Earnings Transcript for FLWPF - Q3 Fiscal Year 2019

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Flowr Q3 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Thierry Elmaleh, Head of Capital Markets. Please go ahead.

Thierry Elmaleh: Thank you, Josh. Participating on today's call are Flowr Corp's CEO, Vinay Tolia; our CFO Alex Dann and available for Q&A is our 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, business and disclosure regarding possible events, conditions or results that are based on information currently available to management which indicate managements 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 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 Q3 2019 MD&A, our Q3. 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 method of calculating non-IFRS measures. The company's approach may differ from those used by other than 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 Q3 2019, which includes reconciliations of the non-IFRS measures. It's now my pleasure to turn over the floor to Vinay Tolia our CEO.

Vinay Tolia: Thanks, Thierry. Earlier this evening, we released our third quarter results and provided a comprehensive corporate update to supplement those results. I'll begin by highlighting our strategic and operational progress before Alex reviews our Q3 2019 financial results. Let me start by saying that our third quarter revenues were short of expectations as we continued to manage construction and production activities as well as ramp up sales and marketing. While were disappointing in the delay of our commercial ramp up, we're exciting to be exiting 2019 with our infrastructure now in place globally. And we're confident in our ability to effectively scale our business in 2020. In particular, we've made good progress building out our infrastructure in Canada and throughout the globe. In Canada, we produced 447 kilos of dry cannabis in the third quarter, a slight decrease quarter-over-quarter. The lower production was due to the use of [indiscernible] rooms within our indoor facility Kelowna 1 to support chrome production for Flowr Forest and for shipments to our facilities in Portugal. Production activities resumed in these rooms during the third quarter. This production was also occurring while we were building out the remaining 10 of our 20-grow room. We're pleased to say that Kelowna 1 is now substantially complete and the evidenced package and amendment application for licensing has been submitted to Health Canada. We're excited to exit 2019 with the heavy lifting of construction now complete on our flagship indoor facility. In terms of sales, we sold approximately 227 kilos at an average price of $8.03. We continue to see strong demand for our core Pink Kush stream as well as other [ITAC] [ph] products, which leads to an important point coming into the first year of reg legalization, production planning was hindered by the lack of reliable consumer insights. We made production decisions based on the available information. And with time, we're getting more insights into consumer demand. Going forward we're prioritizing data acquisition to ensure our product offerings are driven by consumer insights and address consumer demand. Furthermore, we're excited by the introduction of new genetic in 2020 which we think will augment our overall product assortment and support higher yields out of Kelowna 1. We're also excited to complete the first harvest of Flowr a poly-film shade house an outdoor grow. That is located on our Kelowna campus. We planted the crop during the third quarter and have now completed the harvest of approximately 3,189 kilos of dried flower equivalent. The reason for this equivalency is that we flashed growth over 13 thousand kilos of wet cannabis at the time of harvest. Flash squeezing is the first step in our live resin extract process which will differentiate our extraction offerings planned for 2020. We pushed out the launch of our extraction product lines in the second half of 2020 as we pursue a more modest development schedule. All-in-all, we believe that our Canadian operations are well-positioned to focus on cash flow generation in 2020. In Europe, we've been focusing on construction of an indoor cultivation in processing facility in Sintra, Portugal and a large-scale outdoor cultivation in partial processing facility in Aljustrel, Portugal Together these facilities as a cornerstone of our Global Medical strategy. During the third quarter, Sintra underwent its final GMP inspection and we are awaiting our certification which we anticipate in early 2020. With an EU-GMP certification will be ideally positioned to distribute our Holigen brand and medical cannabis products across the globe. As Sintra, the growing through our operational with the remaining three to be complete in Q1 2020. We expect the harvest from the first growth from our first growing to occur by year-end. The oil extraction infrastructure in Sintra is expected to be installed and operational in the second quarter of 2020. And products to be available for sale under GMP in Q3. At Aljustrel, our outdoor growth facility, we propagated 12,000 colons on 100,000 square feet. This initial harvest is expected to be completed by the end of the year. This is an initial harvest and part of the phase development for this 7 million square feet of cultivation area. In 2020, we expect to achieve two harvest at Aljustrel and ramping the cultivation area to 1 million square feet for each of the harvest. Altogether we are on track for our European operations to ramp up revenue in 2020. This progress in Europe is bolstered by our GMP packaging license in Australia which was recently renewed. Now I will turn it over to Alex to run through some financial highlights.

