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Flora Growth Corp. [FLGC] Conference call transcript for 2022 q2

2022-08-15 23:13:20

Fiscal: 2022 q2

Jessie Casner: Thank you all for joining today, Flora’s First Half 2022 Call. We are going to get started here in just another minute as we wait for a few more attendees to come in. Alright, welcome everybody. Welcome to the Flora Growth 2022 Conference Call. My name is Jessie Casner, I am the Chief Marketing Officer at Flora. Please note this conference call is going to be recorded and will be published for viewing shortly after the end of this meeting. Following the initial formal remarks, we will conduct a question-and-answer session. All participants can submit questions via the chat and Q&A function in the webcast. Further instructions will be provided as the Q&A begins. On the call with me today are Luis Merchan, President, Chief Executive Officer and Chairman of the Board. We have Jason Warnock, Chief Commercial Officer. We have Dr. Annabelle Manalo-Morgan, Member of our Board and Lead Scientific Advisor and our newly appointed Chief Financial Officer, Elshad Garayev. Today, we will be discussing the results for the first half of 2022. This afternoon, our unaudited financial statements for the 6 months ended June 30, 2022 were filed with the SEC under the cover of a Form 6F and we disseminated our earnings release. Copies of both of those can be found in the Investor Relations section on our website and on EDGAR. I’d like to remind you that during the call, management’s prepared remarks may contain forward-looking statements which are subject to risks and uncertainties. Likewise, management may make additional forward-looking statements during the Q&A session, which are also subject to risks and uncertainties. Forward-looking statements don’t guarantee future performance and therefore undue reliance shouldn’t be placed upon them. For detailed description of the factors that could cause our actual results or business to differ materially from any forward-looking statements made, please see our Form 20-F filed with the SEC on May 9, 2022. The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances except as they maybe required under applicable securities law. And finally, please note on the call today, management will refer to non-IFRS financial measurements such as adjusted EBITDA and adjusted EBITDA margin, in which Flora excludes certain expenses from its IFRS financial results. At this time, it is my pleasure to introduce Flora Growth, President, Chief Executive Officer and Chairman of the Board, Luis Merchan. Luis?

Luis Merchan: Thank you, Jessie for the introduction. Hello, everyone. Welcome to our first half 2022 earnings call. We appreciate the time you have all taken to be here with us. I am excited to report to you that we have had a very successful first half. Our sales are up 604% over the same period last year. Our gross profit increased 547% over that same period last year and we expect our revenues for the full year to grow between 300% and 400% for the full year 2022 reiterating our guidance. As we have all seen, market dynamics both in the broader U.S. equity market and in the cannabis sector have been challenging for many businesses. The fear of inflation, the value of the dollar, lagged effects of the pandemic and supply chain disruptions have compounding effects that are still being realized today. Despite this challenging backdrop, Flora business units continue to improve their performance and make significant progress. In times like this, it is critical that we carefully evaluate every decision we make to ensure the correct balance of growth and profitability. During the first half of 2022, we saw immensely positive news coming from Colombia, including the legalization of dry flower exports, the election of a Pro-Cannabis Administration, and the addition of cannabis as a fully covered medicine through government sponsored healthcare. These regulatory movements in Colombia coupled with our focus on operational discipline, has meant 2022 is proven to be a year of tremendous growth for our business. This has been the first half of realizing the full potential of our updated growth strategy. This strategy is categorized in three pillars: commercial wholesale, House of Brands, and life sciences. Each of these pillars will be discussed later in the presentation. In the first 6 months of the year, we have finalized the build-out of our cultivation facility and received our 43 ton quota for high THC cannabis export from the Colombian government. We acquired a leading CPG brand in JustCBD and have fully integrated the company into our business operations. And we have developed a clear and revenue generating strategy for our life sciences pillar, including pursuing clinical trials in the UK. All of these milestones have been reached while simultaneously building global supply chain and distribution networks. With that, we will review Flora’s financial performance. And for this, I’ll hand it over to our new Chief Financial Officer, Elshad Garayev.

Elshad Garayev: Thank you, Luis. Revenue for the first half of ‘22 came in at $14.9 million. This represents an increase over 604% versus the same period last year and more than doubled for the second half of 2021. So, revenue was predominantly driven by 4 months of revenue contribution from JustCBD and full 6 months from Vessel. Revenue from Flora Lab and other brands outside of JustCBD and Vessel contributed 12% of the overall revenue as Florida made its tactical decision to emphasize North American market penetration and the development of new brands requiring a tilt of inventory for the back half of 2022. Inventories now sit at $93 million, which we expect to sell through the coming months. Gross profit increased to approximately $7 million, up 547% compared to the first half of 2021, 363% compared to the second half of 2021. This was attributed to higher gross margin profiles in most of our business lines, including our white label operations, Flora Lab 2 and reduced focus on low margin food category. Our household brands supported a gross profit of 43%, which is expected to continue climbing in the second half and our Flora Lab’s 1 through 4 had a blended gross profit over 54%. Operating expenses increased to $37.7 million compared to $6.1 million in the first half of 2021 and $15.2 million in the second half of 2021 driven by the integration of the Vessel of JustCBD resulting in higher payroll, consulting, management fees, share-based compensation, promotion and an impairment charge. Subsequently, costs remain in control despite the doubling revenue as consulting and management fees, they are up only 3.6%, while professional fees are down 40%. G&A, including promotional expenses, increased 176% with the acquisition of JustCBD as well as promotional activities associated with the business and Vessel. Other expense items included many that were one-time in nature and some non-cash based items. This one-time expense items totaled $5.3 million of the operating expenses in the first half of the year. Due to external market forces predominantly steep decline in sector valuations and the use of higher discount rate would recognize a goodwill impairment of $16 million in the first half of 2022. Related to our acquisition of the Vessel, we included a write-down of $1.3 million on our investment in Hoshi due to similar market contractions on valuations. Backing out of impairment and the write-downs of Hoshi investment and non-cash items and one-time items resulted in an adjusted EBITDA loss of $8.2 million for first half of 2022. We continue to expect improving adjusted EBITDA going forward. For full definition of adjusted EBITDA as a non-IFRS measure, please refer to our filing made today with SEC. Net loss for the first half was $32.7 million compared to $5.1 million for the first half of 2021 and $16.2 million in the second half of 2021. Flora currently has 76.9 million shares outstanding, resulting in an EPS loss of the half of $0.42. On June 16, we announced that our Board of Directors had authorized a share repurchase program up to $5 million. Subsequent to June 30, company has repurchased an aggregate of 365,645 shares which commenced on July. Flora make purchases opportunistically and in accordance with buyback rules set out by the SEC and NASDAQ Exchange. Turning to the balance sheet, cash change from 2021 year end of $37.6 million to $10.3 million of cash on June 30, 2022. Cash raised from our Q4 2021 secondary offering in November was $34.5 million, with $16 million of that was used to acquire JustCBD. Cash was also utilized to build inventory for the launch of series of new products from Vessel, JustCBD as well as additional brands to be launched this year. Company remains debt-free. Given broader market condition and we made a tactical decision to diligently manage our cash position, streamlined operating expenses to lower cash burn. With anticipated increase in sales from our commercial sales of cannabis beginning shortly, we believe we have the liquidity we need to reach profitability, positive cash flow next year without capital injection. It’s important to note that we have no major CapEx remaining for the year. We already made completed nearly all our capital projects. We exited a period of investment and now we are entering a period of execution. We’ll look forward to delivering our strong growth objectives for the second half led by our House of Brands, along with continued growth in our Colombian cultivation and lab operations. I will turn back to Luis to discuss our operational highlights.

