Flora Growth Corp

NASDAQ:FLGC

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Flora Growth Corporation Third Quarter 2024 Results Conference Call. [Operator Instructions]

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

[Dany Vaiman, executive]

Thank you, operator, and good morning, everyone. On behalf of the Flora team, welcome to our Q3 2024 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 contain forward-looking information. Today's call will include estimates and other forward-looking information and statements concerning future revenues, results from operations, financial position, market, economic conditions, partnerships and any other statements that may be seen as a prediction of future performance. The information may involve known and unknown risks, uncertainties and other factors, which 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 or 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; and myself, Dany Vaiman, CFO. Following the presentation, Clifford and I will be available for the question and answer period. The Q3 2024 results press release and the accompanying 10-Q have been filed on EDGAR and SEDAR. Please note that all amounts mentioned on this call are in U.S. dollars unless otherwise stated.

I will now turn the call over to Clifford.

[Clifford Starke, executive]

Thank you, Dany. Good morning, everyone on the line. Welcome to the Flora Growth Q3 2024 results and corporate update conference call.

Let's deal with the United States. The recent election of President-elect Donald Trump brings renewed focus to a $28 billion hemp industry catalyzed by signing into the law in 2018 historic Farm Bill. This transformative legislation neutralized hemp at the federal level, fostering explosive growth across the United States. President-elect Trump's recent comments on cannabis regulation, indicating his favorable stance also provide encouraging signals for those advocating for comprehensive cannabis reform.

While federal legalization remains uncertain, his remarks suggest we should see significant progress and regulatory alignment under his administration. At Flora, we view this opportunity to further our presence in the U.S. market, leveraging our flagship brands like JustCBD and Vessel, which are already making strides in capturing market share. With federal rescheduling procedures set to begin in January, we remain optimistic about additional cannabis policy advancements that can bring significant benefits to consumers, businesses and communities alike. The prospect of a rescheduling shift underscores the growing recognition of cannabis' therapeutic potential as rightful place in a modern regulated economy.

Complementing these developments, U.S. Senator Ron Wyden recently introduced the Cannabinoid Safety and Regulations Act. This legislation proposes the most comprehensive framework for hemp regulation in the U.S., addressing key areas such as product safety, labeling and market oversight. We believe this act should serve as a blueprint for the upcoming Farm Bill, offering a pathway for clearer regulatory structures and fostering innovation investment within the hemp industry. A regulatory framework like this would work perfectly with Flora's mission to create safe, high-quality cannabinoid products and meet consumer demand and regulatory standards.

Moving to Europe. We're seeing promising developments in Germany. The country's updated framework for the liberalization and cultivation of industrial hemp underscores its commitment to becoming a leader in sustainable agriculture and cannabis reform. Germany is also making strides with its controlled cannabis retail efforts. The cities of Frankfurt and Hannover have been announced as model locations for Germany's first legal controlled cannabis retail operations. These pilot programs represent a critical step towards broader legalization with the potential to serve as a template for nationwide adoption.

Flora has strategically positioned itself to capitalize on the European market. Our EU-GMP facility in Germany provides a competitive advantage, enabling us to distribute premium medical cannabis across the EU. We are closely monitoring these developments and remain ready to expand our presence as these regulatory framework evolves. It's an exciting time for the industry. We're optimistic about the future as we help drive forward policy and innovation that serves the needs of consumers, businesses and society.

With that, I'll pass along to Dany, who will discuss the financial results for the quarter.

[Dany Vaiman, executive]

Thank you, Clifford. Let me start by noting that in the United States we are actively working to diversify our product portfolio by entering the fast-growing infused beverage market. This move represents a significant step forward as we tap into a segment that is expected to see substantial growth over the coming years. The introduction of our infused beverage line, including Melo and Cola products, allows us to leverage our expertise in product innovation and marketing. These beverages cater to a rising consumer demand for alternatives to traditional alcoholic drinks.

In Germany, we are laying the groundwork for a transformative phase in our European operations. We recently welcomed Dr. Manfred Ziegler, the former Managing Director of CC Pharma, to lead our operations in the region. Dr. Ziegler brings extensive experience and a proven track record of success, including his leadership during the acquisition of CC Pharma by Tilray. Under his guidance, we are launching a Parallel Import business, a key initiative designed to meet the growing demand for affordable, high-quality pharmaceuticals in the European Union. Parallel Importing allows us to leverage pricing differentials within the European market, while adhering to strict regulatory standards, creating a competitive advantage.

Turning over to our financial results. Revenues for the third quarter of 2024 were $12.5 million compared to $17.3 million for the third quarter of '23. Revenues for the 9 months ended September 30, '24 were $46.2 million compared to $58.1 million for the 9 months ended September 30, '23. These decreases are primarily due to the company's deliberate discontinuation of several unprofitable lines as well as increased competition. Total operating expenses were $6.5 million in Q3 '24 compared to $5.5 million in Q3 '23. For the 2024 and 2023 year-to-date periods, total operating expenses were $19.6 million and $57.2 million respectively. This represents a decrease of $37.6 million or 66%.

