Earnings Transcript for FLWPF - Q2 Fiscal Year 2019

Operator: Greetings. Welcome to The Flowr Corporation Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Thierry Elmaleh, Head of Capital Markets. Mr. Elmaleh, you may begin.

Thierry Elmaleh: Thank you, operator. Participating on today's call are The Flowr Corporation’s CEO, Vinay Tolia; our CFO, Alex Dann; and available for Q&A is our Co-Founder and Managing Partner, Tom Flow. 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 the 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 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 Q2 2019 MD&A and our Q2 2019 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 non-IFRS measures 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 Q2 2019 which includes reconciliations [Technical Difficulty] pleasure to turn the floor over to Vinay Tolia, Flowr’s CEO.

Vinay Tolia: Thank you, Thierry. I'd like to highlight progress we've made against our strategic and operational objectives, and will then pass the call off to Alex for a detailed discussion of our Q2 financial results, before I lay out our growth plans in my closing remarks. Last week, we closed the financing for gross proceeds of approximately $43.5 million. Flowr insiders participated in this transaction and have in every round of financing since the Company's inception. Management and insiders continue to own or exercise control of approximately 60% of Flowr, demonstrating our high degree of conviction and fully aligning us with all shareholders. The proceeds from the offering will be used in part to fund Flowr’s full acquisition of Holigen, which we expect to close in late August, and also fund the construction of our facilities around the world. Owning 100% of Holigen enables us to execute our global cannabis strategy. We continue to believe that the cannabis market will bifurcate where the premium dried flower market will be serviced by purpose-built indoor facilities and the global extract market serviced by low-cost large-scale assets. Holigen is in the process of developing large-scale cultivation production facilities in Portugal and Australia. Holigen’s Sintra facility in Portugal, currently has mother plants growing and has a final GMP inspection scheduled for September of this year. In addition, Holigen's large outdoor operation, Aljustrel, Portugal has been fully security fenced and has received permission from regulators to begin planting cannabis. Holigen has recently received an initial shipment of healthy clones from Flowr's Kelowna Campus. We expect the first phase of planting to be roughly 100,000 square feet and to have a harvest by year-end of approximately 1,500 kilos. Remember, this site has an annual capacity of 500,000 kilos. On July 12th, we received our second cultivation license from Health Canada for our Flowr Forest project. Flowr Forest consists of 42 greenhouses, totaling 189,000 square feet, and an outdoor cultivation area of approximately 150,000 square feet. To populate Flowr Forest, we pulled plants out of three grow rooms from our indoor facility, which lowers the amount of potential harvest during the quarter. We expect to get one harvest this year from the Flowr Forest of up to 5,000 kilos of cannabis. Flowr Forest is expected to yield 10,000 kilos of cannabis when operating at full capacity. The cannabis we grow in Flowr Forest will be used for our Rec. 2.0 strategy in Canada. Our first lunch will be a differentiated live resin vape product. From an operational perspective we produced 460 kilos of dried cannabis, representing a 61% increase from our production in Q1. We sold 339 kilos at an average price of $6.41. Our average selling price is driven by strain and product format mix, which can vary from quarter-to-quarter, and our average price per gram is $6.91 for the year. In Q2, harvest occurred in 8 of our grow rooms. Currently, 10 rooms are propagated -- 10 rooms are propagated, half of the 20 grow rooms we will have when the facility is fully complete. We’ve set grow rooms to be operational in Q4 of this year. Now, I'll turn it over to Alex to run through some financial highlights.