Luis Merchan: Thank you, Elshad. In addition to our financial results, we also accomplished a number of major operational milestones in the first half of the year, many of which were focused on investment in human capital and expanding our global footprint. Most notably, in the first half we acquired 100% of JustCBD. This acquisition instantly provided us access to 14,000 points of distribution and 300,000 customers in addition to a robust portfolio of products. Another acquisition was of the CBD brand, Masaya. Masaya boasts patent pending science-backed high-potency formulations and will expand our life sciences offering. Moving forward, Flora will continue to expand through organic growth and evaluate M&A opportunities. With continued consolidation in the industry, we are always looking for opportunities that are accretive in nature, not just from a financial perspective, but through our capabilities and human capital levels as well. Following our 2020 acquisition of Vessel, we appointed James Choe as Chief Strategy Officer and Jessie Casner as Chief Marketing Officer, both having joined our company via the acquisition. We also appointed new members of the leadership team, including Florida’s former Director of Cannabis, Holly Bell as Vice President of Regulatory Affairs and Elshad Garayev, who now serves as Flora’s Chief Financial Officer. To our Board of Directors, we appointed Team Leslie, former Leafly CEO and Amazon executive; Brandon Konigsberg, former senior executive from JPMorgan Chase. Internationally, we have expanded our footprint to include an office and distribution center in London. And additionally, we have increased our European market penetration by securing listing approval on Amazon UK for our JustCBD portfolio. Opening brick-and-mortar stores, we have partnership in Czech Republic and Germany and securing multi-country distribution partnerships. Throughout the first half of this year, Flora also secured international distribution agreements for our MIND Naturals line, which can now be purchased in Mexico and Hong Kong. Florida expanded its presence in Canada through Vessel which launched its direct-to-consumer business in the country in May of this year. In Bucaramanga, Colombia, we completed the build-out of our all outdoor cultivation and onsite extraction facility, producing distillate and isolates using flower grown at our outdoor operation. Flora Growth also reorganized our laboratory facilities which now include Flora Lab 1, our cannabis processing and extraction facility located on our farm in Bucaramanga; Flora Lab 2, a GMP processing facility for cannabis and non-cannabis topicals, phytotherapeutics and over-the-counter products in Bogota; Florida Lab 3, a cannabis transformation facility for edibles and other cannabis derivatives in Fort Lauderdale, Florida; and Flora Lab 4, a custom formulations lab for cannabis prescriptions in Bogota, Colombia. I will now hand it over to our Chief Commercial Officer, Jason Warnock to elaborate on our lab and cultivation infrastructure.

Jason Warnock: Good afternoon. Thank you, Luis. Again, good afternoon, everyone. As Luis has mentioned, 2022 has gotten off to a great start for our 100-hectare license cultivation and operation facility in Bucaramanga, Colombia. While we have had infrastructure there for some time, the complete build-out of the state-of-the-art facilities wasn’t truly realized until the first half of this year. Additionally, the people and expertise necessary to scale a fully functional cultivation facility able to handle our full 43-ton THC quota as well as the high CBD products we cultivate there. As well as back at the beginning of the year, we saw lot of many regulatory milestones achieved, but delays in the passage of several government regulations specifically as it pertains to the export of high THC flower meant our ability to put plants in the ground and being realizing revenues from this channel were prohibited before April 1 of this year. Subsequently, the proper framework has now been put in place and given the date of our quotations, the regulatory checklist, and of course, the time it takes to grow the plant, we are proud to say that we are – now fully commercial harvests are now coming online, August being the very first month technically any cultivator of a newly issued psychoactive dry flower export quota could expect to pull plants from the ground. Today, I am so happy to say we are growing 3 hectares of non-psychoactive cannabis and 5 hectares of psychoactive cannabis, leveraging our perpetual harvesting method afforded to us because of the geo advantageous nature of our location. Through Flora Lab 1, the facility there, we are able to process both high THC and high CBD flower as well as extracting distillate and isolate products for the global export as well for use in Flora’s own product supply chain. Our Flora Lab 1 facility currently has the capacity to process and extract 3,500 kilograms per month positioning us well to meet the current as well as future demands. We have begun the process now of commercial exports and continued export activities to the U.S., Israel, Germany and Australia in the coming months. Our ability to full – to realize full activation of this channel so quickly has been a testament to the Flora team as well as our tight partnership with regulatory partners. Beyond our farm, our commercial business includes Flora Labs 2 and 3, which serve as the formulation and finished goods operations respectively. Floor Lab 2 located in Bogota, Colombia holds three critical GMP certifications, for cosmetics, phytotherapeutics and dietary supplements, positioning well to grow within the Flora product portfolio as well as to the broader market via white label capabilities. Floor Lab 3 in Fort Lauderdale supports the production of Flora’s consumable product offering while additionally offering white label solutions to third-parties in the United States and beyond. The integration of these three labs into the Flora supply chain not only provides compounding value creation at every step, they also provide a stable resource in terms of supply chain and cost management. Additionally, white label business in both locations is projected to grow and drive revenues through 2022 and beyond. I would like to pass it now over to Jessie Casner, our Chief Marketing Officer to discuss the House of Brands.