Alex Dann: Thank you, Vinay, and good evening everyone. Net revenue in the quarter was approximately $1.3 million reflecting 227 kilos sold at an average realized price of $8.03 per gram. On a year-to-date basis, our average realized price is $7.23 per gram. The company recognized provisions of $400,000 related to product returns and price reduction initiatives with its customers. The total cost of sales was $1.3 million for the quarter or an average of $5.33 per gram. This compares to $2.1 million or an average of $6.22 a gram in the prior quarter of 2019. The cash costs per gram sold for the quarter which excludes depreciation and amortization was approximately $5 per gram compared to $5.44 last quarter. The company continue to manage the construction and operations at Kelowna 1 concurrently. With more rooms coming online the completion of the Kelowna 1 facility and the installation of an automated packaging line, management expects the cost per gram to decline. The automated packaging line hardware and installation is pending the licensing of the packaging area of the Kelowna 1 facility. Selling, general and administrative expenditures consisting primarily of salaries and professional fees were approximately $6.1 million in the quarter compared to $5.3 million in Q2 2019. This is 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 in Canada and the build-out of our global business with the acquisition of Holigen. Share based compensation in the quarter was $3.4 million which is comparable to last quarter. The company posted a net loss of approximately $15 million in the quarter which was driven by the continued development of Flowr's infrastructure to support the Canadian and international business. One-time costs of approximately $1.1 million associated with the Holigen acquisition and $7.1 million non-cash loss related to the fair valuation of Flowr's investment of Holigen prior to the acquisition date of August 20. Adjusted EBITDA in the third quarter which excludes non-cash expenditures was a loss of $5.6 million compared to a loss of $4.7 million for the second quarter of 2019. The increase in loss is primarily due to the ramp-up of cultivation, operating and support activities. With the acquisition of Holigen, the company currently has a headcount of 264 employees compared to 192 employees at the time of our last earnings call. Flowr ended the quarter with a net working capital balance of approximately $18 million including a cash balance of approximately $25 million. To bolster our financial position, we recently closed on a $25 million credit facility at favorable pricing. With the first tranche of gross funding of approximately $20 million drawn down. During the third quarter, Flowr continued with its capital programs with the development of the Kelowna campus and the construction of facilities in Portugal. This resulted in total capital expenditures of approximately $15.9 million with approximately $12.8 million and $3.1 million relating to Kelowna and Portugal respectively. I will now turn the call back to Vinay for closing remarks.

Vinay Tolia: Thank you, Alex. I'd like to close our prepared remarks by focusing on our value proposition and positioning based on today's market conditions. Since the beginning we've been focused on business fundamentals and investments that have the highest probability of generating value. In a little over two years we're proud to have been granted two site licenses from Health Canada constructed a purpose-built indoor facility, executed on one of the first outdoor growth in Canada and expanded our footprint internationally to go from 0 to over 7 million square feet of licensed cultivation space it's something we take great pride in. Our strategy is to have the right-sized facilities for the markets we're targeting to ensure that we can cultivate products that meet our customers demand. This avoids pursuing scale for the sake of scale and allows us to prove out the business and what we believe to be a capital efficient way. In Canada, we're committed to the premium end of the dry flower market. Products in this category that deliver on consumer expectations such as our pink kush are achieving impressive sell-through rate. We expect the same to be true for our [exag] [ph] and concentrate products. In the global medical market, UGMP and access to scale will be critical differentiator. In Europe, we have that scale, but our pursuing development in a prudent manner that will increase with demand. By establishing sales and distribution channels in Europe and Australia, we're augmenting our Canadian sales channels and expect to route products to those markets with favorable supply demand dynamics. We continue to see a massive opportunity globally and believe our efficient footprint puts us in a unique position to exploit opportunities as they arrive. We're pleased with our strategic progress and are confident that we're positioned for significant growth in 2020. We're now happy to answer any questions you may have. Operator, please open the line for questions.

Operator: [Operator Instructions] Your first question comes from Noel Atkinson with Clarus Securities. Your line is open.

Noel Atkinson: Good afternoon. Thanks for taking our call. First off, so congrats on the harvest at Flowr Forest, so that's a meaningful amount of flower that you guys are able to take off there. You mentioned that half was flash frozen for your extracted products. Do you have any plans to sell any of that has dried flower of the remainder?

Vinay Tolia: Of the flash -- as a flash frozen product?

Noel Atkinson: The product that wasn't flash frozen.

Vinay Tolia: That's primarily going to be used for different extraction product for different extract product. So, that's again, if you think about the way we've always characterized the markets the two sides of the hourglass to one side, the premium flower for smokable reg products and the other side as product heading towards extraction, the outdoor products will be on the bottom side of the hourglass.

