Flower One Holdings reports Q3 results and cannabis industry-leading yields per square foot and cash cost per gram harvested
Flower One Holdings Inc. (CSE: FONE) (OTCQX: FLOOF), a leading cannabis cultivator, producer and innovator in Nevada, reported 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
Additional Highlights Subsequent to Quarter End
"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.
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:
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.
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.
Source: Flower One Holdings