Jessie Casner: Thanks, Jason. Since its inception, a brand collective has been a part of the Flora promise. In fact, the first revenues realized by Flora were through Mind Naturals, our skincare line. And since then, Flora has grown to house multiple brands, each delivering a better plant based experience in its own unique way. The value of Flora’s House of Brands is now truly being realized in 2022. Brands allow us to enter nearly any target market regardless of the legal status of cannabis or its derivatives, because of the diversity of our product offering. This means that we can begin to build customer base distribution networks and supply chains in regions in advance of movement on cannabis regulations affording us a revenue generating infrastructure that positions us for the future. Additionally, fast lead times and healthy margins commensurate with direct-to-consumer and wholesale businesses provide the company with meaningful revenue as our other pillars begin to ramp up. You can see this strategy come to life as we expand our market penetration from 4 countries in 2021 to more than 10 countries by the end of this year. The percentage of revenue contribution from international sales was roughly 3% of total revenue in the first half and we expect this number to grow exponentially as we deploy new products into these nascent markets. In the first half of this year, roughly 85% of Flora revenues were driven by the House of Brands division, with the majority being attributed to acquired assets, JustCBD and Vessel. As a part of realizing the full potential of our newly acquired business units, in the first half, we focused intently on integration. We identified and began implementing cross-brand synergies from a sales and operations perspective. We have and will continue to take advantage of logistics efficiencies through single location warehousing and combine shipping operations as well as amplifying revenue generating opportunities given each company’s core competencies and channel distribution via cross-selling and co-branded product. In addition to integration activities, the first half saw new product launches and category expansion across all brands. JustCBD expanded its offering to address the hyper growth alternative cannabinoid category with novel and proprietary blends of CBD and alternative cannabinoids in both consumables and vape products. Vessel has continued to expand its dry herb line, which represents about 16% of its overall sales in the first half, but we saw 32% increase of category sales quarter-over-quarter Q1 to Q2, so really promising. This will also expand it into the previously untapped smoke shop retail channel driven primarily by JustCBD’s relationships in that industry. Mind skincare concepted and formulated and brought to market a new line of non-cannabinoid-based skincare, its roots line, which we expect to provide greater access to some global markets and big box retail where CBD infused products have higher barriers to entry or no adoption at all. Stardog, our hemp-based apparel line launched a new line of sustainable sneakers and loungewear and will seek to expand its offering into accessories in the future. Mom Bay, the food and beverage brand in the portfolio has evolved its offering to meet the demands of the market and continues to capture market share in South America. In preparation for the back half of the year, where we expect to increase revenue for all brands given the demands of holiday shopping, we have significantly increased our inventory position to $9.3 million in order to mitigate the impacts of potential supply chain challenges and slowdowns. We expect to convert to cash the majority of this inventory before the end of the year. Now among all of these brands, we still believe there is an opportunity to better address segments of the plant-based market. And so in the back half of the year, you will see internally incubated brands brought to market such as the Tonino Lamborghini CBD beverages, a plant-based wellness brand featuring ready-to-mix drinks and dietary supplements and a new alternative cannabinoid brand. As we continue to be disciplined in our curation of our brand portfolio, we fail fast and we double down on our successes. As a part of this commitment, we have chosen to sunset products or brands within the portfolio in order to better support the long-term viability of the company. Discontinued products are often rolled into white label or business to business offerings. We are pleased with the performance of our House of Brands to-date and we expect this pillar to continue to drive meaningful revenue and provide a pathway to global expansion. Alright. I will now pass it over to Dr. Annabelle to update us on the progress achieved in Life Sciences.

Annabelle Manalo-Morgan: Thank you, Jessie. Our Life Sciences is the newest pillar to our growth strategy. And in the short time that we have been working on our research and formulation development program, we have achieved three major milestones. First, we have moved assertively through our preclinical research data and protocol submission for our clinical trials taking place in the UK in partnership with the University of Manchester and now we await final approval from the National Health Service. We expect to be in-patient and start these trials before the end of the year. Second, we have acquired science-backed high potency CBD brand, Masaya. We are pleased to announce the original Masaya formulation has been submitted as the product for use in our clinical trial in the UK. Masaya provides a path to claims-based clinical grade consumer product and access to both domestic and global distribution, which makes this brand a compelling cornerstone of the Flora Life Sciences pillar. And finally, our third milestone was the breaking ground of our updated custom formulation lab in Bogota, Colombia also known as Flora Lab 4. In this lab, we will be licensed to formulate prescription cannabis and other medicines in Colombia, all of which are required to be covered by Colombian health insurance providers. These achievements position this division well to deliver on the promise of better access to plant-based medicines all around the world. Thank you. And I’ll pass it back to you, Luis.