Net cash used in operating activities was $3.7 million in the 9 months ended September 30, '24 compared to $7.3 million for the 9 months ended September 30, '23, a decrease of $3.6 million or 49%. On a consolidated basis, the net loss for the period was $9.8 million compared to $47.3 million in the comparable period, an improvement of $37.5 million or 79%. Flora finished the quarter with $4.2 million in cash and $21.3 million in current assets, including $7.9 million of saleable inventory.

In terms of performance for each of our divisions, JustCBD maintained a gross profit margin of 40% on sales of $4.2 million. 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 with the remaining 59% generated through business-to-business sales. In the quarter, JustCBD added 83 new wholesale customers to its network.

Vessel maintained a gross profit margin of 55% on sales of $1.1 million. Core products represented 29% of sales and Compass products contributed 45% to sales. The largest individual items sold was the Compass Rise, representing 17% of Vessel sales. Vessel sales were 66% from direct-to-consumer and 34% on business-to-business. Vessel added 35 new wholesale customers in the quarter. Phatebo earned $7 million in revenue with gross margins of 7.1%. 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 period.

[Operator]

[Operator Instructions] The first question comes from Aaron Grey from AGP.

[Remington Smith, analyst]

This is Remington Smith on for Aaron Grey. My first question is, you've announced quite a few initiatives in the past few months. What do you think will be the largest drivers to growth in both the near-term and the long-term?

[Clifford Starke, executive]

The main driver on the U.S. side is really going to be dialed in on the beverage front, which the distros have picked up and you're still going to see in the total wines and ABCs of the world. On the German side, it's going to -- it's going to be, one, the PI business, which we expect extreme high top-line with decent margins on it as well as being able to compete and win the pilots for the retail locations. Those are the main focuses of the business and that's where we're putting money in today, both on the CapEx, OpEx exercises.

[Remington Smith, analyst]

Got you. Yes, that's helpful. And then kind of sticking to that German business, you experienced a little bit of softness, I guess, in your existing German business this quarter and in the prior quarter despite some of the reform that happened. Could you speak to a little bit of that? And then I guess the outlook to that existing business going forward?

[Clifford Starke, executive]

Yes. I mean, Germany, first off, we brought in a world-class team now. So Manfred and the individuals he's brought in under him, I don't think we could find anyone better to actually run Germany in every facet possible. And then what we've done over the last quarter or so is really working on changing the business model a little bit to gain way higher margins on that side of the business, which I think you'll see -- I think you're going to see the effects in a couple of quarters from now, but we're making a lot of changes in Germany.

[Remington Smith, analyst]

Okay. That's helpful. And then I guess, sticking to the gross margin. On the last call, you expected gross margin to expand into kind of that mid-30% range. So is the commercial wholesale going to be a driver there too, I guess, to that expansion? Will it be kind of the house of brands? Talk to, I guess, if the mid-30% range is still the guidance, how you expect to get there? And what will that mix be between, I guess, the 2 segments?

[Clifford Starke, executive]

Dany, do you want to touch on that to start?

[Dany Vaiman, executive]

Yes, absolutely. So Remington, thank you so much for joining us, and I hope you're doing well. As we noted, the business in the United States, JustCBD and Vessel, those ones do experience fairly significant margins, 40% to 55% in some instances. Where the challenge has been has been with the pharmaceutical distribution in Germany, which is offsetting and lowering that average.

And as we noted, the Parallel Import business and the changes that we're implementing in Germany, we expect that margin to increase and that will help bring the average to the low-30s and the high-20s. We just need a little bit more time to develop that business in Germany so that the Parallel Import revenues increase and become the most dominant force in that country. So I think it's just a matter of time and it's just a matter of that business expanding and realizing its full potential.

[Remington Smith, analyst]

Okay. And then my last question. You had quite a few initiatives with launching the THC, the hemp-infused business recently and then the TruHC acquisition too. Do a lot of these kind of weigh on EBITDA in the quarter kind of ramping up sales, especially kind of with the corporate SG&A costs?

[Clifford Starke, executive]

Yes. I mean, we're making investments now both on the beverage front as well as Germany throughout. So right now, we're spending money. Hopefully, we're going to see the benefits in quarters to come.

[Operator]

The next question comes from Sean Wong from Haywood Securities.

[Sean Wong, analyst]

Just wanted to get some clarity on how the launch of the Parallel Import business has been going so far? What we can expect from it? And what the wider European rollout could look like? And also the timeline to get to that 30% margin range that you mentioned earlier?

[Clifford Starke, executive]

Yes. I'll answer the first part then hand over the margin to Dany. Sean, I hope everything is great. First off, Manfred and his team came in, they're retooling a few things on the current business right now, which is a focus. Then what we're going to do is utilize our GMP facility to be able to bring in competitive pharmaceutical products from all over Europe, the [ Hungary's, Romania's ] to the world. Keep in mind, Manfred previously built a $600-plus million business, and this is that category. And I think over the next couple of quarters, you'll see it kind of come together. And it's going well, but what we're trying to do is making sure the current business is stabilized and then grow on the PI business as well as grow and compete for the cannabis licenses that have been given out.

