Flower One Reports Third Quarter 2019 Financial Results
Company's compound weekly sales growth rate continues at 15% with 5 of 15 brands launched in the Nevada market to date
Flower One Holdings Inc. (the "Company") (CNSX:FONE.CN) (OTCQX:FLOOF), a leading cannabis cultivator, producer and innovator in Nevada, today reported its financial and operating results for the third quarter ended September 30, 2019. All amounts are expressed in U.S. dollars unless indicated otherwise.
Third Quarter Highlights
-- Commenced initial flower sales from Nevada's largest commercial greenhouse in August 2019;
-- Launched Nevada's largest cannabis extraction and production facility in September 2019 - a 55,000 square foot facility adjacent and adjoined to the Company's 400,000 square foot greenhouse;
-- Revenue was $2.5 million, with sequential quarterly growth of 292% and representing seven weeks of sales from the greenhouse;
-- Net income totaled $15.7 million;
-- Gross margin before fair value adjustments of $0.6 million, or 25%;
-- Entered three new brand partnerships - plus three more subsequent to quarter end bringing the total number of brand partners managed by the Company to 15;
Additional Highlights Subsequent to Quarter End
-- Including the fourth quarter-to-date, revenue has grown at a weekly compounded rate of 15% since the Company began selling product from its greenhouse in August 2019;
-- The Company recently surpassed $1 million in weekly orders for the first time;
-- To date, the greenhouse has generated industry-leading cultivation performance with yields of 192 grams per square foot on an annualized basis at a cash cost per gram harvested of $0.44;
-- Since the beginning of the fourth quarter, Old Pal and NLVO are amongst the top ten selling flower brands in Nevada, with Old Pal holding four of the top ten flower SKUs in Nevada;
-- The Company announced it has launched the sales of Kiva Confections, a leading edibles brand from California;
-- The Company also announced it has entered brand partnerships, with popular California brands Cookies and 22Red;
-- The extraction lab in the Company's production facility is achieving industry leading purity levels with more than 90% of its distillate achieving 90-95% delta 9 THC levels; and,
-- In November the Company successfully closed an offering for CAD$20.85 million in convertible debt and a USD$20 million sales-leaseback agreement with Treehouse REIT.
"This was another milestone quarter for Flower One as, among other things, it was the first reporting period that included revenue contributions from our flagship greenhouse," said President and Chief Executive Officer, Ken Villazor. "During the quarter, we completed and fully commissioned our 55,000 square foot production facility and welcomed three additional industry-leading brand partners to our growing portfolio. Our greenhouse and production facilities are now fully operational and yielding industry-leading analytics. This, combined with securing 15 brand partnerships, was accomplished within 19 months and places us in an exciting and truly unique path to profitability and positive cash flow in the first half of 2020."
Following the inaugural harvest from the Company's flagship Nevada greenhouse in June 2019, Flower One has now completed 15 harvests, which on average have produced a cultivation yield of 32 grams per square foot at an average harvested cash cost of $0.44 per gram. Flower One's dry cannabis is now transitioned daily to its 55,000 square-foot production facility to generate a wide variety of the most in-demand cannabis products and brands from across the United States. The production facility currently consumes 3,000 to 5,000 pounds of biomass per week. In the last two months, the production lab has also begun producing an extensive product library of high-quality concentrates including shatter, batter, cookie crumble, wax/budder, THCA diamonds, THCA sugar and LPG high terpene sauces. The Company's first lots of concentrates will enter the market this quarter.
Third Quarter 2019 Financial Results
Revenue for the third quarter was $2.5 million, an increase of 292% on a sequential quarterly basis. The increase is primarily from the beginning of flower sales out of the Company's greenhouse in August 2019 and cannabis derived products out of the greenhouse in September 2019. In addition, current period revenue represents NLVO sales and revenues from the initial launch of five of the 15 brand partners. Revenue for the third quarter includes $1.8 million in revenue generated from the flagship greenhouse and $696 thousand in revenue generated from the assets of NLVO. Subsequent to quarter end, sales from Flower One's current operations are tracking strong with a compound weekly growth rate of 15% since the first official sale out of its flagship greenhouse facility in August 2019.