Luis Merchan: Thank you, Dr. Annabelle. Before we open up to the Q&A portion of today’s call, I want to thank everyone again for attending the 2022 – for this attending this call. 2022 has been and will continue to be a formative year of our growing strategy. Despite some aforementioned macro headwinds, the challenges in the capital markets and volatility in the cannabis sector, I am proud of how we have executed the first half of this year. We have been steadfast in our fiscal responsibility having strategically deployed our cash resources in a way that creates returns, while positioning us for continued growth. We expanded our bench of talent with world class leaders and operators and while simultaneously broadening our global reach. We continue to invest in the necessary infrastructure of our cultivation and commercial pillar, which up until this point had been in development. We are now able to realize the value of that investment heading into the second half of 2022 and into 2023. And with the activation of this pillar, we are now one of only a handful of companies who are actively moving cannabis derived products across the globe. We expect that flow of goods to increase substantially in the coming months as we continue to build relationships with regulatory agencies in the governments around the world. Our House of Brands pillar highlights one of our greatest value propositions given the experience of our leadership team in brand building and product distribution. We have grown our House of Brands and continue to offer new and bestselling SKUs in high impact customer segments to customers around the world seeking better plant-based experiences. And in Life Sciences, we are just beginning to unlock the full potential of cannabis research and drug development. We have been able to do this faster and more efficiently than seen by most of our fellow researchers. Even with all of these achievements, we understand there is still much work left to be done. Navigating the regulatory landscape of domestic and global markets is one of the most challenging elements of operating in this space, yet we continue to forge new supply chain networks and create new pathways for product distribution globally. From a financial standpoint, we are optimizing our expenses and cash outlays while keeping our focus on the financial – on our financial disciplines. To that point, although not required to do so, I will note that today we file financial statements with the SEC on a timeline commensurate with a U.S. based company, which I believe is a testament to our team and our dedication as we move away from being classified as a foreign private issuer. We expect our strong growth to continue through the back half of 2022 and beyond. And as such, we are reiterating our revenue guidance of $35 million to $45 million for 2022. A sincere thank you to our customers, our shareholders, our Board of Directors and the entire Flora team. I am confident in our current position and our ability to take advantage of the opportunity before us. And with that, we will begin the Q&A portion of our call. Jessie?

A - Jessie Casner: Thank you, Luis. So to begin with Luis, what is our M&A strategy? Can you reiterate that for everyone?

Luis Merchan: Yes, we highlighted during the call that the industry is going through a period of consolidation. This is happening for a number of reasons, the duration on the capital markets, the inability for some companies to have access to cash or wanting to have access to companies that have the resources to amplify the reach. With that being said, there are many opportunities out there that could help us amplify our distribution or human capital and our capabilities. So going forward, Flora will continue to evaluate M&A opportunities. We certainly are going to play a stronger emphasis on companies that are revenue generating and EBITDA positive as those types of companies will strengthen our balance sheet and our financial position. But we are also looking for companies that once again enhance our human capital capabilities and our potential for realizing a cash flow positive performance over the short-term.

Jessie Casner: Thank you. One question, we have this from , apologies if I am mispronouncing anything, are you required to raise money as the cash balance is only $10 million at the end of the year?

Luis Merchan: We are not. As we highlighted on the call and I will allow Elshad to complement this, we have a path to profitability with the current – with our current structure. It’s important to highlight that the company has no debt. So today, we expect our cash burn to significantly reduce over the second half of this year and we expect to become cash flow positive early next year without having to raise any additional capital. Elshad?

Elshad Garayev: Thank you, Luis. Yes, I can complement that. We will continue to manage our cash diligently. This will include our corporate initiatives to reduce and optimize our costs. As we noted, we already completed all our capital expenses. So, we will see very minimum capital investment. We will be focusing on turning our inventory to cash, optimizing on synergies, capturing the revenue, which altogether should allow us to maintain debt-free position as well as reduce our cash burn significantly for second half of this year.

Jessie Casner: Thank you very much. Can you – this is from Marla. Can you provide color on near-term priorities in terms of growth and consolidating operations?

Luis Merchan: Yes. I am going to give Jason an opportunity to speak and as well as Dr. Annabelle. But I will start. From a consolidation standpoint, we have fully integrating our acquisitions of JustCBD and Vessel. I am speaking today from our San Diego office where our Vessel team stands. And we are very excited about the synergies and realizing the potential of those synergies over the short and long-term. It’s important to highlight that we just acquired JustCBD 6 months ago and Vessel less than a year ago. And we have been able to incorporate these teams at a very rapid pace and that will be seen in terms of revenue contribution and synergistic opportunities over the second half of this year. But in terms of growth opportunities, it’s a balanced approach. From a House of Brands perspective, we are going to continue to amplify revenue generation there, as you said, tried and true and proven channel. And we have an opportunity to enter more markets as the regulatory framework for CPG products is less restrictive as that of the other two pillars, but we are very excited of opening up revenue contribution and fully start to realize the investments we have made on our wholesale and commercial infrastructure starting with local activation over cultivation this year. So I am going to pass that to Jason to talk a little bit about the activation of consumer channels and Flora Lab 1.

Jason Warnock: Thanks. Thank you, Luis. I think I did so much we operate so much in silos sometimes it is hard to – maybe it’s good to expand the conversation. Flora Lab – Flora’s original quota was based entirely on derivative products as it was not legal to export flower of any sort any from Colombia until April 1 of this year. So Flora’s previous quota as well as the time during that before we were cultivating cannabis for and 100% to be used in derivatives that would be exported under those terms. Only this year, where we able to, once the quota and the law was passed we are able to actually begin planting flower for export. And to be fair, the majority of the export to the world is still done by flower, so that the Israeli markets, the German markets, the Australian markets are still primarily looking for flower. So Flora had to this point been cultivating cannabis and high CBD strains intended for derivative products in other markets around the world. Only April 1 is when we began specifically cultivating for flower, which is a totally different market that’s open to us now. So as Luis alluded to those with that change on April 1, we have now been able to move all of our genetics that we want to move to flower. And again, there is many different types, some CBDs, up to 1% THC for the European markets, others for North American markets, much lower, higher THC for some markets and there are caps in certain markets where our genetics are tailored to fit those different categories. So, this is all now just coming online, because it wasn’t legal for any cannabis cultivator in Colombia to export flower until just now.

