ZeroStack Corp. (ZSTK) Q1 2024 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Flora Growth Corp. First Quarter 2024 Results and Corporate Update Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Dany Vaiman, Chief Financial Officer. Please go ahead.

Thank you, operator, and good morning, everyone. On behalf of the Flora team, welcome to our Q1 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, markets, economic conditions, partnerships and any other statements that may be constructed 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 recent filings available on EDGAR at www.sec.gov and SEDAR at www.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; as well as Dany Vaiman, the CFO. Following the presentation, Clifford and I will be available for the question-and-answer period. The Q1 2024 results press release and the accompanying 10-Q has been filed on EDGAR and SEDAR. Please note, that all amounts mentioned in this call are in United States dollars unless otherwise stated. I'll now turn the call over to Clifford. [Technical Difficulty]

I'm sorry, Dany. Clifford's line has dropped. I'm just going to -- we're just going to try to reconnect him.

No problem.

Okay, good. My line just cut, everything's okay?

Yes, all good. Clifford...

Thank you. Dany, did you start off?

Yes. Please go ahead.

Okay. Great. Okay. Welcome to Flora Growth Q1 2024 conference call. Just -- a recap, in June 2023, we took over the company, and we've completely changed the company for the better. We're on track to focus on a few key initiatives and projects that should take this company the next level and create significant shareholder value. Today, we're fully funded to execute on those business plans. We recently closed a $3.23 million financing. And let me focus fully on Germany to start off, where half of revenues are generated. In March, the German government provided a solid green light for the legislation of recreational cannabis, along with the stated liberalization amendments for medical cannabis access. Beginning April 1, 2024, cannabis was formally declassified to a nonnarcotic status, the new law legislation of possession by adults for recreational purposes and allows individuals to grow up to 3 plants on their own. German adults will not be allowed to join -- will be allowed to join for-profit cannabis clubs with a maximum of 500 members starting July 1, 2024. Obviously, we will welcome this game-changing development in Germany as many of our features of [ my own ] legislation efforts in Canada, the German government has indicated that it intends to pursue a second phase of legislation focusing on the regional pilot projects with commercial supply chains. We believe that in time, Germany will further enhance its regulatory over recreational cannabis to allow for profit commercialization. An immediate commercialization opportunity -- Germany rules relates to its medical side of cannabis. Medical cannabis will no longer require a narcotic prescription, which is expected to simplify and streamline the process for subscription. More patients could gain access for medical cannabis, not only as a last resort, but rather as a acceptable treatment option for a variety of ailments. It is important to note that Flora subsidiaries have operated in Germany since 2017. We sold the first gram of legal medical cannabis in the country, and Flora's business is really prepared to take over in a driver seat and be a leader in country. Phatebo, one of our sub companies is a prominent pharmaceutical distribution company. It has an established medical cannabis sales team, and we've done very well over the past number of years. On the historic day, Germany's new rules came in. We announced the acquisition of TruHC Pharma GmBH, while we are pleased with our positioning in Germany, we believe the addition of TruHC to the Flora family will set us apart. Tru possesses key German licenses, including the EU-GMP processing, production narcotics for certified storage and laboratory licenses. In addition to hold certified customizable modules with flexibility to incorporate various production and packaging processes and which enables license extension for future in-country cultivation, which will supply to cannabis social clubs and eventually dispensaries. As part of acquisition, TruHC's management team led by Hendrik Knopp, has assumed leadership role within Flora's European operations. Hendrik was also responsible for -- in the first tender for the cultivation in medical cannabis in Germany back in the day with Aphria. The German legal cannabis recreational market has the potential to reach $4.2 billion upon legalization with the total European market forecast to achieve above $10 billion. On the heels of the German legislation push came reports of a potential reclassification of cannabis by the United States Drug Enforcement Administration, in terms of its list of Schedule I drugs to Schedule III following a recommendation from the Federal Health and Human Services Department. In 2022, President Joe Biden instructed HHG -- HHS to conduct a review of cannabis as it relates to scheduling of the plant. In August 2023 HHS recommended that cannabis be rescheduled to a schedule III substance. Schedule III drugs are those with a moderate to low for abuse and currently accepted medical uses. The DEA proposal formalized must be still reviewed by the White House Office of Budget and Management, after which DEA will take public comments before publishing its final rule. The U.S. market represents strong opportunities for Flora's businesses. Flora has expanded in the U.S. by offering complementary cannabis [indiscernible] consumer products through Just brand and cannabis accessories through Vessel. Additionally, Flora has been active in developing partnerships to expand the reach of our portfolio. In the quarter, we signed exclusive distribution agreements with Althea Group Holdings for Vessel brands in the United Kingdom, it is estimated that the vape pen and dry herb category represents a multibillion-dollar industry, it is expected to grow over the next decade from $5 billion to $15 billion. In April 2024, we entered 2 strategic distribution agreements, one with IMCC, IM Cannabis Corp. for Vessel production and distribution in Israel. IMCC's brands are well known for premium Israeli cannabis market, facilitating the import and wholesale of medical cannabis through retail pharmacies, online platform distribution center. Israel is one of the largest and longest standing medical markets in the world, and we plan on obviously positioning ourselves for that market. Second, with Me Raw Trade Ltd. to distribute both Just and Vessel-branded products in Poland and potentially other countries within the EU. Me Raw is expected to represent these brands and dispensaries, smoke shops, convenience stores, gas stations across Poland and offer white-label services to leading brands in the region. Overall, we're excited. I think we're making great strides and extremely excited over the next quarters to come when the business plan will really take shape and form. Dany, I'd like to hand over to you to go over more of the financial side of the business. And thank you.

