Earnings Transcript for FLWPF - Q4 Fiscal Year 2020

Operator: Okay. Hello, my name is Philip 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 The Interim CEO, Lance Emmanuel 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 to financial information regarding Flowr, it's business and disclosure regarding possible events, conditions, or other results that are based on information currently within, 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 results discussed today, given the risks and uncertainties. Once you're 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 or Q4 2020 NDNA 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’s and are used by management to assess the financial and operational performance of the company. And these are not, these are non-IFRS’s measures and they include they're often limited to adjusted EBITDA. If there -- as there are no standardized methods of calculating non-IFRS’s 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’s measures are intended to provide additional information and should not be considered independently in substitution for measures prepared in accordance with IFRS’s. We refer your to our Indian aid for the fourth quarter of 2020, which includes reconciliations of non-IFRS’s measures. It is now my pleasure to turn the floor over to Lance Emmanuel.

Lance Emmanuel: 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 in sales and operational progress. I'll also provide a brief recap of 2020 noteworthy accomplishments. Before I read the reviews are Q4 2020 and year-end financials. 2020 worth of transition with year for the company during the year, the company completed the build-out and commissioning of its facilities in Kelowna for the last ballroom at the K-1 facility came online in April of 2020. The August draw in central facilities and 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 focused on execution and March towards profitability. So that on Flowr announced the appointment of Daryl Brooker as chief executive officer of the company effective Mayfair, Daryl 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 culinary team as vice president operations. Bonnie is a senior's operations and logistics professional with leadership experience in manufacturing, operations, logistics, contract management, and finance. Bonnie was previously with such companies that may be in bed and can't be growth. In addition to these changes, the company bolstered his financial position in December, 2020 with the acquisition of tourist global Brittany, more than $18 million cash into the business. Subsequently the company raised an additional $15.9 million to a bought deal financing to close 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 wintering persistence of the COVID-19 pandemic and its impact on our business operations cultivation related challenges. That the way 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 licensed 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 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, I mean, increasing number of LPs continue to produce higher T based dried Flowr premium producers need to continuously identify and cultivate higher public T genetics to justify their premium price points. While our Pecos cultivars evidence, our ability to grow award-winning products, having to rely on one call to bar in the middle of the pandemic while facing more competition and higher THC demand by consumers challenge, our short term ability to produce the results we in our shareholders expect while the fourth quarter of 2020, it was a challenge quarter for us. I'm very pleased to see that the first quarter of 2021 will be a significantly bound from a revenue perspective. And we expect the company's best quarter today. We believe there are three major areas of opportunity within our core product segments in Canada, to adapt to the evolving Canadian cannabis landscape. Number1, you called the bus. He began shooting BC black cherry in January, and I've experienced great success of this new called I think, example of this success. Our first border landed in British Columbia and sold out in less than one hour. We have also established exclusive relationships with genetic providers to bring in a pipeline of exotic differentiated screens with high T team for peak potential. We will be leveraging our dedicated Grover rooms in the R&D facility to cultivate, optimize and selecting. The best of these had got extremes for commercialization. As many of you will recall R&D facilities is 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. We expect this facility to drive enhancements and cultivation practices and help us develop our brand introduction of new genetics into the market. Number two, new product formats to date, we have primarily focused on producing three knock grand jars. We heard standing 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 orders to go back further diversifying our revenue sources. We are also playing watches in Manitoba and Saskatchewan in Portugal. While we did take an impairment on holiday in which are we able to stop shortly? We are still incredibly bullish in the European opportunities. We still believe in the major areas of opportunity in Europe or getting 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 opportunity in Q1 2021. The Portuguese, these regulatory authorities authorized the first ever dry Flowr sales. It's a local pharmacist. This is a watershed moment in the EU, as it represents a second country behind Germany to legalize medical cannabis and allowed domestic sales as previously announced the entered into a strategic warehousing partnership with Tilray, which represented a 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 planted utilize our GMP certified central facility to undertake towing operations for several local JCP producers, which will bring in additional revenue. The pulling agreements allow it to generate revenue while we seek our own market authorizations in Portugal and conduct stability testing on our own. Well, 2020 was a challenging year overall Nicky progress. He achieved nowhere, he accomplishments, but underscored the strength of the foundation we 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 1, our BGP course was a top 10 selling dried Flowr skew and the top selling premium dry Flowr skew through Q3 2020 and the top four selling dried Flowr skew in Q4 2020. Everybody validating our thesis that we can produce and sell a premium product at a premium price point. And the two, our BC pink coast was awarded the top thing. They could dry Flowr in Canada, like over 160 retail bartenders from across the country. Number3, our first marketing campaign, art and science, which was focused on VC pink crush won a prestigious Cleo cannabis award. We also want Adkins campaign of the year in addition to at camp branding here and before we rolled out our new bright brand identity to great fanfare, number five, our first test result for BP black cherry came in at 24.7% tat and 3.2, 5% total turkeys providing confidence that we have found our next grade cultivar. Number six, we operationalize all 20 rooms and K-1 putting us in a strong position to achieve our 10,000 kilogram production capacity. Number seven, to help protect our employees and avoided a COVID related shutdown on K-1, thanks to robust COVID policies. Number eight, we harvested approximately 2,700 kilograms of outdoor medical cannabis from approximately 40,000 plants in August shot, which we believe to be the largest legal harvest in European history. We also saw our first revenue from our Portuguese operations, number 9, we successfully harvested 20% THC dried Flowr from our Polycoms and eldest shawl demonstrating the potential to cultivate high tea T the GMP grade medical cannabis in a low cost structure. Number 10, we operationalized R&D facility and formally kicked off our strategic partnership with Hawthorne, which will strengthen our competitive advantage and cultivation and enhance our status as a global leader in cannabis driven R&D. And number 11. We were able to complete product placement financing, tiny things totaling, approximately 21.5 million. And lastly, number 12, we completed the strategic application of tariffs global bolstering our balance sheet and bringing additional diversity and depth of experience with these directors and stakeholders at our side. While Q4 2020 was a challenge quarter for us. I'm very policing on the first quarter of 2021 represents the best quarter in the company's history. Now we'll turn it over to Irene to run through some financial highlights.

