Flora Growth Corp

NASDAQ:FLGC

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Flora Growth Corp. Second Quarter 2024 Results Conference Call. [Operator Instructions], and the conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Dany Vaiman, Chief Financial Officer. Please go ahead.

[Dany Vaiman, executive]

Thank you, operator, and good morning, everyone. On behalf of the Flora team, welcome to our Q2 2024 results 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 retain forward-looking information. Today's call will include estimates and other forward-looking information and statements concerning future revenues, results from operations, financial position, markets, economic conditions, partnerships and other statements that may be constructed as a prediction of future performance. The information may involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied by such statements. Factors that could cause or contribute to such differences are described in detail in the company's most recent filings available on EDGAR at sec.gov and SEDAR at sedar.com.

Any estimates of 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 Starke, CEO; as well as Dany Vaiman, CFO. Following the presentation, Clifford and I will be available for the question-and-answer period. The Q2 2024 results press release and accompanying 10-Q has been filed on EDGAR and SEDAR. Also note that all amounts mentioned in this call are in United States dollars unless stated otherwise.

I'll now turn over the call to Clifford. Please go ahead.

[Clifford Starke, executive]

Thank you, Dany. Good morning, everyone on the line. Welcome to the Flora Growth's Q2 2024 Results and Corporate Update Conference Call. Let me start by noting that in the second quarter, Flora made several accretive acquisitions and form strategic partnerships to capitalize on the most robust market trends. These actions are designed to further diversify our activities and continue building inroads to areas where we see potential for growth.

The first acquisition was TruHC and came in April at the time of Germany's legalization of cannabis. To date, we have seen meaningful integration with the TruHC team and have established key initiatives to stimulate our business activities in the country. With the largest population and a gracious purchasing power in Europe, Germany boosts Europe's fastest-growing cannabis market. With the following 2 phases of German legalization expected in the coming 12 to 18 months, Germany is expected to become the largest federal and legal adult-use cannabis market globally. The German government has indicated it intends to pursue a second phase of legalization focusing on regional pilot programs with commercial supply chains. With approximately 230,000 medical cannabis patients today, Germany continues to lead the way in European medical cannabis as well.

Moving on to the U.S. market. And in May 2024, the U.S. administration announced that is moving to reschedule cannabis under U.S. federal law. The Justice department is expected to post its proposed rule to reclassify cannabis from Schedule 1 to Schedule 3 under Controlled Substances Act in the Federal Register. It's important to emphasize that this is the first time in the history of the United States that all major party -- presidential candidates are open to initiating important cannabis reform.

On the Democratic side, both Kamala Harris and Tim Walz are widely expected to take a progressive stance. Vice President, Harris has expressed support for cannabis legalization and Governor Walz legalized recreational cannabis in his home state in Minnesota. More recently, former President Trump suggested he would be in favor of reform.

As the U.S. continues to move towards progressive cannabis legislation, Flora intends to capture media opportunities and market trends. In the quarter, we established a joint venture with Althea Group Holdings to capitalize on the beverage market in the United States. The joint venture will link our U.S.-based CPG team and Althea's Peak, which is recognized as a market leader in cannabis-infused beverages and operates as world-class emulsion technology, Envision. This partnership is positioned to facilitate market access via traditional channels like wine and liquor stores. We believe that these types of beverages is robust in the beverage market segment, currently representing a very small fraction between 1% to 3% of all U.S. cannabis sales. Cannabis-infused beverages are beginning to overtake alcohol when it comes to first-time daily use.

Another area where we want to leave a mark is in the global e-commerce space. To this end, Flora acquired Australian Vaporizers in June. Australian Vaporizers was founded in 2010, and has become one of the largest online retailers of vaporizers, hardware and accessories in Australia. Australian Vaporizers has the potential to drive synergies within Flora's remaining portfolio, including our high-end brand, Vessel.

With that, I'll pass on to Dany, who discuss our financial results for the quarter. Dany, please go ahead.

[Dany Vaiman, executive]

Thank you, Clifford. Let me start by noting that in addition to the acquisitions we made in the quarter, Flora launched several new products to stimulate organic growth. Vessel unveiled the second-generation Compass Rise, which has a unique design and the ability to stand upright. JustCBD introduced a series of new gummies for sleep and relaxation, underscoring an already best-selling line of products.

