Flower One's First Quarter 2020 Highlighted by Continued Revenue Growth and Execution of Brand Partnership Strategy

Published: July 17, 2020

Flower One's First Quarter 2020 Highlighted by Continued Revenue Growth and Execution of Brand Partnership Strategy

Flower One Holdings Inc., a cannabis cultivator, producer and innovator in Nevada, reported its financial and operating results for the first quarter ended March 31, 2020. The Company also provided a corporate update including preliminary financial and operational highlights subsequent to quarter end. All amounts are expressed in U.S. dollars unless indicated otherwise.

First Quarter Highlights

  • Delivered revenue of $8.8 million, representing sequential quarterly growth of 52%;
  • Achieved record monthly sales in March of $3.9 million;
  • Maintained industry-leading cultivation performance levels with an average harvested cash cost of $0.49 per gram; and,
  • Received Nevada state approval to launch three vape brands, including The Clear, Old Pal, and Heavy Hitters.

“Revenues of $8.8 million in Q1 2020 were just shy of our total revenues for the full year 2019, and March revenues set a record for our company,” said Ken Villazor, President and Chief Executive Officer of Flower One. “Coinciding with our strong revenue growth, we continued to cultivate flower at industry-leading levels with a cash cost per gram of $0.49 for the first quarter, with substantial improvements in overall quality. If the events of 2020 to-date have demonstrated anything, they show that the depth and overall cannabis competencies of the Flower One team are amongst the best in the industry. Our ability to optimize our operations to continue to support all our leading brands and retail partners without interruption shows just how flexible and efficient we are as a company. With the recent launches of Cookies and 22Red, we could not be more excited about the opportunities that lie ahead for Flower One.”

Highlights Subsequent to Quarter-End

A.      Market and Revenue Highlights

  • In June, signed Lift Tickets Laboratories, premium California brand and pre-roll innovator, as 16th brand partner. Lift Tickets is expected to launch in Q3 2020;
  • In July, successfully launched premium brands Cookies and 22Red into the Nevada market. Launch inventory for both brands, including Cookies’ entire line of products – the namesake Cookies brand, along with Lemonnade, Powerzzzup, Grandiflora, Runtz and Minntz – and 22Red’s full selection of dry flower, pre-roll, vape cartridges and CBD selections, have essentially been pre-sold;
  • As of the date of this news release, the Company continued to achieve sales growth from recently launched vaping products, such as Old Pal, and is looking forward to broadening its vape product SKUs with the launch of Heavy Hitters in Q4 2020;
  • Successfully closed two non-brokered private placements on May 4, 2020, and June 29, 2020, totaling $13.9 million;
  • Eliminated CDN$26.6 million of corporate debt by way of partial conversions of November 2019 and March 2019 convertible debenture issues; and
  • As of the date of this news release, the Company’s pace of sales continued to improve. Following a 78-day closure of casinos in Las Vegas, and with the reopening of the Strip on June 4, 2020, Flower One’s June sales grew 144% over May and 78% over April.

B.      Operational Highlights

  • The Company’s production facility is now delivering more than 100 SKUs to the market, remaining an industry-leader in producing the widest and deepest range of high-market finished product derivatives;
  • In Q2 2020, the Company successfully validated its optimized Fresh Frozen harvest process allowing Flower One to expand its product offerings while also continuing to provide best-in-class concentrates to the market;
  • Through continued improvements in efficiencies in the Company’s upstream extraction processes, Flower One’s first-pass distillate are now achieving an average of 92% THC across all lots; and,
  • The Company previously announced that effective today Geoff Miachika will be stepping down as Chief Financial Officer. David Kane has been appointed Interim CFO, effective July 16, 2020. Mr. Miachika will continue to work with Flower One in an advisory capacity to ensure a smooth transition. Mr. Kane, a certified public accountant, joins Flower One with more than three decades of capital markets, accounting and operations experience. Most recently, Mr. Kane was CFO at Xtreme Cubes Corporation, a manufacturer of high-end modular structures, and at Tryke Companies, a vertically integrated cannabis cultivator, manufacturer and retailer in Nevada.