Luis Merchan: Yes. So I will summarize that we are very excited about the initiation of our exports of dry flower, the initiation of exports of derivatives out of Flora Lab 1, but of course, we are also activating our Life Sciences division albeit the contribution will be small, but we are very, very enthusiastic about the potential that cannabis will have in the pharmaceutical grade space and just perhaps as Dr. Annabelle to provide some comments around the Life Sciences pillar.

Annabelle Manalo-Morgan: Yes, for sure. Thank you, Luis. I’d like to quote my colleague, Jason Warnock who always says, the first time we are doing something is the first time it’s ever been done. And it’s so true, especially in with our Life Sciences pillar is where a lot of what you see in medical cannabis has completely voided out the preclinical side that actually gives medical cannabis its credibility to be able to move into a pharmaceutical product and into the hands of providers to be able to create prescriptions. We are doing what we are doing so that we can actually put claims behind the products that we put to market as medicine. Of course, right now, a lot of products on the market that you don’t really get a lot of guidance when it comes to medicine. So, the clinical trials that we are doing are the first of its kind. We are able to partner with the University of Manchester. We did all the preclinical work within 6 months that is all complete. So, that’s in cell studies, in animal studies, metadata analysis, if you know that world that can usually take anywhere from 5 to 10 years and cost over $10 million. So we have been able to do it in 6 months and we are turning some heads by doing that and we expect to be in patients by the end of this year. It’s all in the hands of the NHS, which essentially is the FDA of the United Kingdom. But we are really excited about that also in Colombia taking advantage of the fact that medical cannabis can be paid for by health insurance providers. So, we have a custom formulations lab also called FL Flora as I had mentioned and we are targeting six different products for six different conditions that will be prescription based only. So we are really shedding light on filling that gap that is truly the medical cannabis space so that we are taking our time and doing the due diligence to put cannabis on the map in the right way. Thanks.

Jessie Casner: Thank you, Dr. Annabelle. Okay. Moving on to a question from Aaron Gray from AGP, you mentioned exporting to Germany, Israel and Australia in the coming months. Can you speak to whether this would be extract or flower and how you are progressing in terms of flower cultivation and THC levels being achieved? I think you touched a little bit on this, Jason, but if you could shed just a little bit more like that would be helpful?

Jason Warnock: Sure. Excellent. So as we said, most of those markets actually can take both products. But the truth is, with our current licensing as well as our certifications, our JCP product can go into many, many nations that are looking for different products of that category of drive input. So most of that will be predominantly flower, to be honest with you most of our Flora Lab 1 production, we convert to distillates and isolates that are used within our internal supply chain, our vertical integration, if you will, as well, because we touch so many different areas within our ecosystem. So most of our exports in the short-term are directed towards in those markets, certainly Israel, Germany and Australia, are towards flower. There are other markets that we are looking at continuously and we continue to update that daily on what we can produce for certain segments whether that be distillates or isolates. Primarily like I said, that’s mostly internal today most of our focus is on flower. We have different categories of genetics for different markets. Certainly, we see our genetics reaching up into the high 20s as well as specific ones that are like Israel can have more than 24.1%. So there is some that are specific to markets and others that go a great deal beyond that.

Jessie Casner: Great. Thank you, Jason. And now we have one from Scott Fortune of ROTH. Can you provide color on the Colombian grow and look at the THC supply agreements and additional new global distribution as far as timing and color and genetics and strains quality to sell into Europe, potential revenue mix for THC products? A little bit of a similar question, but I think some insights into our particular strains and genetics here would be helpful?

Luis Merchan: I will start with – let me start, Jason, I will allow you to complement. So I think to reiterate some of the messages that we have delivered on this call, we currently are growing 8 hectares of land of our 100-hectare licensed cultivation facility. 5 of them are high-THC strains, 3 of them are high-CBD strains. The agreements that we have today are the demand that we have for the product on both THC and non-THC strains is exceptionally high. And we have already started shipment to some of our clients in Europe and beyond. Now, as was mentioned also in the call, some of these shipments are being done for the first time meaning that the time it takes from getting the regulatory approval to ship that one first shipment, getting the F&E which is the narcotics fund that evaluates your ability to move products from Colombia to other parts in the world is being done for the first time. It takes some time to get all those approvals. And we expect that the timing from an order being generated to delivery to move from 90 days to 60 days and then like obviously optimize over time. In terms of genetics, I would like Jason to highlight our current strains and the ones that are currently being – that are in development.

Jason Warnock: So yes, so currently in cultivation harvest, there is two high-THC strains and two CBD strains that we are focused on. Both of them like I think I mentioned earlier, up to nearly 1% in one of THC – for one of our CBD strains and one is a little bit lower in order just to make sure we can accommodate all markets. And again from derivatives and isolates, that’s obviously a better choice as well. So, we don’t have any remediation. And then when it comes to THC, we are doing all of our THC strains and the initial ones are targeted to that under 24%, so that we can target the Australian and Israeli market later this year, which we already have working through is our balanced strains. So, like a one to one and 10 and 10 as well as a very high-THC strains upwards of 29%, which we targeted more for the German and other markets. All went by the fourth quarter. So the other ones are being harvested now by the fourth quarter would be the last two strains I mentioned.

Jessie Casner: Great, thank you. And a follow-on question from Scott, can you provide a little color on the broad range of 2022 guidance from $35 million to $45 million and the mix that would be coming from the U.S. CBD meaning JustCBD and Vessel, a little more light on what is factoring into this range?

