© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello. My name is Phillip, and I'll be your conference operator today.At this time, I would like to welcome everyone to the Flowr Q4 2020 Earnings Conference Call. [Operator Instructions] Thank you. You may begin your conference.
Thank you, operator. Participating on today's call are the Flowr Corporation's President and Interim CEO, Lance Emanuel; and CFO, Irina Hossu.Please note that throughout the call we will refer to “Flowr” and “the company” interchangeably with the Flowr Corporation.Before management discusses results, I would like to remind participants that all amounts discussed on this call are denominated in Canadian dollars.Please also note that statements made during this call may include forward-looking information and future-oriented financial information regarding Flowr, its business and disclosure regarding possible events, conditions or other results that are based on information currently available to management which indicate management's expectations of future growth, results of operations, business performance and business prospects and opportunities. Such statements are made as of the date hereof, and Flowr assumes no obligation to update or revise them to reflect events, disclosures or circumstances, except as required by applicable securities laws.Such statements involve significant risks and uncertainties that are not guarantees of future performance or results, as a number of these risks and uncertainties could cause results to differ materially from the results discussed today. Given the risks and uncertainties, one should not place undue reliance on these statements and information. Please refer to the risk factors, forward-looking information and future-oriented financial information sections of our public filings including, without limitation, our 2020 year-end annual information form, our Q4 2020 MD&A and our Q4 2020 earnings press release for additional information, which are now filed on SEDAR.In addition, this discussion may include certain financial performance measures that are not defined by IFRS and are used by management to assess the financial and operational performance of the company. These are non-IFRS measures, and they include, but are not limited to, adjusted EBITDA. As there are no standardized methods of calculating non-IFRS measures, the company's approach may differ from those used by others in the industry and may not be comparable as a result. Accordingly, these non-IFRS measures are intended to provide additional information and should not be considered independently or in substitution for measures prepared in accordance with IFRS. We refer you to our MD&A for the fourth quarter of 2020, which includes reconciliations of non-IFRS measures.It is now my pleasure to turn the floor over to Lance Emanuel.
Thank you, Michael.Earlier this evening, we released our fourth quarter and fiscal year-end results. I'll begin by highlighting our recent capital transaction and sales and operational progress. I'll also provide a brief recap of 2020 noteworthy accomplishments before Irina reviews our Q4 2020 and year-end financials.2020 was a transitional year for the company. During the year, the company completed the build-out and commissioning of its facilities in Kelowna, where the last grow room at the K1 facility came online in April 2020. The Aljustrel and Sintra facilities in Portugal were completed by September 2020. And the R&D facility in partnership with Hawthorne Canada, a subsidiary of the Scotts Miracle-Gro company, was commissioned in the fourth quarter of 2020.We are pleased to have all of our facilities substantially complete now as we focus on execution and march towards profitability. To that end, Flowr has announced the appointment of Darryl Brooker as Chief Executive Officer of the company, effective May 3. Darryl brings an extensive track record of building regulated CPG businesses in Canada with a hands-on approach to management.The company is also pleased to announce that Bonnie Donovan has joined the Kelowna team as Vice-President, Operations. Bonnie is a senior operations and logistics professional with leadership experience in manufacturing operations, logistics, contract management and finance. Bonnie was previously with such companies as AB InBev and Canopy Growth Corp.In addition to these changes, the company bolstered its financial position in December 2020 with the acquisition of Terrace Global, bringing more than CAD 18 million in cash into the business.Subsequently, the company raised an additional CAD 15.9 million through a bought deal financing that closed on March 16, 2021.We are also pleased to report that the first quarter will be the best quarter in the company's history from a revenue perspective.In 2020, the company faced significant resource constraints which hampered our ability to execute on our overall plan. The strengthening of our financial position helped offset our Q4 results, which suffered in part due to the lingering persistence of the COVID-19 pandemic and its impact on our business operations, cultivation-related challenges that delayed the introduction of new strains, evolving consumer THC demands and a lack of financial resources required to fully ramp up cultivation.I've seen with several license producers the lockdown in major urban areas impacted the rollout and success of retail store locations and the ability for our sales staff to be on-site at retailers. Additionally, in the Canadian market, consumer expectations are still largely driven by THC and how much THC they will get for their dollars, although terpene content is becoming more of an important conversation point.As an increasing number of LPs continue to produce higher THC-based dried flower, premium producers need to continuously identify and cultivate higher-potency genetics to justify their premium price points. While our Pink Kush cultivar has evidenced our ability to grow award-winning products, having to