Revenues for the quarter for the second quarter of 2024 were $15.7 million compared to $21.5 million for the second quarter of 2023. Revenues for the 6 months ended June 30, 2024, were $33.7 million compared to $40.8 million for the 6 months ended June 30, 2023. These decreases are primarily due to the company's deliberate discontinuing of several unprofitable product lines as well as increased competition. Total operating expenses were $6.7 million in Q2 2024 compared to $44 million in Q2 2023, a decrease of $37.3 million or 85%. Excluding noncash impairment charges, the decrease in operating expenses quarter-over-quarter was $2.5 million or 28%.

For the 2024 and 2023 year-to-date periods, total operating expenses were $13 million and $51.7 million, respectively. This represents a decrease of $38.7 million or 75%. Excluding noncash impairment charges, the decrease in operating expenses year-over-year was $4.8 million or 29%.

Net cash used in operating activities was $1.6 million in the 6 months ended June 30, 2024, compared to $7.8 million for the 6 months ended June 30, 2023, a decrease and an improvement of $6.2 million or 79%. On a consolidated basis, the net loss for the quarter was $2.7 million compared to $44.6 million in the comparable quarter, a decrease of $41.9 million or 94%.

Flora finished the quarter with $6.1 million in cash and $21.4 million of current assets, including $6.7 million of salable inventory. Net working capital was $3 million. In addition, we have set the stage for a wide array of financing alternatives to further fuel our business plan.

In terms of performance for each of our divisions, JustCBD maintained a gross profit margin of 34% and sales of $4.4 million. It's top selling products in the quarter included the bear, nighttime bear and peach gummies. Approximately 41% of its revenues stemmed from direct-to-consumer sales and the remaining 59% generated through business-to-business sales. In the quarter, JustCBD added 120 new wholesale customers to its network.

Vessel maintained a gross profit margin of 53% and sales of $1.4 million. Core product represented 35% of sales, and Compass products contributed 41% to sales. The largest individual items sold was the wood slates, representing 11% of Vessel sales. Vessel sales were 59% from direct-to-consumer and 41% on business-to-business. Vessel added 60 new wholesale customers, including several multistate operators in the quarter.

Phatebo earned $9.6 million in revenue with gross margins of 8.4% in the quarter, including income from continuing operations of $0.2 million. All sales were business to business and included brand-name pharmaceuticals.

I will now hand the call back to the operator for the question-and-answer session.

[Operator]

[Operator Instructions] First question comes from Aaron Grey with Alliance Global Partners.

[Aaron Grey, analyst]

So first one for me, just in terms of the EBITDA and profitability, maybe even tying gross margin. So I think you had a $700,000 inventory impairment there. So just as we think on the go forward for gross margins, as you exited some low-profit SKUs you mentioned on the go forward there, how should we think about the evolution of gross margin, how that ties into you guys going back to EBITDA profitability?

[Clifford Starke, executive]

Dany, do you want to handle that?

[Dany Vaiman, executive]

Yes. So, thank you so much for the question, and thank you for joining us on the call. Yes, this Q2, as we noted in our MD&A and our financial disclosures, was a bit unusual in the sense that we had a fairly large inventory impairment charge of $700,000 in the quarter, which drove down the gross margin. If we look at it on a go-forward basis, I think on a consolidated level, we're probably looking in the mid-30s in that range from a gross margin perspective. And as we grow and add more profitable lines to our portfolio, we expect that number to gradually increase.

[Operator]

Okay. All right. Makes sense. Second question would be, you guys have a couple of different irons in the fire there on some of the initiatives that could heat up and drive some revenue. So just as we think about near-term opportunities to drive revenue growth, what are you seeing as what could be the biggest impact to the P&L in the next 6 months here?

[Clifford Starke, executive]

Like a specific focus for the company?

[Aaron Grey, analyst]

Would it be more Germany? Do you think it's more JustCBD, with some of the hemping issues that you have there? I know you guys have a dozen -- a couple of different irons in the fires, trying to see what we should think about what are the most near-term growth ops versus will be more longer term in terms of when it impacts P&L?

