speaker 2

Market presents strong opportunities for Fluoro's businesses. Fluoro has expanded the U. S. By offering complementary cannabis service consumer products through Just Brands and cannabis accessories through the vessel. Additionally, Fluor has been active in developing partnerships to expand the reach of our portfolio.

Speaker 2

In the quarter, we signed exclusive distribution agreements with Althea Group Holdings for vessel brands in United Kingdom. This estimate that the vape pen and dry herb category represents multibillion dollar industries expected to grow over the next decade from $5,000,000,000 to 15,000,000,000 In April 2024, we entered 2 strategic distribution agreements, 1 with IMCC, I'm Cannabis Corp for vessel production 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 longest standing medical markets in the world and we plan on obviously positioning ourselves for that market. 2nd, with Niro Trade Limited to distribute both Just and vessel branded products in Poland and potentially other countries within the EU.

Speaker 2

New Raw is expected to represent these brands, dispensaries, smoke shops, convenience stores, gas stations across Poland and offer white label services at leading brands in the regions. 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 the financial side of the business. And thank you.

Speaker 1

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 Q1 of 2024 were $18,000,000 compared to $19,300,000 for the Q1 of 2023.

Speaker 1

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 $11,300,000 in Q1 2024 compared to $8,000,000 in Q1 2023. Total operating expenses were $6,300,000 in Q1 'twenty four compared to $7,700,000 in Q1 2023, a decrease of $1,400,000 or 18%. Excluding non cash impairment charges, the decrease in operating expenses quarter over quarter was $2,300,000 or 30%. Net cash used in operating activities was 1,300,000 dollars in Q1 2024 compared to $4,300,000 in Q1 2023, a decrease and an improvement of $3,000,000 or 70%.

Speaker 1

On a consolidated basis, the net loss for the quarter was $3,400,000 compared to 3,900,000 dollars in the comparable quarter, an improvement of $500,000 or 13%. Before the impact of impairment and unrealized non cash losses, the operating loss was $1,600,000 compared to $2,400,000 in the comparable quarter, an improvement of $800,000 or 33%. Fibaro finished the quarter with $4,200,000 in cash, $21,800,000 of current assets, including $9,200,000 of saleable inventory. Net working capital was 2,400,000 dollars 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% and sales of $5,400,000 Its top selling products in the quarter included the Nighttime Bear, peach and CBD plus gummy gummies.

Speaker 1

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. Vethsel achieved a gross profit margin of 39% and sales of $1,300,000 Core products represented 48% 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.

Speaker 1

In the quarter, vessel added 35 new wholesale customers, including several multistate operators. Fortivo sales consisted of business to business sales of branded pharmaceuticals, including medications for Merck, Vertex, Novatris, 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 2 of the most sought after global markets in Germany and the United States are on the verge of ushering a new era in cannabis. This is precisely what our business was built for.

Speaker 1

I will now hand the call over back to the operator for the question and answer period.

Operator

Thank The first question comes from Bill Quirk with Roth and Kilometers. Please go ahead.

Speaker 3

Hey, good morning everybody. Thank you for taking the questions and thank you for the update. So there's obviously

Speaker 1

been a lot of changes over the last

Speaker 3

the business will look like sales mix wise by like vision? The business will look like sales mix wise by like vision 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 breakup sales mix that you're expecting going forward?

Speaker 2

Yes. So right now, quarter in quarter out, Germany is between, I would say, 50%, 55%. I think over the I don't feel comfortable telling you exactly what we're forecasting so on and so forth future wise. But I think you're going to see an increase both on the German side and the German side is going to be really on the medical cannabis launch, which we're already seeing like I don't know, sure you guys are following, but supply is extremely tight in Germany again. Within the 1st 2, 3 weeks, everything went bonkers more or less on simple flower product, high THC, good high level strains.

Speaker 2

Now on the U. S. Side, we're extremely excited on vessel and vessel's growth. I think that's going to have a tremendous trajectory over the next probably 2 quarters. And then something we're working on, which we haven't announced yet, is where we're really focused on the U.

Speaker 2

S. Side. And in coming weeks, we'll give more of a focal point and what we're trying to achieve.

Speaker 1

But I would say, at this point, I

Speaker 2

don't feel comfortable giving you exactly the breakdown. And when we put out guidance, if we do, then I think we'll be able to give you some more information, obviously.

Speaker 3

Okay. Appreciate that. And then one on just CBD, 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 want to get at is, year over year, the profitability of just CBD was about unchanged.

Speaker 3

But I think some of those product lines you took out were maybe unprofitable. So is it fair to expect the profitability of just CBD in the segment to get better after those changes in the Q1?

Speaker 2

I think Just is positioned extremely well now to have a significant relaunch. Besides obviously cutting non profit or very low margin businesses, we've also had unfortunately some issues with regulators in the quarter, 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 forward, you 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 focused on from a team perspective. Awesome. Thank you.

Speaker 2

I appreciate it.

Operator

The next question comes from Aaron Grey with Alliance Global Partners. Please go ahead.