Thank you, Clifford. Let me start by further elaborating that the momentum around cannabis reform could become a transformational moment for the sector and for Flora. We at Flora have been anticipating it and are ready to welcome it with an efficient, flexible and fit-for-purpose public company vehicle. Our business focus has shifted to allocating resources where there is potential for explosive growth, particularly in Germany and the United States. Revenues for the first quarter of 2024 were $18 million compared to $19.3 million for the first quarter of 2023. The decrease is primarily due to the company's deliberate discontinuation of several unprofitable product lines. These decreases in sales were partially offset by improved performance in our German operations, where sales increased to $11.3 million in Q1 2024 compared to $8 million in Q1 2023. Total operating expenses were $6.3 million in Q1 '24 compared to $7.7 million in Q1 2023, a decrease of $1.4 million or 18%. Excluding noncash impairment charges, the decrease in operating expenses quarter-over-quarter was $2.3 million or 30%. Net cash used in operating activities was $1.3 million in Q1 2024 compared to $4.3 million in Q1 2023, a decrease and an improvement of $3 million or 70%. On a consolidated basis, the net loss for the quarter was $3.4 million compared to $3.9 million in the comparable quarter, an improvement of $0.5 million or 13%. Before the impact of impairment and unrealized noncash losses, the operating loss was $1.6 million compared to $2.4 million in the comparable quarter, an improvement of $0.8 million or 33%. Flora finished the quarter with $4.2 million in cash, $21.8 million of current assets, including $9.2 million of salable inventory. Net working capital was $2.4 million. Each of our operating divisions have achieved results at or close to breakeven on income from continuing operations and adjusted EBITDA. JustCBD maintained a gross profit margin of 41% and sales of $5.4 million. Its top selling products in the quarter included the Nighttime Bear, Peach and CBD plus Calming Gummies. Approximately 36% of its revenues stemmed from direct-to-consumer sales and the remaining 64% generated through business-to-business sales. In the quarter, JustCBD added 200 new wholesale customers to its network. Vessel achieved a gross profit margin of 39% on sales of $1.3 million. Core products represented 48% of sales and Compass products contributed 31% to sales. The largest individual items sold was Core Black, representing 11% of Vessel sales. Vessel sales were evenly split between direct-to-consumer and business to business. In the quarter, Vessel added 35 new wholesale customers, including several multistate operators. Phatebo sales consisted of business-to-business sales of branded pharmaceuticals, including medications for Merck, Vertex, [ Antares ], MSV, Novo Nordisk, AstraZeneca, Janssen and Gilead Sciences. All in all, what we see in the capital markets is the beginning of a renewed sense of optimism around cannabis. Investors are beginning to appreciate the situation at hand with 2 of the most sought-after global markets in Germany and the United States are on the verge of ushering a new era in cannabis. This is precisely what our business was built for. I will now hand the call over back to the operator for the question-and-answer period.

[Operator Instructions] The first question comes from Bill Kirk with ROTH MKM.

So there's obviously been a lot of changes over the last 9 months or so over the last year. Can you give us a sense of what you're thinking the business will look like sales mix wise by like vision going forward? And if you can also by geography -- I think, Clifford, I think you said 50% Germany. But can you give us a sense of the division breakup sales mix that you're expecting going forward?

Yes. So right now, quarter in, quarter out, Germany between I would say, 50%, 55%. I think over the -- I don't feel comfortable telling you exactly what we're forecasting, so on and so forth future-wise. But I think you're going to see an increase both on the German side and the German side is going to be really on the medical cannabis launch, which we're already seeing, like, I don't know -- I'm sure you guys are following, but supply is extremely tight in Germany again. Within the first 2, 3 weeks, everything went bonkers more or less on simple flower product, high THC, good high-level strains. Now on the U.S. side, we're extremely excited on Vessel and Vessel's growth. I think that's going to have a tremendous trajectory over the next probably 2 quarters. And then something we're working on which we haven't announced yet is where we're really focused on the U.S. side. And in coming weeks, we'll give more of a focal point on what we're trying to achieve. But I would say at this point, I don't feel comfortable giving you exactly the breakdown. And when we put out guidance, if we do, then I think we'll be able to give you some more information, obviously.