rely on one cultivar in the middle of a pandemic while facing more competition and higher TC demands by consumers challenged our short-term ability to produce the results we and our shareholders expect.While the fourth quarter of 2020 was a challenged quarter for us, I'm very pleased to see that the first quarter of 2021 will be a significant rebound from a revenue perspective, and we expect the company's best quarter to date.We believe there are 3 major areas of opportunity within our core product segments in Canada to adapt to the evolving Canadian cannabis landscape. Number one, new cultivars. We began shipping BC Black Cherry in January and have experienced great success with this new cultivar. As an example of this success, our first order landed in British Columbia and sold out in less than 1 hour.We have also established exclusive relationships with genetic providers to bring in a pipeline of exotic differentiated strains with high [ THC ] and terpene potential. We will be leveraging our dedicated grow rooms in the R&D facility to cultivate, optimize and select from the best of these exotic strains for commercialization.As many of you will recall, the R&D facilities is the only one of its kind in the world, a purpose-built facility dedicated to cannabis research in partnership with the Scotts Miracle-Gro company. The facility was fully commissioned at the end of 2020, and we expect this facility to drive enhancements in cultivation practices and help us develop our brand for the introduction of new genetics into the market.Number two, new product formats. To date, we have primarily focused on producing 3.5-gram jars. We are expanding our product format portfolio to include new formats for pre-rolls as well as in larger format sizes.And number three, new provinces. In January 2021, we shipped our first commercial order to Quebec, further diversifying our revenue sources. We are also planning launches in Manitoba and Saskatchewan.In Portugal, while we did take an impairment on Holigen, which Irina will discuss shortly, we are still incredibly bullish on the European opportunity. We still believe the major areas of opportunity in Europe are gaining market authorization in Portugal and producing GMP-certified product for Germany and now Portugal.Through the profit-sharing agreement with Terrace Global, we were able to complete most of the capital projects in Portugal, putting us in a position to take advantage of upcoming market opportunities.In Q1 2021, the Portuguese regulatory authorities authorized the first-ever dried flower sales into local pharmacies. This is a watershed moment in the EU, as it represents the second country, behind Germany, to legalize medical cannabis and allow domestic sales. As previously announced, we entered into a strategic warehousing partnership with Tilray, which represented our first revenue in Portugal.In addition, we are currently in discussion to sell approximately 2,700 kilograms of biomass grown in Q3 2020. We also plan to utilize our GMP-certified Sintra facility to undertake [ tolling ] operations for several local GACP producers, which will bring in additional revenue. These [ tolling ] agreements allow us to generate revenue while we seek our own market authorizations in Portugal and conduct stability testing on our own genetics.While 2020 was a challenging year, over all, we made significant progress in achieving noteworthy accomplishments that underscore the strength of the foundation we've built. While there are a number of accomplishments to highlight, I'll list the ones that best support our belief that 2021 will be a breakout year for our company.Number one, our BCP Kush was a top-10 selling dried flower SKU and a top-selling premium dried flower SKU through Q3 2020 and a top-4 selling dried flower SKU in Q4 2020, thereby validating our thesis that we can produce and sell a premium product at a premium price point.Number two, our BC Pink Kush was awarded the Top Indica Dried Flower in Canada by over 150 retail budtenders from across the country.Number three, our first marketing campaign, Art and Science, which was focused on BC Pink Kush, won a prestigious Clio Cannabis Award. We also won ADCANN's Campaign of the Year, in addition to ADCANN Brand of the Year.Number four, we rolled out our new brand identity to great fanfare.Number five, our first test result for BC Black Cherry came in at 24.7% THC and 3.25% total terpenes, providing confidence that we have found our next great cultivar.Number six, we operationalized all 20 rooms in K1, putting us in a strong position to achieve our 10,000-kilogram production capacity.Number seven, we helped protect our employees and avoided a COVID-related shutdown of K1 thanks to robust COVID policies.Number eight, we harvested approximately 2,700 kilograms of outdoor medical cannabis from approximately 40,000 plants in Aljustrel, which we believe to be the largest legal harvest in European history. We also saw our first revenue from our Portuguese operations.Number nine, we successfully harvested 20% THC dried flower from our [indiscernible] in Aljustrel, demonstrating the potential to cultivate high-THC, GMP-grade medical cannabis in a low-cost structure.Number 10, we operationalized the R&D facility and formally kicked off our strategic partnership with Hawthorne, which will strengthen our competitive advantage in cultivation and enhance our status as a global leader in cannabis-driven R&D.Number 11, we were able to complete private placement financings totaling approximately CAD 21.5 million.And lastly, number 12, we completed the strategic acquisition of Terrace Global, bolstering our balance sheet and bringing additional diversity and depth of experience with new directors and stakeholders at our side.While Q4 2020 was a challenged quarter for us, I'm very pleased to announce that the first quarter of 2021 represents the best quarter in the company's history.Now I'll turn it over to Irina to run through some financial highlights.