Noel Atkinson: Okay. Can you just talk a little bit about where you guys stand with getting the sales license for process products? You mentioned that you were going to do live resins like I guess second half of next year. Are you going to do any process products ahead of that?

Vinay Tolia: I think where we are going to be leading with the live resin product. We were constructing our extraction facilities adjacent to Kelowna 1 right now. It is all depending on Health Canada licensing. So as you know sometimes it's tough. It's out of our control. We will likely submit our application for the flower -- for the extraction facility right after we get our finished 14 and 15 of K1, so again that's why I'm targeting essentially Q2, Q3 because so much of this is dependent on licensing.

Tom Flow: Noel, this is Tom speaking. We actually already on our K1 facility already have obtained our processing license many months prior. So now working through the sub-class so we have a pretty detailed plan and getting the sub-class for extracts added as well as our new product notices to be able to launch all the live resin products in the second half of the year.

Noel Atkinson: Okay. Can you talk a little bit about the CapEx budget for Portugal for the two facilities in terms of -- in order to get to finishing Sintra and the first harvest for the other facility? How much more CapEx do you have to spend?

Alex Dann: It's Alex. Yes, we're looking at approximately CAD$10 million for completing the facilities in Portugal. They have access to credit facility that they will be drawing down as well. So, the impact on our cash will be less.

Noel Atkinson: Right. And then, how about for Canada between the extraction facility and anything else you need to do at Kelowna 1 -- Kelowna campus, I apologize.

Alex Dann: So, yes, so combined we're looking at about $10.9 million for Kelowna. Extraction and storage facility is approximately 5.6 million. And as of September 30, we had $5.3 million to spend on Kelowna 1.

Noel Atkinson: Okay, great. Can you talk at all about the concessions that we're encouraged during the quarter? Are you seeing this in any particular province or through your medical channel or -- and like what are you seeing now in terms of Flowr demand through the Canadian channels as Q4 ramps up?

Vinay Tolia: Sure. This goes back to our comment we made about consumer insights. So, this is particular product in BC and Alberta. Again, we have products like pink kush that we can't keep on the shelves, so we have other products that -- it's not moving as fast. That's why we are kind of adjusting pricing to get that to move that out of the channel and really going forward we are adjusting our production planning to come out with more of those streams and more of those cultivar where we find lots of demand. And going forward, you read about supply [goals] [ph] and while that's true on a macro level we are still seeing very strong demand for that that premium ITAC products again like I mentioned the pink kush.

Noel Atkinson: Okay, great. And then, just finally before I go back in the queue, I apologize if you've said it before but the Sintra for the first three grow rooms that are coming online, can you give us a sense of how much capacity per year those rooms could achieve?

Vinay Tolia: So, I'll give you a run rate for all six grow rooms. All six grow rooms, I think, again, it really depends on your yield assumption, but I will give you a range -- to be a conservative range anywhere from 2000 to 3000 kilos.

Noel Atkinson: Okay, great. All right. Thanks very much.

Vinay Tolia: Thank you, Noel.

Operator: [Operator Instructions] And your next question comes from Bill Kirk with MKM Partners. Please go ahead.

Bill Kirk: Thanks for taking the question. So, we spend a lot of time thinking about the supply curve for product to be sold in Europe. Can you guys spend a little bit talking about the demand curve maybe in terms of its size, its timing and in what regions you're expecting it to come from?

Vinay Tolia: The big limiting factor in Europe right now is having GMP products. They are just simply not a lot of it available in Europe. I mean we are seeing very, very strong demand primarily from Germany for GMP dry flower. It again goes back to getting that GMP certification. So, obviously, timing will depend on that, but we are seeing far more demand for product in Europe right now than we'll be able to produce out of the Sintra and out of our initial -- out of our initial planting Aljustrel.

Bill Kirk: I guess related, can the product grown outdoor in Portugal can that become GMV if it goes through Sintra, is there a process for that to be GMP?

Vinay Tolia: Product is going in a greenhouse, yes, because it's still GACP.

Bill Kirk: Okay. Then I…

Vinay Tolia: Sorry, go ahead.

Bill Kirk: Well, I was going to ask, I think you previously expected the GMP for Sintra by year-end. Now I think you said early 2020, so what pushed that out?

Vinay Tolia: Just delays on the government and we're just waiting to hear from them. We've been bugging them. And we're just being conservative with timing. I think it will happen in January.

Bill Kirk: Okay. I'll yield and hop back in the queue. Thank you.

Vinay Tolia: Thank you, Bill.

Operator: [Operator Instructions] There are no further questions at this time. I'll turn the call back to Thierry for closing remarks.

Thierry Elmaleh: Thanks everyone for joining us. Have a great evening.

Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.