Luis Merchan: Yes, I will start and then I’ll have Elshad to complement. Well, first off, I think the variability the broad range is directly related to the industry in which we operate that we highlighted in the call that approximately 85% of our revenues are coming from a House of Brands and our top two brands from that portfolio are JustCBD and Vessel. So, that is the contribution for the first half. We certainly expect the contribution from commercial wholesale to significantly improve over the second half as we are starting to export dried flower and export derivatives in albeit is going to be smaller on the derivative side due to the reasons that Jason explained. Elshad?

Elshad Garayev: Yes, I can compliment that we definitely would see some percentage change which is currently 85%, 12% and 3%. I think we will see somewhere that we – depending on the operationalization of our revenues for Life Sciences cultivation, I can see that percentage contribution coming down to 60% to 75% range. But again, we are not providing guidance. This is a new operation as we build up those capabilities we definitely would like to accelerate revenue. At the same time, we definitely want our House of Brands stay as a strong performer. So, it’s still delivering to both the top and bottom line.

Jessie Casner: Great. Thank you guys. And this question comes from Adam Williams from CBD-Intel. What are your thoughts on the likelihood of the approval of the recreational cannabis legislative proposal in Colombia?

Luis Merchan: It’s very likely. Senator Gustavo Bolivar is the author of that law. I’ve been in multiple discussions with the Senator regarding the contents of the bill. And it makes a tremendous amount of sale – for sales for Colombia. The purpose of the law is not only to legalize cannabis for recreational adult-use is to provide some social relief to communities that have been disproportionately affected by the war on drugs. And there is no country that has been more affected than Colombia. And these laws specifically will also encourage the support of small and medium companies as well as support aboriginal communities in Colombia. So we feel strongly that the law is going to pass. Senator Bolivar, he belongs to the party of President Petro who was newly elected and they hold the majority in Congress today. We firmly believe he is going to be part of their first 100 days agenda and it will get passed pretty swiftly.

Jessie Casner: That’s great news. We have received this question from a number of people. So when does Flora expect the stock price to turnaround?

Luis Merchan: Yes. Well, thank you for that question. I will highlight we will continue to execute on the fundamentals of a well operated business. I think it’s important to highlight and I did so at the end of our call. Our financial discipline and our operational excellence, continues to improve on a daily and weekly basis. It’s reflective on the fact of the timing on this reporting. We expect to continue to give consistent, accurate reporters that are inline with a U.S. based company and that we will ensure that investors are appropriately informed of the improvements that we are making. And as such as they receive information like they are today, they will be more likely to invest in holding our company. We certainly believe that we are developing a strategy that is sound that is going to take us to a proud of profitability over the short-term, and in turn, investors will buy and hold the stock and the share price will appreciate. Elshad?

Elshad Garayev: Yes, let me add. As you all know, we are obviously exposed to systematic risk. We are exposed to capital risks to exogenous factors beyond our control. However, in our sector, within our group, we would like to aim ourselves to be best performer in terms of our operational execution, ability to integrate newly acquired units and ultimately focusing on customer, which allows us to amplify shareholder value on long-term. So, that’s the way we are positioning ourselves in order to minimize our exposure to market, which again, we will be focusing even in during this difficult times on our operational execution, cost management delivering results, which we promised to our shareholders.

Jessie Casner: Fantastic. Thank you. This comes from Steve Silver. You mentioned that Flora has completed its CapEx for 2022. Are there any major projects envisioned or requiring capital allocation for 2023?

Elshad Garayev: Not at this time, we have fully deployed our capital expenditures. The majority of them, there is some very, very small investments that are being utilized to finalize the build out of our Flora Lab 4 facility that Dr. Annabelle mentioned during the portion of her presentation. But we are moving into a period of execution. We are realizing the investments that we have made over the last couple of years. It is important to highlight that we have made machine based investments strategically and in line with the demand that we expect to see over the next couple of years. So, if demand accelerates dramatically over the next 18 months, and then we will reconsider our current CapEx budget. But as of today, based on our own revenue projections, we are not deploying any more CapEx resources or see any major project projects into 2023.

Jessie Casner: Okay. Thank you very much. One question here, it looks like it’s from anonymous, so I apologize. I don’t have the name. Will you be working with any micro cultivators or processors in Colombia?

Luis Merchan: Yes, we are. And it’s important to highlight there. We just announced a press release a couple of months ago that highlighted a partnership that we signed with the Misak community. The Misak community is the largest native community, native tribe of Colombia. They are located in Kalka, which, once again, has been a department of Colombia that has been dramatically impacted by the war on drugs. These communities led by a woman called , which is an incredible entrepreneur that wants to move forward, her native community, currently, is a licensed holder, and is growing cannabis. And we are going to help develop product portfolio, which we are experts at, but also transform her flower and export her flower into other countries internationally, which of course, those communities don’t have the capabilities to do so. And we certainly believe that that is the pathway for small cultivators in Colombia, to have to reap meaningful economic benefits in the cannabis industry.

Jessie Casner: Great. Thank you. Another question, this one looks like it’s from anonymous, but I have seen it pop up a couple of times. Can you highlight maybe the top two or three challenges that you see Flora facing across the back half of the year and into 2023?

Luis Merchan: Sure. We have – I am going to pass it over to Holly since she – I will highlight that Holly Bell is our VP of Regulatory Affairs. Once again, she was the head of cannabis for the for the State of Florida and joined us just a couple of months ago. So Holly, would you care to answer that question for us?

Holly Bell: Can you repeat the question for me, please?

Jessie Casner: Yes. What are maybe the top two or three challenges that you see Flora facing across the back half of 2022 into 2023?

Holly Bell: Certainly, it would be dramatic changes in the regulatory environment that we can’t predict. And so that would be the biggest challenge I would see coming. I don’t see anything on the horizon. But again, that’s kind of unpredictable as our elected officials get into session.