Thank you, Lance, and good evening, everyone.As Lance stated, we've made significant progress towards our objectives in 2020. And with the closing of the Terrace acquisition, coupled with the early success of BC Black Cherry as well as provincial expansion, Flowr is well positioned to have a breakout 2021.Now let's review Q4 results. We sold a total of 311 kilograms of product in Q4, which was a decline of 241 kilos versus the third quarter. The decline in kilograms sold was primarily due to the timing availability of product as we worked through the tail end of the mother health production challenges we discussed in our Q3 call.Approximately 77% of the product sold was our flagship BC Pink Kush, at an overall gross price per gram, net of excise, of CAD 6.73. Price per gram was impacted by form factor mix, such as bulk versus package versus pre-rolls. Throughout 2020, we held our flagship strain prices steady, and we continue to maintain our positioning within the premium segment.At the end of the quarter, 592 kilos of product was harvested, which was available for sale in early January, which, therefore, gave us a fast start to 2021.For the full year 2020, we sold approximately 1,405 kilos of product.Gross revenue, net of excise, was approximately CAD 2.1 million for the quarter, which represented a 30% increase from our Q4 2019 revenue.Net revenue was CAD 1.6 million in the quarter, which was below expectations due to the production timing I just mentioned.For the full year 2020, total gross revenue, excluding excise, was CAD 9.4 million, and net revenue was CAD 7.5 million, which represents a 45% increase as compared to 2019.The total cost of sales before impairment for the company was CAD 2.9 million for the quarter. This normalized for approximately CAD 1.4 million of Holigen, nonrevenue-generating and onetime costs. The cost of sales in Canada were CAD 1.5 million.Our Q4 Canadian gross margin is, therefore, breakeven on an adjusted basis and 22% on an adjusted cash basis and is our second consecutive positive gross margin quarter on an adjusted basis for Canadian operations.On a full year basis, cost of sales, excluding impairments, were CAD 11.5 million. Throughout the year, our cost per gram showed significant improvement, as we saw the benefit from automation and fixed cost dilution as we spread our fixed costs over a larger amount of product. We expect to continue to see a reduction in cost per gram through the second half of 2021 as we increase our production at the K1 facility.The normalized cash cost per gram sold for the quarter, which excludes depreciation, amortization, share-based compensation and onetime adjustment, was CAD 3.84, which was higher than Q3 due to the lower Q4 production I mentioned earlier.The company impaired CAD 842,000 worth of product in the fourth quarter pertaining to lower-THC product grown in the third quarter as a result of the mother health issues described in Q3. On a full year basis, total inventory impairment was CAD 3.5 million, due to the product that did not meet our standards and aged inventory in Portugal from our initial indoor test harvest.Selling, general and administrative expenditures, consisting primarily of salaries and professional fees, were approximately CAD 5 million in the quarter, versus CAD 3.7 million in Q3 of 2020. The increase was primarily driven by legal fees as a result of amendments within our loan syndicate as well as other onetime expenses.In addition, in the fourth quarter we began investing in our selling and marketing activities to drive increased distribution and deeper penetration nationally and expect the investment to continue into 2021.Adjusted EBITDA in the fourth quarter, which excludes certain noncash expenditures and restructuring costs, was a loss of CAD 5.4 million, compared to a loss of CAD 3.5 million during the third quarter of 2020. The increase in loss was largely due to the lower production-constrained revenue and a onetime increase in SG&A expenses in light of the amendment with our loan syndicates as well as investments in selling and marketing initiatives.In the fourth quarter, the company recorded an impairment charge of approximately CAD 84 million, including