Okay. I appreciate that. And then one on JustCBD. There are some big changes to the product lineup there. Can you walk us through a little bit more of those changes? And I guess what I want to get at is year-over-year, the profitability of JustCBD was about unchanged. But I think some of those product lines you took out were maybe unprofitable. So is it fair to expect the profitability of JustCBD as a segment to get better after those changes in the first quarter?

I think Just is positioned extremely well now to have a significant relaunch. Besides obviously cutting nonprofitable very low-margin businesses. We've also had, unfortunately, some issues with regulators in Florida, which is now solved, but that definitely hurt the top line and bottom line in the business for the quarter. So I would say from this point forth, you probably see quite a bit of growth on not necessary the gummy business or the tincture business, which are mature, but more new things that we're in the process of launching and focused on from a team perspective.

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

So first one for me, just on Germany. Obviously, early days of cannabis reform that took effect April 1. So I wanted to just speak more in terms of your expectations, what you're seeing early days in the market, how you look to capitalize specifically? Distribution, is that now something that's easier for you to utilize for cannabis now that's off the narcotics versus before being traditional pharma. And then any other ways that you're looking to capitalize on the opportunity there?

First off, Germany is obviously a big focal point of the company, we've been there for a long time. The short-term effects of April 1 were really on the medical side in terms of literally strains just getting sold out just because people are getting scripts far easier than before. It is still quite confusing where we are in the cycle in Germany because as social clubs come in effect, what does that mean for us and others. But really what we're playing this game for is when does it turn, where that next cycle is, or Phase 2 is ready to go, which is this quasi real rec space where Aaron walks in for a profit, buys cannabis and leaves. And that's what we're positioned for. That facility and team are the right fit to execute our business plan, both short term and long term. Short term, I think we're going to be very focused on medical distribution of the strains we currently move as well as July rolls in, we're going to make sure that if the not-for-profits or social clubs, great, but for a profit we can work all around that, whether it's supplying them genetics, whether it's supplying them third-party services for testing, whether it's growing on their behalf, obviously, we'll have our own club, but it's just to be part of it. But really what we're positioning for getting ready for is that Phase 2. And short term, I think you're going to see the rip happen purely on medical flower. It's a little bit confusing as well because being in the U.S., where almost everyone on this call is -- it's so far ahead of Germany in terms of products, while right now we're talking about flower. And the reality is I can't really introduce, for example, a cart to Germany legally. The reason is the pharmacist at the end is the one actually dispensing and is in control of actually releasing that to the patient and actually filling it today, okay? So there seems to be this whole new momentum of when things evolve and change. We're really right there touch every vertical to make money. But still, today, it's still the same focus it's been for years. It's just a lot easier and easier access and the margins are still sitting there, which is great.

Okay. Great. Appreciate that color. Second one for me on JustCBD. A lot of conversations lately around the hemp-derived beverage space and edibles as well, but really in some of the minor cannabinoids Delta-9 THC as well from public companies listed on Nasdaq and otherwise. So wondering if you're seeing additional opportunities through more traditional distribution channels? Obviously, a lot of patchwork in terms of the state regulations, some allowing it, some limiting milligrams and otherwise, but would love to get a perspective just in terms of what opportunities you see in the beverage channel for hemp-derived products for JustCBD and the distribution opportunities out there?

I think beverages is unbelievable category. Obviously, yourself and Bill prior to you obviously understand the beverage category very well outside of cannabis as well. And the way it's being positioned, it's not really a cannabis play. It's actually also distribution play or an alternative to alcohol distribution or alcohol. And what we're seeing is there's no national brand that exists today. There's unbelievable case studies done in various markets, but the Totals of the world are coming in and really starting to gear up. And when the category in the United States represents 2%, 3%, there's a tremendous amount of growth. And the person who traditionally smokes cannabis and rolls a joints and smokes, obviously, that's probably a different market. I think this is a new consumer who doesn't feel comfortable smoking or has different alternatives or wants to try cannabis or feels more comfortable with taboos over -- legally with it. And we see a huge explosion, in the past 60 to 90 days, it's already exploded with a tremendous amount of people trying to create brands. I think our team is extremely well positioned. I don't want to get into it too much on this call, but I think our team is extremely well positioned to actually be a leader in the category just like we were early days gummies. A period of time, we probably sold more gummies than most in the United States. In beverages, I think it's really important to be able to produce ultra-great quality. And I think what's on the shelf today is not. So I wouldn't be surprised if you go and start ripping off cans from the shelves of Total and start testing them and you're going to see the contents are far different than what you think from an MG standpoint, ML standpoint. And I think quality is going to win at the end of the day, I think having proper stability in place, what are the consumers actually 30 days out drinking what they're supposed to, is going to win. The supply by night, I don't think is going to last much longer. So that's definitely, I would say, probably the most exciting opportunity in this whole [indiscernible] space. Aaron, you mentioned it to me -- said to me a while ago and you see Tilray finally talking about it, obviously, something is happening there. At the same time, again, I don't want to get too involved in plans, but we're potentially looking at the beverage category for sure. I mean also on the I like -- I don't want to -- I don't think you're going to see over 5 MG be able to move around nationwide. But I'm not sure. I'm sure there's states like Tennessee where you could put in a 50 and there's no issues. But there's other states that obviously, like Florida, which is a little bit more difficult. And then we're seeing some states even do 4 caps. So I'm more curious also to hear what you have to say on that, but I'm sure 5 at the end of the day will probably be the threshold.