Luis Merchan: Yes. Thank you, Holly. And I complement this, so yes, absolutely. Number one is regulatory, I think there is a big difference between what our government elected officials say they are going to do and the time in which they do it. And also even we have seen now that even as regulatory changes that have been implemented, there is a level of hesitancy that we are seeing from the various organizations that control cannabis trade. And it’s going to take some time for these organizations to become comfortable with exports of cannabis, with exports of dry flower from Colombia into other countries across the globe. That’s going to take some time. Depending on how comfortable these eight entities and agencies become, then the risk will start to alleviate. And second one is supply chain driven. The supply chain for cannabis products and derivatives is extremely complex. There is only a handful of freight forwarders or logistics operators that are willing to work with cannabis companies today. And we are experiencing those challenges. We certainly have included that that risk into our revenue projections and our financial projections, but they certainly are meaningful out there.

Annabelle Manalo-Morgan: Luis, can I add one more thing to that?

Luis Merchan: Sure.

Annabelle Manalo-Morgan: One of the things that we will see and Luis touched on this is, we are doing this for the first time. This is a process and anytime you are doing something for the first time, it takes time and it presents some challenges. We have personally experienced that at Flora growth. But due to our great relationships and our proactive approach, we are figuring out how to do that very effectively.

Jessie Casner: Great. Thank you. A question here from Chuck Wolf, what is the process you have in place to make sure you don’t grow too fast and that with existing growth you allow the necessary infrastructure to stabilize?

Luis Merchan: Yes. I will start, it is demand based growing operation and that means that you compromise over the short-term in terms of speed to delivery of those – of that market, but we are being very careful in not over plant. We have seen what has happened in North America, specifically in Canada hundreds of tons being burnt and going to waste or inventories being marked down inclusive inside of Colombia. So, we are only growing based on the demand that we are expecting to fulfill over the short-term. As the supply chain continues to become more predictable, then we are going to be able to optimize our grow, as well as optimize our time to delivery for those for those orders. Jason?

Jason Warnock: I will just say that’s a great way to put it, Luis. I think that we are continued to be very cognizant of where our demand-supply or demand forecasting is today, and where we will be into 2023. We have the capacity and the ability to expand dramatically. But just because it’s there, it doesn’t mean we should exercise that. So, to Luis’ point, we are very cognizant of building infrastructure, both to support it domestically and within our vertical supply chain, as well as to meet future demand. I have no doubt that as the larger companies and countries around the world start to begin unlocking some of these kind of regulatory challenges, like Holly mentioned, we will increase demand and commensurate with that opening, increased production.

Jessie Casner: Great. Thank you. Another question here from Aaron at AGP. So, we spoke to the synergies following the acquisitions, particularly on sales channel synergies. Can you provide color on where you see these sales channel synergies and when might they be realized?

Luis Merchan: Yes. They are starting to be realized today. There is a number of examples that we can highlight. We started accelerating revenue generation internationally. That is one of the capabilities that JustCBD wanted to acquire from a company that is positioned to be a global distributor. We are starting to just amplified revenue distributions in those channels, specifically in the European Union. And I think Jessie mentioned that revenue contribution from international sales is approximately 3% that contribution will increase dramatically. We also launched Vessel brand, which is – which had been traditionally a DTC brand over 90% of revenues came from our direct-to-consumer channel to retail, wholesale is channel, which was the bread and butter of JustCBD. And we are seeing significant growth from that channel launch. We are going to be – continue to amplify revenue contribution on both of those channels. But the synergies go beyond channel via current distribution and channel sales. They also attached to the way we are fulfilling the supply chain for our consumers. We are leveraging both East Coast and West Coast warehouses. We are also identifying whitespace opportunities and developing brands that go to market and will be launched here in the second half, based on the intelligence that we are garnering from both of our major brands. And the fact that we have a global reach allows us to understand what is happening with the consumer sentiment out there, what is the wider space opportunities in terms of product innovation, and we are able to mark it because of the synergies that we are starting to realize from those acquisitions.

Jessie Casner: Great. Couldn’t have said it better myself. We have just a couple of minutes here. So, I am going to try and get through two more questions. This one comes from Joey Hasan . Are there any thoughts or plans in opening direct stores in the U.S. markets? I think brick and mortar stores that would be Florida specific?

Luis Merchan: Yes. In fact, we are currently working on a concept development store in Miami. The store was a pop-up, is a location for our startup brand, which was our hemp clothing brand, that is now morphing into our entire concept store that will highlight our entire product portfolio. And this will be used to provide access to consumers to more mainstream consumers, to our entire portfolio of brands. We are going to evaluate this as a pilot and understand if there is a good reception on this type of format. It needs the format is successful as we need to we need to be cautious in terms of investment, then we will scale that number. We are going to start with that one location in Wynwood in Miami, Florida.

Jessie Casner: Thank you. Okay. The last question is sort of an amalgamation of a few questions I have seen come through. But I think the growth pillars are fairly clear and straightforward. We have our commercial wholesale, we have our House of Brands, we have our life sciences. As you look at category operation, so whether that be consumables or hardware or prescription grade pharmaceuticals or commercial, where does Flora see the most growth happening in its broader portfolio of products?