[Clifford Starke, executive]

I think the U.S. team is very dedicated and focused on becoming a real brand in the beverage sector. We picked up distribution into several states. As we go into the fall, continue to -- we see ourselves getting to 6 to 8 states relatively quickly here. On the U.S. side, that's where the growth is going to come from. Germany, the business plan's coming together quite nicely. We also have some partnerships we're working on that will really put our SKUs, the proper place. And what's happening in Germany, we're realizing it's very e-commerce-driven. We have a great partnership, which we can't really get into right now.

But you're going to see besides what we talked about before, our seeds, cons, flower, accessories, Vessel, Just, and so forth will be established on this one platform that has, I would say, probably 2.5 million viewers on a monthly basis in Germany, and is by far the leading source for consumer to be able to actually identify what they want to actually purchase within the medical cannabis market and recreational market in Germany. So I'd say two-pronged, U.S. on beverages and Germany, we're touching every facet we possibly can within the European market.

[Operator]

The next question comes from Sean Wong with Haywood Securities.

[Sean Wong, analyst]

Just wanted to kind of look at the recently completed Australian Vaporizer acquisition. And I want to kind of touch around what's left in terms of the integration process and what does that look like from a capital perspective.

[Clifford Starke, executive]

Okay. So Australian Vaporizers, first, I'm very familiar with it. When I was one of the largest shareholders of Namaste back in the day, that was the main asset. When it came back to us recently, obviously, we had some short-term struggles in actually closing the transaction, which we end up doing relatively quickly recently. Instead of the integration, it's more that the business plan has actually changed.

So a retail individual does not have the actual ability to actually order a battery for a vaporizer, even nicotine on the e-commerce platform. Everything is getting driven through the doctors and pharmacists which short term is a little bit confusing, long term it is going to be a huge success for a couple of reasons. A lot of the smaller players are gone.

And second is, a lot of, for example, the Pascoes of the world are not registering their products, properties in the marketplace. The vessel, which is our hardware component, which is also another category of significant growth for us, is doing extremely, extremely well in the Australian market. After the U.S. is the second largest market for us. So it's not really integration or cost. Those guys really bought that, they had cash and balance sheet, plenty of inventory. The first shipment of vessel came, I think, 2 weeks ago, and everything is going to be integrated properly on that aspect. But I would say there's not really catch-ups or issues. It's more just integrating the platform to offer more selections to consumers through the pharmacists and doctors.

[Sean Wong, analyst]

Awesome. And my next question is kind of turning back to Germany and the adult-use market there. And it's kind of the first full quarter that we're seeing in the early phase. And I'm just wondering what you guys are seeing there and basically how you guys are expecting that to develop over the coming months? And what's the preparation required?

[Clifford Starke, executive]

2 questions. So Germany, obviously, since April has had a big influx in prescriptions, just where is your ability to access scripts even outside of German medical systems throughout EU. So there's been that influx. What's interesting is high-quality products as well as low-quality products, price dependent are all selling within the marketplace. For us, unfortunately, we -- us and many others ran out of our SKUs relatively quickly. What we're doing is we've sourced high-quality, low-quality flower, which should be arriving in the next couple of months and just integrating it to 2 form, one into our current pharmacy market, which is traditional for us.

The second is this e-commerce relationship. A lot of what I'm referring to, which is not public yet, but that's really where we're focused on integration-wise. And Germany, we just continue to keep on growing, and we're trying to focus really on just finding opportunities that didn't realize -- I never really envisioned it going so e-commerce driven versus traditional. So we adopted really closely to that. I think we've done a good job. But the growth is really going to come from just getting honestly more SKUs on to certain platforms and feeding our pharmacies because a lot of people on certain quality strains are -- they sold out.

[Operator]

The next question comes from Bill Kirk with ROTH Capital Partners.

[William Kirk, analyst]

Dany, you mentioned 120 new wholesalers for JustCBD. I think the number was 60 for Vessel. How many wholesalers are in like the base number that you're adding the 120 and 60 to, and what kind of bump from new wholesalers in terms of your sales by division, what kind of bump would you expect?