CAD 1.6 million relating to the design of the K2 facility, CAD 15 million to intangible assets and CAD 64 million to goodwill for Holigen, of which CAD 10.9 million pertained to the Terrace acquisition.The impairment reflects primarily the slower-than-anticipated ramp-up of Holigen's Portuguese operations and the overall market and a general decrease in valuation metrics in the sector. Despite these challenges, the Sintra facility continues to be 1 of only 3 GMP-certified facilities within the European Union. And as mentioned previously, we expect to see a ramp-up in revenue in the near term. Holigen also still built the largest cultivation footprint in the EU with indoor greenhouse and outdoor capacity.As Lance mentioned, on December 22, the company completed the closing of the Terrace Global acquisition. The acquisition of Terrace improved the financial position of the company by consolidating approximately CAD 18.7 million in cash, net of transaction costs, without any material increase to liabilities. Terrace also brings to Flowr select board and management team members with extensive experience in cannabis jurisdictions outside of Canada.As I mentioned, in December we had harvested approximately 592 kilos of product, and we started off the year strong. We are looking forward to giving specifics around Q1 results at the end of May. However, we expect Q1 2021 to be our strongest sales quarter to date and expect net sales of approximately CAD 3.7 million.With the launch of our newest strain, BC Black Cherry, our entry into the Quebec market and the expected expansion of Ontario retail stores from approximately 600 to over 1,500 by year-end, we are optimistic about the year.I'll now turn the call back to Lance for closing remarks.
Thank you, Irina.While 2020 was another foundation-building year, there is no doubt that Flowr is on a path to significant growth. The clearest example of the beginning of this growth will be showcased by Q1, with the company-generated revenue equating to approximately 50% of our entire 2020 revenue.We are now happy to answer any questions you may have. Operator, please open the line for questions.
I see a question on the line from ATB, Frederico Gomes.
I just wanted to touch on your R&D facilities. So you guys recently announced a strategic review of your operations. So just wondering how your R&D facility, which obviously is going to demand some additional operating expenses, how does that fit into your cost-cutting process?
I'm sorry. I just want to make sure I understood the question. I apologize. I heard a little bit of background noise. I believe you're asking about the R&D facility and the additional cost? Is that what you -- did I understand that correctly?
Yes, exactly.
Okay. Great. So from an R&D perspective, we are absolutely materially built out on the facility. So we do not anticipate any further CapEx investments.What's really interesting about the partnership that we have with Scotts Miracle-Gro is that it is very much a strategic partnership, whereby we provide the facility, they provide the substantial resources behind it. So a large portion of the operations of the R&D facility are not Flowr's cost in there. So no significant incremental Capex. And from an OpEx perspective, a large portion of that will not be held by Flowr.
Okay. And then just regarding your international operations, so you guys have almost 3,000 kilograms of medical cannabis for sale. So just wondering what kind of prices can you expect there.And then, when can we expect the next harvest coming from Portugal? And what would be the size of that?
Sure. So I'll go ahead and just speak briefly about the pricing, and then I'll pass it along to Lance in terms of the strategy for Portugal.So we are in the process right now, Frederico, of working through a negotiation to sell almost all of that product. We have actually a number of potential customers for that product. So I wouldn't want to get into the pricing right now, for obvious reasons, but we are very confident in the near term we'll be able to sell that, and we hope to be able to announce something more definitive over the coming weeks.Lance, do you want to speak about the strategy there?