Cost of goods sold was $1.9 million for the quarter, inclusive of production costs expensed and the cost of inventory sold. The increase over prior quarter is a result of flower and cannabis derived product sales beginning during the three-months ended September 30, 2019 out of the NLV Greenhouse. As sales out of the NLV Greenhouse continue to increase each period, the Company expects the per gram cost of goods sold to decrease as the sales mix continues to shift towards low-cost product out of the NLV Greenhouse as compared to the higher cost of indoor grown product out of the Neeham Property. The Neeham Property will continue to be used to test various strains from its genetic library and to grow select, premium craft cannabis. As the Company moves out of the initial start-up phase and into steady-state operations, we expect the per gram costs of goods sold to decrease further as the operation gains efficiencies.
General and administrative expenses for the quarter totaled $4.4 million, including $640 thousand for accounting and legal fees, $794 thousand in wages and salaries, $559 thousand in consulting costs and $677 thousand in rent and security costs.
Net income for the quarter was $15.7 million, which was mainly driven by the gain on growth of biological assets of $18.4 million and a gain on fair value of derivatives of $9.7 million.
Gross margin amounted to $616 thousand, or 25%. As sales out of the greenhouse continue to expand and our sales-mix shifts towards this lower-cost product, we expect cost of sales on a per-gram basis to decrease. This, coupled with the upcoming brand launches, is expected to drive an increase in margins as we move through Q4 and into 2020.
Net income was partially offset by $3.7 million in finance expenses, $1.1 million in share-based compensation, $3.9 million in deferred income tax expense related to the fair value gain on growth of biological assets, and the aforementioned G&A expenses.
Liquidity and Capital Resources
As of the end of the third quarter, Flower One had working capital of $38.2 million compared to a working capital deficit of $32.9 million at December 31, 2018.
Cash and cash equivalents for the third quarter totaled $5.6 million, $1.3 million in accounts receivable, $3.9 million in pre-paid expenses, $55.4 million in inventory, and $18.8 million in biological assets. The Company continues to use its operating cash flow to pay down debt and make investments in its Nevada operations and brand partners.
Cannabis inventory and biological assets as a result of the cultivation activities during the nine months ended September 30, 2019, totaled $54.0 million and $18.8 million, respectively. Additionally, the Company invested $53.7 million in property, plant and equipment primarily for the Nevada greenhouse facility over the same time period.
Flower One's 2019 full third quarter financial statements and management's discussion and analysis will be issued and filed on SEDAR at www.sedar.com on November 26, 2019 and available on the same day on Flower One's website at www.flowerone.com/investors/financial-reports.
Brand Partner Updates
To date, Flower One launched sales of five brand partners through its flagship greenhouse in Nevada. The Company is on track to launch an additional two brands in the remaining part of the fourth quarter of 2019. Together these brand launches, along with a number of additional launches in early 2020, will serve as a significant growth catalyst for the Company.
One of Flower One's first brand partners, Old Pal, is now a leading flower brand in the state of Nevada within its first three months of sales. In fact, Old Pal and NLVO are among the top ten selling flower brands in Nevada. These achievements are confirmation of Flower One's scale and ability to rapidly leverage the full potential of its recently completed greenhouse and production lab.
Subsequent to the quarter end, Flower One announced three new brand partnerships including:
-- Cookies, one of the most respected and top-selling cannabis brands in California founded by prolific Bay Area rapper and entrepreneur, Berner, in 2012. Cookies-branded products produced by Flower One are expected to be available in dispensaries throughout Nevada in early 2020.
-- 22Red, a Los Angeles-based premier cannabis and apparel brand founded by System of a Down bassist, Shavo Odadjian, in 2018. 22Red's entire selection of thoughtfully curated, high-potency products will be available for purchase in Nevada in Spring 2020.