Irina Hossu: 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 tariffs acquisition, coupled with the early success of BC Black Cherry, as well as provincial expansion Flowr’s 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 is a decline of 241 kilos versus the third quarter. With a decline in kilogram sold was primarily due to the timing availability or product, as we worked through the tail end of the Mother Health Production challenges we discussed in our Q3 call. Approximately 77% of the products sold with our flagship BC pink Kush had an overall growth price per gram, net of X size of $6 73. Price for brand was impacted staff factor mix such as bulk versus a package versus pre-rolls. Throughout 2020, we held a flagship string price that prices steady, and we continue to maintain our positioning within the premium. At the end of the quarter 592 kills a product is 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 $2.1 million for the quarter misrepresented, a 30% increase from our Q4 2019 revenue net revenue was $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 exercise was $9.4 million and net revenue was $7.5 million, which represents a 45% increase as compared to 2019. The total cost of sales before impairments of the company was $2.9 million for the quarter. That's normalized for approximately $1.4 million of collagen non-revenue generating and one-time cost. The cost of sales in Canada were $1.5 million of Q4 Canadian gross margin is therefore breakeven on an adjusted basis and 22%. On an adjusted cash basis and as our second consecutive positive gross margin quarter on an adjusted basis for Canadian operations on a full-year basis, cost of sales excavating impairments for $11.5 million throughout the year, our cost per gram showed a significant improvement. As we saw the benefits from automation and fixed costs 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 increased our production at the K-1 facility, normalized cash prosper grant sold for the quarter, which includes which excludes depreciation, amortization share-based compensation and one time adjustment was $3 84, which was hired in Q3 to develop Q4 production. I mentioned earlier. The company impaired $842,000 worth of product and the fourth quarter pertaining to lower THC product grown in the third quarter as a result of the mother health issues described in Q3 on a full year basis. Total inventory impairment was 3$.5 million due to the product that did not meet our standards and aged inventory and Portugal, Martin initial indoor test harvest selling general administrative expenditures consisting primarily of salaries and professional fees were approximately $5 million in the quarter versus $3.7 million in Q3 of 2020. The increase was primarily driven by legal fees as a result of amendments within our milk and our long syndicates, as well as other one-time expenses. In addition, in the fourth quarter, we began investing in our selling and marketing activities to drive increased distribution, deeper penetration Nash, naturally, and the investment to continue into 2021 adjusted EBITDA in the fourth quarter, which excludes certain non-cash expenditures and restructuring costs was a loss of $5.4 million compared to a loss of $3.5 million. During the third quarter of 2020, the increase in loss is largely due to the low to production constrained revenue and a one-time increase in SGNA expenses and 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 $84 million, including $1.6 million relating to the design of the kitchen facility, $15 million to intangible assets and $64 million to Goodwin, to Goodwill for holiday of which $10.9 million pertain to the tariffs acquisition. The impairment reflects primarily the slower than anticipated and ramp up of holiday apologist portion is operations and the overall market and a general decrease in valuation metrics in the sector. Despite these challenges, the central facilities continues to be one of only three GMP certified facilities within the European union. And as mentioned previously, we expect to see a ramp up in revenue in the near term policy. Also still both the largest conservation footprint in the EMU with indoor greenhouse and outdoor capacity. As Lance mentioned on December the 22nd, the company completed a closing of the terrorist global acquisition. The acquisition of terrace improved the financial position of the company by consolidating approximately $18.7 million in cash net of transaction costs without any material increase. The liabilities. Karen also brings to Flowr select board and management team members with extensive experience in cannabis jurisdiction outside of Canada. As I mentioned in December, we had harvested approximately 509 to choose a product. And we started off the year strong. We are looking forward to giving specifics around she won 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 $3.7 million with the launch of our newest string VC Plat Cherry for entry into the Quebec market and the expected expansion of Ontario retail stores from approximately 600 to over 1500 by year end. We are optimistic about the year I'll now turn the call back to Lance for the closing remarks.