Luis Merchan: I am going to allow my team to answer portions of this question. But it’s a matter of timeline. I think it over the short-term, we have a very clear path to profitability. And we are – and the reason why we are there at this point is because we invest it in a House of Brands portfolio. Brands allows us to have a meaningful connection with customers and communities. They have a high margin profile. They allow us to control our own destiny and they have a lower regulatory framework than the other two portions of our strategy. For that reason, we are able to – we have been able to accelerate meaningful revenues and have that exponential growth. And of course, it’s both organic and paired with a meaningful M&A strategy. The potential of dry flower cannot be understated. Almost 50% of the global cannabis trade is done in dry flour. We are just starting to export dry flower. We have the ability to grow flower with high quality and one of the lowest production costs in the world. And we reiterate we don’t talk about this too much. But we are growing cannabis at $0.06 per gram of dry flower. This podcast of a gram of THC is about $11 in Europe right now. So, the idea and the potential to fulfill a European or international market, with high grade product out of Colombia that has a significantly low cost structure has tremendous potential. Now, there is risks inherent with this specific pillar. There are regulatory risks that we highlighted and the supply chain. It’s going to take some time. But once we get there, I think the tremendous flow is going to be meaningful. And I left life sciences for last because I believe it’s the one that has the most meaningful potential over the long-term. The possibility to replace opioids, which there are 300 million prescriptions that are being served to consumers today to patients today and replace those with plant based medicine that is non-addictive, that is safe, that can help the ailments that have millions of – billions of patients worldwide. That potential is yet to be realized. That’s why we are investing in life sciences because we believe in the long-term potential. And thankfully we have Dr. Annabelle Manalo leading those efforts, but we certainly believe that over the future cannabis will play a meaningful role in pain management, in anxiety management as well as insomnia. I am going to let my team answer the last – they will complement that so, why don’t we start with Dr. Annabelle?

Annabelle Manalo-Morgan: Yes. Sure. I am always saved for last, so thank you Luis. It’s really some big shoes to fill leading life sciences because there is so much potential you hear a clinical trial and you are like, oh, okay, you are going to give patients cannabis and they are going to tell you they feel better. As I had mentioned, we are doing things in a more traditional manner, and creating data in ways that is actually very untraditional to our current cannabis protocols. So, for instance, in the UK, we are not just asking patients from zero to five, how do you feel after utilizing cannabis. We are actually utilizing our proprietary measurable pain data mechanism where we can actually see through live feed, where the pain comes from and how the pain is relieved once the patient uses our cannabis. It’s about treating a patient for a patient. And that’s what plant based wellness really is opposed to just giving the same medication to everybody that has pain. And it’s also about relieving medicines from the toxicities that historically we always see. One medication causes another kind of condition and/or disease. Our recent preclinical data shows that at 5,600 milligrams per day, a mouse which is still traditional science could not overdose on CBD or on any cannabinoids that we gave the mouse. So, 5,600 milligrams per day is way overdoing it. But the potential there were showing the safety, the efficacy, something that FDA would really look for. The potential there is to get into other countries. There are still a lot of countries that are very conservative about cannabis, but they are starting to look into it. They will look into it, if we have done the science. That will be there. A lot of countries that’s their first kind of chance that they are going to give the cannabis industry is a product that has studies behind it to prove that it’s safe. Okay, we will start there. We will try there. And then it’s a domino effect. This can open up into a whole ton of over the counter products. And then of course lead to many more clinical trials. Last thing is that our current clinical trial, and just to show you how the protocols within plant-based medicine can be very diverse. Usually you will do a clinical trial, you will study cancer and see if the cancer increases or decreases. In this clinical trial, we are studying fibromyalgia patients, so we are studying inflammation, pain, chronic musculoskeletal pain, but we are also looking quality of life. We are looking at anxiety, depression, and we are looking at the patient as a whole. And I think that’s what really makes life sciences very special. It’s more than products. It’s more so about treating a patient for a patient in getting an amazing outcome that’s not toxic and very safe.

Jessie Casner: That’s great. Thank you, Dr. Annabelle. I will jump in quickly from the House of Brands perspective, and we are looking at growth categories and highlight something that we touched on earlier in this call, which is, our real value proposition of the House of Brands is our access to our consumers and our ability to gain consumer insights and be able to act on those insights quickly. And as an example, I would highlight something that we did this year and just CBD. Within 90 days, they evaluated the market, identified that alternative cannabinoid vape products would represent a meaningful growth sector within their product portfolio. They develop that product and brought it to market in 90 days. And so when we think about what our opportunities are, and what our sort of growth categories look like. Especially from the House of Brands perspective, we are able to accelerate that timeline, take advantage of trends as they come online. So, I could tell you today that, alternative cannabinoid vapes is our key growth market today. And in a month, that may change and we can activate on that and have products in market before the end of the year. So, I think our strength is really our speed, as well as the diversity of our product offerings. We can capitalize on those trends as they come and go. And we are not so heavily reliant on any one channel, any one brand, any one product offering for us to be able to deliver on our promises that we have made here today.

Jason Warnock: If I could, maybe I will just pick up the commercial end of this question. I think the really interesting thing about Florida, but I have said this many times before. So, often the initial thinking of how cannabis economies worked, there was a rush to build infrastructure, there is rush to put capital into massive facilities, rush to put all these things out. And then eventually, there will be a regulatory change that happens. And we will all get rewarded for that. Well, Flora took the opposite approach. We can make meaningful House of Brands activation in the U.S. even as a NASDAQ-listed company, today. And we went and made the steps necessary to do that. Even from the commercial side, we can still build infrastructure and to the point where we can activate in many sectors in the world that were not available even six months ago, certainly not available 2 years ago. But we didn’t have to wait and invest capital and not – and wait on a return that may or may never come, the company was able to immediately understand that there are multiple levels of consumers and ways that we can access the market. I think Flora’s approach to shifting revenues as we continue down this infrastructure to come online and start to reap those initial benefits only gives us more opportunity and more runway to fully integrate and reach more markets than ever before.

Jessie Casner: Beautiful. Well, we went a little bit over. So, thank you for everybody who was able to stay on and finish this out with us. We appreciate everybody’s time today. Thank you so much to obviously Luis, our CEO, Jason Warnock, Chief Commercial Officer, Dr. Annabelle, our Lead Scientific Advisor, our brand new Chief Financial Officer, Elshad and Holly Bell, our VP of Regulatory Affairs. Thank you all so much for being here. And we will talk to you all soon.

Luis Merchan: Thank you everyone.