-- Kiva Confections, a California-based brand known for its precise, discreet and delicious edibles. Kiva currently occupies five of the top ten selling edible products in the state of California. Kiva's Camino Gummies will be available for purchase from Nevada retailers in December 2019. The remaining selection of the brand's award-winning products are slated to launch in stores in 2020.
Recent Financing Activities
On September 27, 2019, Flower One announced the filing of a base shelf prospectus with securities regulators in Canada. The shelf prospectus will allow the Company to offer up to $250 million worth of common shares, debt securities, subscription receipts, units, warrants, or any combination thereof, from time-to-time during the 25-month period after the applicable Canadian securities regulatory authorities have issued a receipt for the final prospectus. Subsequent to the quarter end, on October 22, 2019, Flower One filed and obtained receipt for a final short form base shelf prospectus.
On November 15, 2019, Flower One successfully completed a public offering of 20,850 convertible debenture units for aggregate gross proceeds of CAD$20.85 million. Each unit consists of a 9.5% unsecured convertible debenture and 666 common share purchase warrants exercisable at a price of CAD$1.55 for a period of 36 months. Flower One intends to use the net proceeds from the offering to advance and support the continued launch of its Brand Partners' products into the Nevada market and working capital and general corporate purposes.
On November 18, 2019, the Company successfully closed the sale-leaseback agreement with Treehouse Real Estate Investment Trust, Inc. ("Treehouse") for its 25,000 square-foot indoor cultivation and production facility in North Las Vegas. As part of that agreement, Treehouse will purchase the property from the Flower One for $20 million. Flower One will lease the property back for a period of 20 years, with two 10-year extension options.
Given Flower One's strong revenue performance to-date, the Company is forecasting that it will achieve approximately $9 million in revenue by its fiscal year end of December 31, 2019. This figure represents less than six months from the active selling of product out of the Company's flagship greenhouse. Also, due to its strong results in Nevada, the Company is projecting to reach positive cash flow during the first-half of 2020.
Flower One continues to lay the foundation for long-term success including potential geographic expansion. Given the current market conditions and the relatively high cost of capital, the Company now believes that it is in the best interests of all our stakeholders to pause on its initial entry plans into California and plans to reassess the opportunity sometime in 2020. In the meantime, the Company remains focused on delivering continued executional, operational, and financial excellence in Nevada by leveraging scale, maximizing yields, being a low-cost producer, and driving the success of its brand partners.
Notice of Conference Call
Management of Flower One will host a conference call at 8:30 a.m. ET on Wednesday, November 27, 2019 to review the third quarter financial results. To join the conference call, please dial 677-427-7450 or 888-231-8191. A live audio webcast of the call will be available at http://bit.ly/Q32019FONE. Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast.
For those unable to join the live call, a replay will be available until Thursday, December 12, 2019. To access the archived conference call, please dial 855-859-2056 and enter the conference code 3875748. An archived replay of the webcast will be available online for 90 days.
About Flower One Holdings Inc.
Flower One is the largest cannabis cultivator, producer and full-service brand fulfilment partner in the state of Nevada. Flower One's fully operational flagship 400,000 square-foot greenhouse and 55,000 square-foot production facility is used for cannabis cultivation, processing, production and manufacturing of dry flower, pre-rolls, cannabis oils, distillates, concentrates, edibles, topicals and infused products. The Company also operates a 25,000 square-foot indoor cultivation and production facility in North Las Vegas, with nine grow rooms, and a commercial kitchen that will produce several of the industry's top performing edible brands.
Leveraging its scale and more than 20 years of greenhouse operational excellence, Flower One offers consistent, reliable, high-volume, and just-in-time fulfilment to a growing number of established cannabis brands. The Company is fully licensed for both recreational and medical marijuana cultivation and production in the state of Nevada.
The Company's common shares are traded on the Canadian Securities Exchange under the Company's symbol "FONE" and in the United States on the OTCQX Best Market under the symbol "FLOOF". For more information, visit: https://flowerone.com.