Lance Emmanuel: Well, 2020 was another foundation building year. There's no doubt that Flowr on the path to significant growth. The queers example of the beginning of this growth will be showcased by Q1, which the company generated revenue, approximately 50% of our entire 2020 revenue there. Now, happy to answer any questions you may have operator please open the line for questions.

Operator: [inaudible] I see a question Alliance from, NTB, Federico Gomez.

Federico Gomez: Hi. Irina. Thanks for taking my question. I just wanted to touch in your R&D facilities. So you guys recently announced a review of your operations. So just wondering how, how you are in a decent facility, you know, which obviously is going to demand some, operating expenses. How does that fit into your process?

Irina Hossu: 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 said? I understand that correctly.

Federico Gomez: Yeah, exactly.

Irina Hossu: Yeah. Okay, great. h, so from an R&D perspective, we are, uh, absolutely materially built out on the facility. So we do not anticipate any further cap X investments. Uh, what's really interesting about the partnership that a partnership that we have with Scott's Miracle Grill is that it is very much a strategic partnership whereby we provide, uh, the facility they provide, , the substantial resources behind it. So a large portion of the operations of the R&D facility or not Flowr cost in there. So no, uh, no significant incremental tap backs and from an op ex perspective, um, a large portion of that will not be, uh, held by Flowr.

Federico Gomez: Okay, thanks. And then just still regarding the orients international operations. So you guys had almost 3000 kilos, the grand stuffs, uh, medical cannabis for sale. So wondering what kind of price can expect there. And then, uh, when can you expect, you know, the next harvest coming from Portugal and what would be the size of that?