Speaker 4

Hi, thanks for the questions. So first one for me just on Germany. Obviously, early days of cannabis reform that took effect April 1. So wanted to speak more in terms of your expectations, what you're seeing early days in the market, how do you look to capitalize specifically, distribution, is that now something that's easier for you to utilize for cannabis, now that's often narcotics versus before being traditional pharma? And then any other ways that you're looking to capitalize on the opportunity there?

Speaker 4

Thanks.

Speaker 2

Yes, thanks. Hope all is all, Aaron. First off, Germany is obviously a big focal point for the company who's been there for a long time. The short term effects of April 1 we're really on the medical side in terms of literally strangers 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 our social clubs come in effect, what does that mean for us and others?

Speaker 2

But really what we're playing this game for is when does it turn where that next cycle is or Phase 2 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 July rolls in, we're going to make sure that if the non 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.

Speaker 2

But really what we're positioning for getting ready for is that Phase 2. 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 being in the U. S. Where almost everyone on this call is, Bank Canada, it's so far ahead of Germany in terms of products, while right now we're talking about flower.

Speaker 2

And 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 actually filling it today. Okay. So there's going to be a whole new momentum of when things evolve and change. We're really right there to touch every vertical to make money.

Speaker 2

But still today, it's still the same focus it's been for years. It's just a lot easier and easier access and the margins are still sitting there, which is great.

Speaker 4

Okay, great. Appreciate that color. The second one for me on just CBD. A lot of conversations lately around the hemp derived beverage space and edibles as well, but really in some of the minor cannabinoids, delta-nine THC as well, from public companies, listening 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.

Speaker 4

I would love your guys' perspective just in terms of what opportunities you see in the beverage channel for hemp derived products for just CBD and the distribution opportunities out there? Thanks.

Speaker 2

I think beverages is an unbeatable 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 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 totals of the world are coming in and really starting to gear up.

Speaker 2

And when the category in the United States represents 2%, 3%, there's tremendous amount of growth. And the person who traditionally smokes cannabis and rolls the joint and smokes opposite is 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 Tabooza over legally with it. And we see huge explosion in the past 60, 90 days, it's already exploded with tremendous amount of people trying to create brands. I think our team is extremely well positioned.

Speaker 2

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. 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 alter great quality. I think what's on the shelf 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 an MG standpoint, ML standpoint.

Speaker 2

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. Then fly by night, I don't think it's going to last much longer. So that's definitely, I would say, probably the most exciting opportunity in this whole D9 space. Aaron, you mentioned it to me and sent to me a while ago when you see Tilray finally talking about it, obviously something is happening there.

Speaker 2

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. I mean, also on the I don't think you're going to see over a 5 MG be able to move around nationwide, but I'm not sure. And I'm sure there are states I can see where you could put in a 50 and there's no issues, But there's other states that obviously like Florida, which is a little bit more difficult. And then we're seeing some states even do 4 caps. So I know I'm more curious also to hear what you have to say on that, but I'm sure 5 at the end of the day will probably be the threshold.

Speaker 4

Yes, yes. No, definitely appreciate that color. And obviously, you've seen a lot of patchwork there at the state level with some even lower milligram limits than 5. But appreciate the color then. I'll go ahead and jump back

Operator

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

Speaker 5

Yes. 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 sign ups or doctors number of doctors issuing prescriptions? I know it's only been 6 weeks, but I think there was an article out there that suggested that total patient sign ups since the launch or since the change in the regulations on April 1 has nearly doubled the patient count. So any color you can provide on that or sort of trends you've seen in the 1st 6 weeks would be great?

Speaker 2

Yes. I don't want to come in and stamp a number by say, but I think what you're saying is probably pretty accurate. I think there has been a huge explosion. You see that in the shortage supply. At the same time, there's a lot of poor quality strains that aren't getting that.

Speaker 2

I think there's 2 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 higher prices, no middle ground, it seems. So we're seeing a lot of low quality and high quality cannabis move nowhere in between.

Speaker 2

And for us, obviously, we're 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 being aligned for. And the medical sales and the RIPA 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.

Speaker 2

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 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 drug market today. It's a blessing and it's great. So I think Phase 1, we're doing well on the medical side, but really we're trying to build out a bigger game plan, obviously for the market.

Speaker 5

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 commercial markets and the news out of the U.

Speaker 5

S. With potential rescheduling, 2 major global players that I would think will create a tailwind, for some new countries and markets that 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 switch?

Speaker 2

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.

Speaker 2

Very conservative country, moving 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 would just surely follow your German's lead, but really the big markets would be interesting to see to be interesting to see how they roll out 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 years ago, everyone was talking about Australia was subject to that market and it's never going to take off and then the blah, blah, blah and suddenly it explodes, right?

Speaker 2

And everything kind of comes together and now 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 the UK and France eventually that would be unbelievable. But this side of the world, I mean, this is I think the next opportunity in the frontier to focus on is Europe. Even our just in vessel businesses, I mean, there's plenty of competition in the U. S, a very different market and very different positioning in this part of the world.

Speaker 5

Okay. Yes, thanks. That's helpful. Yes, the UK, I would agree, would be incredibly exciting if they could move forward.

Speaker 2

That would be awesome.

Speaker 5

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

Speaker 2

Thank you.

Operator

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

Speaker 2

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

Operator

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

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