And then Dany, do you want to get to the margin question?

[Dany Vaiman, executive]

Sure. Sean, I hope things are well on your side. I think that's a great question and we will provide an update on that specific topic in the first quarter in 2025 once Manfred and his new team have had a chance to settle in. I think that would be the best time to begin addressing that question.

[Operator]

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

[William Kirk, analyst]

Cliff, it looks like you're now on the board at Hoshi in Portugal. I think I saw that in the press release. So how does that business and that upcoming facility fit into your plans for Germany, your plans for Europe? And when do you expect product to start coming out of that facility?

[Clifford Starke, executive]

Bill, I hope everything is great. So one, this was an investment made historically. This was with the [ Metro ] and team back in the day, which I think everyone remembers, Mike Haynes and Trevor and those guys. In the past couple of years, a big investment came in and they put another $10 million in that facility. It's fully built. They just got their GACP license. The grow has obviously been up and running for well over a year now.

There's 2 things that we would like to do. One is obviously get good quality product out of Portugal into Germany, which will be happening over the next couple of quarters. The second thing is what's interesting is we're able to utilize our current GMP facility. We'd be able to actually put an extension of it on to the Portugal facility in one of the drive rooms, which will make the entire flow process way easier and better and more efficient. But everything is coming together there. And I think the next couple of quarter is when we'll receive the first product out of there.

[William Kirk, analyst]

Okay. And as this will relate to Germany as well, could you give some more detail on the relationship with Curaleaf, like the responsibilities, maybe the commitments for both parties? And I ask because the announcements initially didn't seem like both groups were on the same page. So I want to make sure I understand what you and Curaleaf can and cannot do? And maybe how Parallel fits into that dynamic?

[Clifford Starke, executive]

Yes. Let me -- I have a long-standing history with the EMMAC guys. EMMAC was sold to Curaleaf a number of years ago. Prior to them merging, we had a supply agreement that was supposed to be delivered from Portugal into Germany a number of years ago. No supply arrived and we went and rebuilt the relationship with Curaleaf, which obviously we announced, which was a little bit, I guess, confusing for everyone, unfortunately.

We're expecting delivery within the next month or so of high top quality product from Northern Green via the Four 20 guys. Originally what will happen is, we're going to use Four 20 to bring in the product. And then over the next quarter or 2 quarters after that, we'll stabilize the product in our GMP facility. And we expect a long-term relationship as long as they could deliver high-quality flower we could put into the market.

[William Kirk, analyst]

Awesome. That helps a lot. And if I could sneak one more in going back to U.S. beverages. In some markets, Melo and Cloud Cola I think are THC-infused and in other markets they're more hemp-infused. Is the goal of the brand ultimately to be THC-infused where and when you can or should we expect kind of a mix or is it -- how -- what do you envision that kind of formulation behind those brands ultimately to be?

[Clifford Starke, executive]

So we're seeing two-fold. We're seeing -- obviously, we're very D9 driven, I think everyone knows right now, and that's what's going into the totals and ABCs right now. About 30% of that business will be online driven as well. But we also got a lot of demand from big box type of stores of, hey, we're obviously not ready to bring in THC-infused yet, could you do the same category, but with mocktail form, which we're working on now for a couple of clients. But I think what we're trying to do is build, at least dominate the Southeast, where really that's our presence and network, both on grassroots, in-store, activate everybody as well as hit the -- what we could do really within the local colleges, universities and really try to create a sustainable long-term brand.

I think it's -- that relationship with Peak has literally driven -- save us 8 years of work and experience have been great to work with. The emulsion facility is obviously up and running in Florida. We're focused on our own brands, but also powering a few other ones. And it's going very well. And it's -- I was surprised that the team did a really good job getting just grows onboard relatively quickly, which is great. And now we're just working through more figuring out what are really working capital needs on what's going to happen on the growth side. But where we're seeing -- I think you're going to see hyper growth on that category on a quarterly basis.

[Operator]

[Operator Instructions] The next question comes from James Udasco from Aegis Capital.

[James Udasco, analyst]

It's James Udasco from Aegis. So we were just wondering how has the Sunshine partnership helped with distribution across the retail consumer space in both the U.S. and Germany?

[Clifford Starke, executive]

Good. So I hope everything is okay in New York. In terms of Sunshine, they've really just opened up the Florida market for us. That's who we chose. We decided to work with a little bit of a small distributor to get attention and very craft beer type of feel in terms of service. They did a great job getting into the retailers, which you're going to see a launch next week. Sunshine has no parallel outside of the Southeast, including Germany and Europe.

[Operator]

This concludes our question and answer session. I would like to turn the conference back over to Clifford Starke for closing remarks.

[Clifford Starke, executive]

Thank you for all stakeholders for coming on the call. The management team is available for anything further, and have a great day.

[Operator]

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