[Dany Vaiman, executive]

Yes. I think that's a good question. Thank you for that, Bill. I think if we look at it from a grand scheme of things, there are close to 20,000 points of distribution overall for the business and the company. But you're looking at a dollar value, and not all of them are material, obviously. From a bumping and sales perspective, I think that particular increase, we would expect it to be between 2% and 3% in the immediate to short term. So that would be the number that best reflects that increase in the number of wholesale distribution for Just.

[William Kirk, analyst]

Okay. And then, Cliff, I have a broader question on CBD or intoxicating hemp versus THC. It seems like some of the hemp groups are at odds with some of the proposed THC legislation that's out there. So can you talk about that conflict a little bit and maybe how the success and opportunities for hemp in JustCBD differ from THC in the U.S.?

[Clifford Starke, executive]

Yes. I think there's a couple of bad seeds out there that are creating negative atmosphere or trouble within the hemp space, psychoactive or not. The way we operate our business is on credibility and building trust with our consumers, both direct and through the wholesale channels. And there's real opportunities for growth. I just -- there's a lot of people out there that are selling psychoactive hemps that are not falling within the limits, and it's causing real issues for other people trying to build their businesses.

For us, it's more or less now focused on our traditional lines of gummies, tinctures, so on and so forth, our 800 different SKUs. But really, the team, like I said before, has really dialed in on the beverage front. So everyone is really, really focused on developing that, and we see that as a huge, huge growth opportunity versus just selling other gummy. I'm going to the White House, September 25. I don't -- I think there's a lot of political noise on the synthetics, obviously, besides the bad seeds in terms of companies and people. There's a real risk on the synthetic side, which we understand. The rest, I think, will be perfectly fine on. And again, I don't think we're actually worried about it in 2024 anyways. Bill, the fall and running into the political movement here, I think we'll learn a lot more. But it's tough to comment on politics, certainly, we feel comfortable overall.

[William Kirk, analyst]

Sure. And Dany, I think you mentioned increased competition. Is that, Cliff, what you're referring to with some of the folks pushing some of the psychoactive products maybe a little haphazardly. Is that where the competition is coming from?

[Clifford Starke, executive]

Yes. Just so I really think that this whole -- a lot of the major players are moving into the D9 space on the beverage front. They're very credible. There's other groups that are running smoke shops that -- so we shouldn't be going into and buying and leaving, and I understand that. So how do we actually govern this property? So it's very similar to alcohol. How is it going to unfold? And it's a really political awkward situation for everyone, from MSOs to us, to even the private prisons of -- everyone has an angle and issue. And I understand the political standpoint, I mean people are in jail for cannabis and still are for extremely small amounts and you're given a situation now where synthetic and MSOs don't feel comfortable with that -- with all given CapEx to office is put into actually going to states and is following the law, and you now see in New York kind of switching over finally.

I was with Aaron in New York a while ago, after our dinner I walked around. It's extremely uncomfortable walking into the stores that are selling illegal cannabis derivatives, hemp derivatives, mushroom derivatives, so on and so forth. While it's -- we're just trying to build a real credible and trustworthy business. So if everyone can get on the same page and gets governed properly, like following everyone else. That's what we're trying to do. And I think that will be implemented. I don't think it's a scare of our business. I don't think CB -- we saw anything that's going in the opposite way. Some CBD retailers or the [ bay-box ] stores are starting to feel very comfortable, obviously.

On the beverage side, you're seeing big alcohol distros feeling very comfortable in the [ toll of wine ], so on and so forth. And is fighting anyone who actually is saying and notice that they're doing anything wrong. So it's always moving in the right direction. But in this political environment, which is very tricky introducing for everyone, I think we just have to get to November and then stay close to what's happening day to day. But I do think there has to be a better job to protect kids as well as make sure the right companies are actually operational in certain states.

[Operator]

[Operator Instructions] Since there are no more questions, this concludes the question-and-answer session. I would like to turn the conference back over to Clifford Starke for any closing remarks. Please go ahead.

[Clifford Starke, executive]

Thank you for all stakeholders we joined today. We're working hard to build the company. I think, also, you're going to see some macro trends come into effect in a positive manner on both sides politically. And we're very, very excited for it. And if anyone needs more information, we're happy to provide it, reach out to Dany and I. Thank you very much, and have a great day.

[Operator]

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