Alex Dann: Thank you, Vinay, and good afternoon,, everyone. Net revenue in the quarter was approximately $2.2 million, reflecting 339 kilos sold at an average realized price of $6.41 per gram. The total cost of sales was $2.1 million for the quarter or an average of $6.22 per gram. This amount includes non-cash expenses such as D&A. The cash cost per gram sold for the quarter was approximately $5.44 per gram. The Company continues to manage the construction and operations at Kelowna 1 currently, and with more rooms coming on line and the completion of the Kelowna 1 facility, management expects the cost per gram to decline. Selling, general and administrative expenditures, consisting primarily of salaries and professional fees were approximately $5.3 million in the quarter, compared to $1.5 million Q2 2018, and in line with management's expectations. The higher SG&A is due to the expansion across all functional areas to support the increasing production platform of the Kelowna Campus, the costs associated with maintaining a public company and costs related to the financing in Holigen transactions. Share-based compensation in the quarter was $3.5 million with grants of equity provided to key new hires and additions to the Flowr team. The Company posted net income of approximately $11 million in the quarter, as a result of the Company recognizing a gain on investment in the Holigen of approximately $18.8 million. This gain resulted from the fair value estimate of Flowr’s incremental increase in ownership of 15% in Holigen. The closing of this additional ownership occurred in late June, as well as the initial loan investment of $6 million, which was also converted into shares of Holigen for a combined total ownership of 19.8% as of June 30th. The closing of the remaining 80.2% interest in Holigen is expected to close in late August, resulting in the Company owning a 100% of Holigen. Adjusted EBITDA in the second quarter, which excludes non-cash expenditures, was a loss of $4.7 million as compared to a loss of $1.8 million for the same quarter last year. The increase in loss is primarily due to the ramp up of cultivation, operating and support activities, with the total headcount of 192 at the end of the quarter, compared to 67 employees the year prior. Flowr ended the quarter with a net working capital balance of approximately $5.4 million, including a cash balance of approximately $9.5 million. As Vinay mentioned, on August 8th, we closed an offering of 10.6 million units for gross proceeds of $43.5 million. If the overallotment option is exercised by the underwriters, Flowr will raise an additional 6.5 million in gross proceeds. During the quarter, Flowr continued with its capital programs with the development of the Kelowna Campus, which incurred expenditures of approximately $12.7 million. The development of Kelowna 1 continues to progress and spending for the quarter totaled $7.3 million. The total budget for Kelowna 1 is estimated at $36.3 million, with $9.7 million expected to be spent in the second half of 2019. Kelowna 1 will be fully operational in the fourth quarter. The capital expenditures for Flowr Forest are estimated at $9.5 million, of which $7.2 million has been spent year-to-date. I'll now turn the call back to Vinay for closing remarks.

Vinay Tolia: Thanks, Alex. Let’s now review our plan for the remainder of the year. Construction, as Alex mentioned, construction of Kelowna 1 is progressing and should be completed by the end of the year. In Flowr Forest, we're not fully propagated and anticipate to run the harvest towards the end of the year of up to 5,000 kilos. Construction of our Hawthorne R&D facility advanced according to plan during the quarter and the project remains on track for completion by the end of the year. In Q2 Flowr and Hawthorne developed a clean stock protocol, proprietary process that certified that Flowr's clones are free of pests and pathogens. This contributed to our successful shipment of clones to Holigen. We believe in the global medicinal cannabis opportunity and the cash flow generation potential in front of us. The Holigen team brings very complementary skill sets to Flowr, specifically on the pharma and GMP side. Regarding our potential NASDAQ listing, our listing approval does not expire and we intend to list on the NASDAQ at a future date. We decided that the cost associated with the listing, including D&O Insurance, are not expected to generate returns comparable to using fund to expand our operations. We have an exceptional team and are focused on investments that have the highest probability of generating near-term cash flow. Alex, Tom, and I are now happy to answer any questions you may have. Operator, please open the line for questions.

Operator: At this time, we will be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line Noel Atkinson from Clarus Securities.

Noel Atkinson: [Technical Difficulty] Nice harvest in Q2 for you guys at Kelowna 1. Can you give us a sense of where you're at now for sort of an annualized yield per square foot?

Vinay Tolia: You don't know, it's still really noisy, we’re working on some new genetics that we should get -- that will be necessary for us to get to our 300 grams a square foot yield. We're still targeting that for early next year. We've had some rooms that are up around 200 grams a square foot and we’ve had some that are considerably less. So, still it's still noisy and it depends, really from harvest-to-harvest and strain-to-strain.