Irina Hossu: Sure. So I'll go ahead and just speak briefly about the pricing and then I'll pass it along to, to Lance in terms of the strategy for proportional, so we are in the process right now, inside Rico of, uh, working through a negotiation to sell, almost all of that product, you know, we have actually a number of potential, uh, customers for that product. So, uh, I wouldn't want to get into the pricing right now for obvious reasons. So we are very competent on the sheet 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 as to launch. Do you want to speak about the strategy now?

Lance Emmanuel: As a re-imagined just to build upon what you said. We were entertaining a lot of parties with parties who wish to partner with us. How did the tolling arrangements or broader investment discussions?, We do have the capital now to deploy it and a company is diligently evaluating options to ensure we achieve a good return on any investment. And with respect to your question about future harvest, we will absolutely be considering future harvest with not some new leadership coming on board. There's a lot of strategies 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 warnings that we've had from the queue for harvest that we've produced the 2,700 kilos again, which, some news to share, hopefully 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.

Federico Gomez: Okay, great. And if I can just, uh, uh, one more, uh, maybe if you could just elaborate more on some of your cost saving initiatives, you know, mentioning the, the strategic review process and then if that COVID-19 had any effect on your operations?

Irina Hossu: Thanks. Sure, absolutely. Thanks, so there, there is quite a number of them we've been doing actually quite a bit of work. I haven't seen the strategic review committee. So I'll start by saying, uh, we believe if you recall back in Q4 of 2019, uh, we did a fairly significant 25% and restructuring within the total organization. So we did spend some time doing a strategic committee further optimizing that, uh, we anticipate, on an annualized basis about $2 million in incremental, uh, savings through SGNA. We are also looking, uh, to, of selling non-core assets. So saying, you know, such as land that's currently not being utilized, uh, potential equipment. That's not being utilized. and you know, quite a bit of time on that. And I would say it's sort of the third piece is we don't, we're also looking to optimize, um, the regions in which we operated. So we are pleased that we, uh, signed a definitive agreement to sell our Australia operations of, uh, yesterday. We actually find that, uh, we are divesting of, uh, some of the terrorist mingle educated that came in as well, uh, to really give us an opportunity, like I said, to fully optimize and to fully focus on, uh, Canada and Portugal, which is really where we see a significant value and significant growth in the near term.

Federico Gomez: Great. Thanks.

Operator: You have a question from the line of Robert street?

Unidentified Analyst: I just had a question about the BC Tahoe. G I 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 for the upcoming quarter?

Lance Emmanuel: Thank you for the question, BC Tahoe, as they're evolving with the evolving consumer demand profile that we're seeing in the market right now, and some of the exciting trends that we have with BC black cherry, uh, we felt that the opportunity cost of continuing to focus on a strain debt with respect to having DC black cherries and the other exciting genetics that we're bringing on mine, 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.

Unidentified Analyst: Yeah, of course. So they're understanding what your R&D facility being up. And the other thing I wanted to get into was the cloning. I know in the interview just the other day with, um, the CFO, they mentioned, uh, the cloning is going to be part of your new revenue stream. And I noticed you didn't also talk about that. I was wondering how to incorporate it into the next quarter and exactly what strain you're gonna be offering us clones.

Lance Emmanuel: So our primary business. Thank you for the question. So it would be fair. I understand the question is, are we going to be selling clones your future?

Irina Hossu: Well, your CFO confirmed it two days ago on a, on a [inaudible]. I have, I, we, it was never planned on being incorporated in the answer.

Unidentified Analyst: Yeah, no, no, no worries. I must've spina once again, you're not going into anything else, but that at the moment, other than roles, I also noticed that you sold, or if this is you, did you also sell a million dollar? Um, was it a little extraction oil structure?

Irina Hossu: I believe, uh, we have not sold it as yet. So as I previously mentioned, as part of this community, we are looking at non-core assets. So the extractor is currently listed as available for sale.

Operator: And there are no further questions at this time.

Irina Hossu: Okay. Thank you so much for the time, everyone. Yes. Thank you. And that does conclude today's conference. Thank you for participating. You may now disconnect have a great day.