Forward Looking Statements
Statements in this press release that are not statements of historical or current fact constitute "forward looking information" within the meaning of Canadian securities laws and "forward looking statements" within the meaning of United States securities laws (collectively, "forward-looking statements"). Such forward-looking statements involve known and unknown risks, uncertainties, and other unknown factors that could cause the actual results of the Company to be materially different from historical results or from any future actual results expressed or implied by such forward-looking statements. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "believes," "belief," "expects," "intends," "anticipates," "potential," "should," "may," "will," "plans," "continue" or other similar expressions to be uncertain and forward looking.
Forward-looking statements may include, without limitation, statements relating to the Company's ability to remain as a leading cannabis cultivator, producer and innovator in Nevada; its ongoing harvest, yields, sales, per gram cost of goods sold, and revenue; the Company's expected revenue by year end of December 31, 2019; the Company's production facility and its performance; the Company's brand partners portfolio; profitability and positive cash flows in 2020; the production of a wide variety of the most in-demand cannabis products and brands from across the Unites States; the weekly amount of biomass consumed by the Company's production facility; the use of the Neeham Property; the Company's ability to pay down its debt and make investments in its Nevada operations and brand partners; potential brand partnerships; the performance of the Company's brand partners; the availability of Bookies-branded products in Nevada in early 2020; the availability of 22Red's selection of products in Nevada in Spring 2020; the availability of Kiva's Camino Gummies for purchase from Nevada retailers in December 2019 and of the remaining selection of the brand's award-winning products in 2020; the use of net proceeds from the November 2019 public offering; the ability of the Company to exercise its option under the lease agreement with Treehouse; the Company's long-term success and potential geographic expansion; the Company's continued executional, operational, and financial excellence in Nevada by leveraging scale, maximizing yields, being a low-cost producer, and driving the success of its brand partners; Company's leadership as a cannabis cultivator, producer and full-service brand fulfillment partner; the Company's ability to offer consistent, reliable, high-volume, and just-in-time fulfilment to its brand partners; and the scale and capacity of Flower One's cultivation, production, processing, manufacturing and high-volume production and packaging facilities in Nevada.
The Company is indirectly involved in the manufacture, possession, use, sale and distribution of cannabis in the recreational and medicinal cannabis marketplaces in the United States through its subsidiary Cana Nevada Corp. Local state laws where Cana Nevada Corp. operates permit such activities; however, these activities are currently illegal under United States federal law. Additional information regarding this and other risks and uncertainties relating to the Company's business are contained under the heading "Risk Factors" in the Company's management discussion and analysis dated November 26, 2019 (the :"MD&A") filed on its issuer profile on SEDAR at www.sedar.com.
The forward-looking statements contained in this press release are expressly qualified in their entirety by this cautionary statement, the "Forward-Looking Statements" section contained in the Company's most recent MD&A. All forward-looking statements in this press release are made as of the date of this press release. The forward-looking statements contained herein are also subject generally to assumptions and risks and uncertainties that are described from time to time in the Company's public securities filings with the Canadian securities commissions, including the Company's most recent MD&A.
Although Flower One has attempted to identify important factors that could cause actual results, performance or achievements to differ materially from those contained in the forward-looking statements, there can be other factors that cause results, performance or achievements not to be as anticipated, estimated or intended, including, but not limited to: dependence on obtaining regulatory approvals; investing in target companies or projects that are engaged in activities currently considered illegal under United States federal law; changes in laws; limited operating history; reliance on management; requirements for additional financing; competition; hindering market growth and state adoption due to inconsistent public opinion and perception of the medical-use and adult-use marijuana industry and; regulatory or political change.
Accordingly, readers should not place undue reliance on forward-looking statements. The forward-looking statements in this news release are made as of the date of this release. Flower One Holdings disclaims and does not undertake any intention or obligation to update or revise any such forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
NEITHER THE CANADIAN SECURITIES EXCHANGE NOR THEIR REGULATIONS SERVICES PROVIDER HAVE REVIEWED OR ACCEPT RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS RELEASE.
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SOURCE Flower One Holdings Inc.