First Quarter 2020 Financial Results

Revenues

Revenue for Q1 2020 was $8.8 million, an increase of 52% on a sequential quarterly basis. The increase is primarily from the benefit of a full three months of flower sales out of the Company’s greenhouse, which did not commence until August 2019, and cannabis-derived products out of the greenhouse, which did not commence until September 2019.

Expenses

Cost of sales was $6.3 million for the quarter. The increase in cost of sales over the prior quarter is in line with the higher sales volumes in Q4 2019 combined with increased costs on a per gram basis of inventory sold during the period.  The cost per gram is in line with Q3 2019, but represents an increase in per gram cost from Q4 2019. The increase in per gram cost is a result of lower production in Q1 2020 versus Q4 2019 of flower and extracted products out of the lab, resulting in an increased costs basis for those products sold. As sales of branded products expand, driving higher production for flower and extraction products, the Company expects to realize higher margins going forward.

General and administrative expenses for the quarter totaled $6.2 million, a decrease of $0.6 million over Q4 2019. The Company continues to identify ways to manage expenses and reduce overhead costs.

Profitability Measures

Net loss for the quarter was $6.4 million, driven mainly by a one-time non-cash write-down of inventory totaling $10.6 million. The Company’s sales declined in Q2 2020 as a result of the COVID-19 pandemic. As a result, certain flower grown by the Company was set to expire beginning in late Q2 2020 through the end of Q4 2020. As such, management determined that a portion of inventory carried on the books will be sold as distillate or related products, instead of flower. This strategic decision to take a one-time non-cash write-down in Q1 2020 allows Flower One to extend the shelf life of this inventory and positions the Company strongly for the opportunities presented by its newest brand partners and strains.

This write-down, along with general and administrative expenses of $6.2 million and finance expenses of $6.7 million, were partially offset by $7.5 million in fair value gains on biological assets, $7.5 million in gains on fair value of derivatives and $3.1 million in foreign exchange gains as a result of the convertible debentures.

Gross margin amounted to $2.5 million, or 28% of revenue, for Q1 2020, compared to $2.6 million, or 44% of revenue, in Q4 2019. The lower gross margin as a percentage of revenue in Q1 2020 was attributable to the increased cost basis on flower and extracted products due to decreased production in Q1 2020. The recent brand launches combined with increased production are expected to drive an improvement in gross margins.

Flower One’s Q1 2020 financial statements and management’s discussion and analysis will be issued and filed on SEDAR at www.sedar.com on July 15, 2020 and available on the same day on Flower One’s website at www.flowerone.com/investors/financial-reports.

Second Quarter 2020 Guidance

As previously announced on June 8, 2020, Flower One continues to expect revenue of approximately $3.8 million for Q2 2020, ahead of the original company guidance of $3.25 million to $3.75 million for the quarter.

Guidance expectations for Q2 2020 are based on the following:

  • COVID-19-related decisions by the State of Nevada resulted in a notable constriction of its cannabis market during the months of April and May. As a result, the Company’s sales declined to approximately $1.9 million during the first two months of Q2 2020;
  • The re-opening of dispensaries in early May to in-person sales, combined with the re-opening of casinos and the Las Vegas Strip in early June, appears to be having a positive impact on inventory levels at cannabis retailers. The Company has seen a notable increase in its weekly orders through its retail accounts since early June. As previously noted, sales in June following the reopening of the casinos grew 144% over May, to $1.9 million; and,
  • During Q2 2020, the Company added 11 new bulk and retail accounts to continue to broaden its overall customer base and maintain its retail penetration of over 90%.

Flower One also anticipates that entering Q3 2020, the Company will continue to reduce its variable operating costs as a result of continued operational efficiencies and a right-sized crop management plan through the upcoming quarter.

Flower One is the largest cannabis cultivator, producer, and full-service brand fulfillment partner in the state of Nevada. By combining more than 20 years of greenhouse operational excellence with best-in-class cannabis operators, Flower One offers consistent, reliable, and scalable fulfillment to a growing number of industry-leading cannabis brands.