Noel Atkinson: Okay. For Holigen for the Portugal facility, when do you expect to have for saleable product out of that facility?

Vinay Tolia: So, there is two facilities in Portugal, there is Sintra, which we expect to -- that smaller indoor facility, we expect to have our first harvest there by Christmas time. And Aljustrel, the outdoor facility depends on the exact timing of the next batch of clones, but we expect a harvest there, call it Novemberish. Now that product -- all that product can be sold under non-GMP. But assuming we get the -- our GMP approval after the September inspection, we should be able to sell -- have some saleable product by the end of the year there.

Noel Atkinson: Any idea would be to be selling into primarily the European markets, are you looking at Mexico or other places?

Vinay Tolia: Primarily Europe, but we're looking all over.

Noel Atkinson: Okay. Can you talk a little bit about what your strategy is for premium flower now in Canada? So, you've got 10,000 to 12,000 kilos coming very shortly out of Kelowna 1. If you've deferred K2 for the time being, what is the plan to be able to supply the Canadian market?

Vinay Tolia: Yes, good question. So, as I mentioned earlier, that stuff will be coming on line, in call it 6 to 9 months, so we have our own proprietary genetics. And we still see tons of demand for that high-end flower. And as retail rolls out more in Ontario, Alberta further expand, BC further expand, we see a tremendous demand for that high-end product. K2, we will be revisiting. We will be -- we're constantly revisiting our financing options for K2. So, K2 is not by any means off the table. It’s just put on hold for now.

Noel Atkinson: And then, just finally for me, could you talk a little bit about where you are with your oil sales license, given that you're going to be doing the hold of resin product in the market and using that product from Flowr Forest to be able to launch, I'd imagine a fairly robust processed products group?

Vinay Tolia: Yes. So, we expect our -- given the new CTLS licensing system, we can’t have more than one license per facility. And so, that's what's taking us so long to get our oil sales license. But, I just want to comment on our live resin vape product. We really think that this is going to be a differentiated product. We have a team of experts that are coming from California to set up the lab and set up the extraction. And we think that the vast majority of distillate vape product is going to be undifferentiated, and that our proprietary process for the product coming out of Flowr Forest is going to result in a really a premium and on-brand live resin vape product that you'll be able to tell the difference, you'll be able to smell and taste the difference, compared to distillate product right away.

Tom Flow: This is Tom speaking. Just to sort of add to that, I guess, our real vision, our long-term vision for the market remains that there's still a huge appetite from consumers for a premium line of product, both on the flower and on the vapes and other associated products. And, we really believe consumers are looking for a brand they can trust to deliver that. And that remains a really solid focus for us. And that's really what drives our focus, both on -- in terms of what we're producing on Flowr, in the indoor facility, as well as how we approach sort of the build, the outdoor and in greenhouses, as well as the extraction operations that we're building.

Noel Atkinson: Do you see an opportunity -- just one, really quick last one, do you believe that there's an opportunity out there for you to go and outsource extraction, if the oil license takes a little longer than you hope? Can you outsource any extraction for this right now?

Vinay Tolia: I think we're in a good place from the extraction side, in terms of licensing. We applied quite some time ago, we went through a significant portion of it. It’s just been our focus on other -- approving other areas, as far as licensing goes as kind of prioritized. So, we'll come back to the extraction now and we can get it.

Tom Flow: And Noel, just to add to that, we could but we wouldn't want to outsource that to third-parties, because then we feel you wouldn't have a differentiated product. So, we believe that having that in-house and having that expertise and having that proprietary process is going to be a real differentiating factor.

Operator: [Operator Instructions] There are no further questions in the queue. And I'd like to pass the call back to management for closing remarks.

Vinay Tolia: Thank you all for attending, and we look forward to speaking with you in the future.

Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.