Yes. Yes. I definitely appreciate the comments. Obviously, seeing a lot of patchwork there at the state level, with some even lower milligram limits than 5. But I appreciate the color there.

The next question comes from Colin George with Haywood Securities.

Maybe if we could just turn back to Germany for a bit here. And any sort of trends or data that you're able to share with regards to new patient sign-ups or doctors -- number of doctors issuing prescriptions. I know it's only been 6 weeks, but I think there was an article out there that suggested that total patient sign up since the launch of -- since the change in the regulations on April 1 has nearly doubled the patient count. So any color you can provide on that or sort of trends you've seen in the first 6 weeks would be great.

Yes. I don't want to come in and stamp a number, I say, but I think what you're saying is probably pretty accurate. I think there has been a huge explosion. You see that in the shortage of supply. At the same time, there's a lot of poor-quality strains that aren't getting that. I think there's 2 things that are happening. There's the consumer either is extremely price dependent, i.e., very, very low or wants extremely high quality of cannabis, which obviously for higher prices, no middle ground in a sense. So we're seeing a lot of low-quality and high-quality cannabis move nowhere in between. And for us, obviously, we're -- the business is picking up clearly in Germany, but I really think, again, it's -- our plan is more for future development. That's why we've done our acquisition. That's what we've been in line for. And the medical sales and the rip in medical sales is great. We're obviously getting an extreme amount of calls and orders that we can't fulfill yet for items like [indiscernible] and potentially clones down the line, which we're trying to get organized on to actually meet the demand. But we're seeing -- it really reminds us, like we said, it really mindset of Canada early days, where everyone was kind of ripping early on and even the home-grows were doing quite well. And the ironic part is you probably remember back in Canada, when we're talking about like supply issues. And it's nice that supply issues on certain strains are actually real in the real market today. It's a blessing and it's great. So I think Phase 1, we're doing well on the medical side, but really, we're trying to build out a bigger game plan, obviously, for the market.

Okay. Great. That's helpful. And then maybe more of a crystal ball question here. With the changes in Germany, it looks like they're trying to move forward expeditely with the commercial market, some of the news out of the U.S. with potential rescheduling, 2 major global players that I would think will create a tailwind for some new countries and markets to sort of look down the route of legalization or some sort of cannabis reform. Are there any other countries internationally that you think could be one of the leaders following on Germany or ones that you're keeping a close eye on as maybe the next to switch.

I mean I have my hopes, which is not actually a great word, but I would love to see the U.K. go. I think that could be a great, great market. It's still in kind of education, but if that could go that would be unbelievable. Very conservative country, moving at a slower pace. And then obviously, it would be interesting to see over time what happens in France. The smaller markets in Europe, I expect would surely follow your -- Germany's lead, but really the big markets, it would be interesting to see -- it'll be interesting to how they roll out their policy and how we could play around it. But there are certain markets that are obviously quite big. They need to get attacked at the right time. If it could be -- years ago, everyone was talking about how Australia was such a bad market, and it's never going to take off and blah, blah, blah, and suddenly it explodes, right? And everything kind of comes together and now it's actually feeling another effect a little bit, but it had a really good 18 months of patient growth and real businesses and real distribution channels and so on and so forth. So if that could happen in the U.K. and France eventually, that would be unbelievable. But this side of the world, I mean, this is, I think, the next opportunity in the frontier to focus on is Europe. Even our Just and Vessel businesses, I mean, there's plenty of competition in the U.S., it's a very different market and very different positioning in this part of the world.

Okay. That's helpful. Yes, the U.K., I agree, would be incredibly exciting if they could move forward.

That would be awesome.

This concludes the question-and-answer session. I would like to turn the conference back over to Clifford Starke for any closing remarks. Please go ahead.

I just want to thank everyone for coming on today, I appreciate everyone's time, and we're really looking forward to report quarter in, quarter out, and we're very optimistic to build a real company and create great shareholder value for everyone. Thank you.

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