So as Irina mentioned, just to build upon what she said, we are entertaining a lot of interest with parties who wish to partner with us, either through [ tolling ] arrangements or broader investment discussions. We do have the capital now to deploy, and the company is diligently evaluating options to ensure we achieve a good return on any investment.And with respect to your question about future harvests, we will absolutely be considering future harvests. Obviously, with some new leadership coming onboard there's a lot of strategy still to be discussed there to make sure that everybody is aligned with how best to move forward. But we're well prepared with both the learnings that we've had from the Q4 harvest that we produced the 2,700 kilos, again which we'll have some news to share hopefully in the not-too-distant future around that. But with those learnings, we're well positioned to actually take advantage of the European market opportunities going into the balance of this year.
Okay. Great. And if I can just ask one more. Maybe if you could just elaborate more some of your cost-saving initiatives. You mentioned the strategic review process. And then if COVID-19 had any impact on your operations.
Sure. Absolutely. Thanks for that, Frederico. So there is quite a number of them. We've been doing actually quite a bit of work, I would say, with the strategic review committee. So I'll start by saying, if you recall back in Q4 of 2019, we did a fairly significant 25% restructuring within the total organization. So we did spend some time through the strategic review committee further optimizing that. So we anticipate on an annualized basis about CAD 2 million in incremental savings through SG&A.We are also looking to selling noncore assets. So things such as land that's currently not being utilized, potential equipment that's not being utilized. We spent quite a bit of time on that.And I would say that sort of the third piece is we're also looking to optimize the regions in which we operate in. So we are pleased that we signed a definitive agreement to sell our Australia operations. Yesterday, we actually signed that. We are divesting of some of the Terrace legal entities that came in, as well, to really give us an opportunity, like I said, to fully optimizing, to fully focus on Canada and Portugal, which is really where we see a significant value and significant growth in the near term.
You have a question from the line of [ Robert Street ].
I just had a question about the BC Tahoe OG. I'm just wondering why is it only available in Alberta. And I know you didn't mention it for the upcoming quarter. And I was just wondering why you didn't mention it for the upcoming quarter.
Thank you for the question. So BC Tahoe OG, with the evolving consumer demand profile that we're seeing in the market right now and some of the exciting strains that we have, like BC Black Cherry, we felt that the opportunity cost of continuing to focus on a strain that with respect to having BC Black Cherry and some of the other exciting genetics that we're bringing online, it just didn't make sense to continue to do so. And so that's why you're seeing it only available in limited areas, because we're bringing on what we believe to be much higher potency genetics in the very near future.
Yes, of course. So very understandable with your R&D facility being up.The other thing I wanted to get into was the cloning. I know in the interview just the other day with the new CFO, they mentioned the cloning that's going to be part of your new revenue stream. And I noticed you didn't also talk about that. I was wondering how that's being incorporated into the next quarter and exactly what strains you're going to be offering as cloned.
So our primary business -- thank you for the question. So to make sure I understand, the question is, are we going to be selling clones in the near future?
Well, your CFO confirmed it 2 days ago on a live news broadcast. So that's confirmed publicly, I believe. [indiscernible], I don't know.
Sorry to step in here. You may have Flowr confused with another LP. I'm the CFO of Flowr, and I don't believe I spoke about clones. So you may have us confused with another LP. [ That's not part of our revenue stream ].
That's not part of your revenue stream and it is never planned on being incorporated [indiscernible]?
[indiscernible]
[indiscernible]. No worries. That must just have been a liked video that it must have been about flower. The problem with the company sometimes is with the search, of course, because [indiscernible].
Completely understandable.
I heard that. That's why I was really curious. Because it sounded like an interesting venture. But that's fair. So it's just flower and, once again, you're not going into anything else but that at the moment, other than rolls.I also noticed that you sold, or if this is you, did you also sell your CAD 1 million, was it, oil extraction, oil extractor, I believe?
We have not sold it as yet. So as I previously mentioned, as part of the strategic review committee we are looking at noncore assets. So the extractor is currently listed as available for sale, but we have not sold it as yet.
And there are no further questions at this time.
Great. Thank you so much for the time, everyone.
Thank you.
And that does conclude today's conference. Thank you for participating. You may now disconnect. Have a great day.