Luis Merchan of Flora Growth Recaps How The Company Tripled Revenues In 2022, Says More To Come

Yesterday, cannabis producer and marketer Flora Growth (NASDAQ: FLGC) reported astounding profit growth during 2022 by 494% to over $14 million USD on 314% revenue growth. CEO Luis Merchan took time to discuss the company’s results and future prospects in an exclusive interview with Loren Moss, executive editor of Finance Colombia.

Finance Colombia: So, I’m here with Luis Merchan. He’s the CEO of Flora Growth. So, thanks for your time. It’s always great to talk to you and it’s fun to report on you guys because it’s always good news and that’s more fun to report than bad news.

Luis Merchan: [laughs] for sure Loren, it’s good to be here. Thank you for the invitation.

Finance Colombia: So, Flora Growth. I think you guys have a really interesting business model because when it comes to cannabis products, a lot of companies specialize kind of more on lifestyle brands and on the CPG side of things, Consumer Packaged Goods and then there are other companies with more of a medical focus, but you guys are really broad and you guys have kind of…I know you have your House of brands which focuses on CPG products and we’ll get to that.

But let’s talk about you recently received a certification kind of a lab certification and I’m not an expert in cannabis or well, so maybe if you can kind of explain what a CGMP certification is and what that means for the company?

Luis Merchan: Yeah, of course Loren. Look, you’re absolutely right. Our strategy has been the core of our company is it has been our guiding pathway to achieve the revenue growth that we have been able to achieve over the last four years and it’s anchored under 3 pillars. It’s Consumer Packaged Goods which we call House of brands; commercial, wholesale and pharmaceutical.

In pharmaceutical, we focus specifically on the manufacturing and distribution of pharmaceutical grade product, as well as scientific based research that supports those pharmaceutical good products. So yesterday we announced, actually this morning I believe, we announced that we achieved a CGMP certification in our lab that is anchored under the third growth pillar pharmaceutical that’s called Flora Lab four and CGMP stands for Current Good Manufacturing Practices and is the designation that is given to laboratories that manufacture compound medications that are prescription grade products, that are specifically tailored for that one patient.

So, for a just achieve that certification specifically for cannabis products, which means that we now are going to be able to manufacture and distribute these products which are covered by medical healthcare in Colombia to patients to the millions of patients that are looking for these types of products inside the country.

Finance Colombia: That’s good to know. So now we’re my understanding is that you guys are going to release several different prescriptions, I think 8. Now how does that work? Are these like, is that analogous to medicines where it’s like I can go and buy atorvastatin or I can go and buy, I don’t know, acetaminophen or paracetamol or something like that, or is it going to be more of a custom type of thing? Are you guys coming out with medications? And forgive me, I’m not an expert in that area, so I don’t really understand how that works?

Luis Merchan: Yeah, but you’re absolutely right, Loren. So, we do have 8 medications that have either cannabidiol or THC in the formulation, various different levels of ratios. So, we have 2 to 1 formulation, 3 to 1 formulation depending of the ailment or the condition that each formulation is intended to try, but that formulation, once is prescribed to that patient; the doctor and the patient will work together to adjust the dosage of that of that formulation to tailor the specific needs of that patient.

So, it’s a lot of feedback and interaction between the patient and the doctor to find the perfect customized formula, which is precisely what customers and patients are looking today and you know you mentioned acetaminophen and what consumers and patients do today is they self-prescribe, they kind of go and they get 100 milligrams or 200 milligrams or 500 milligrams and if they want to get something more than they just really have to get prescription and get 800 milligrams, but these type of interaction removes that type of guessing from the patient and allows for better clarity and interaction and more importantly, better efficacy when it comes to treating the conditions that the patients are going to the doctor for.

Finance Colombia: Now are these formulations? Are they THC or are they CBD or are they some other type of thing?

Luis Merchan: They are both. So, we have 4 formulations with CBD alone. We have 4 formulations that have THC and a combination of THC and CBD.

Finance Colombia: OK, good to know. So, let’s get into to the good stuff. You guys had recently come out, just this week, you had your earnings call and you’ve generated almost $40 million in revenue. Is that U.S. dollars or Canadian dollars?

Luis Merchan: US Dollars. we report all in US dollars.

Finance Colombia: So that’s right. I forget you guys are on NASDAQ, which is interesting because a lot of a lot of Cannabis oriented companies are in Toronto, so forgive my brief lapse there. That’s over 300% compared to 20/21. Not bad. Well, so maybe you can explain, you know, normally when the CEO, they say explain yourself, it’s usually something bad happened, but I’m going to say explain yourself because these are some this is some pretty good news.

Luis Merchan: Yeah. Look Loren, once again, this is a result of our strategy. We anchor the company and I think it’s good to look back at 2019 where we were a pre revenue company and is it crazy to believe that just 2019 we’re a pre revenue company and just last year we delivered close to $40 million but it’s a testament to the strategy that we have put in place. We understood early on that some of the regulatory framework to activate the export of cannabis of high THC flower, which amounts for almost 60% of the trade globally, was going to take some time and then in fact, that didn’t take place in Colombia until April of last year.

So, we were operating without being able to activate the most important source of revenue in the cannabis industry. But even beyond that, you not only need the country of origin to have some regulatory changes, you also need at the destination to have meaningful regulatory movement so you can actually connect the supply chain and for that reason we focused early on CPG, because CPG has lower barriers of entry. They are very high and we focused on brands or our food and beverage products and these portfolios of brands where the outstanding outliers of the industry and I would say of our company last year performed exceptionally well both from a Consumer-Packaged Goods standpoint, as well from an M&A perspective, we acquired a couple of companies that really allowed us to hyper charge the growth in inside of company.

Finance Colombia: Now, you mentioned CPC. You guys recently did a deal and I think your products are now in the Juan Valdez chain, which is kind of like the Colombian version of Starbucks. Because you know, Juan Valdez is owned by the Coffee Growers Association and outside of Colombia, it’s mostly known as kind of the export brand for coffee. But here in Colombia and actually increasingly internationally, Juan Valdez is kind of like the Colombian Starbucks, so tell me about that deal that you guys have done. Tell me about their products. You guys are now distributing through Juan Valdez and what you see in the future for those types of arrangements?

Luis Merchan: Yes, we have been very active in the Colombian territory for a number of reasons. We operate there. So, we should own that market and we do, so that’s number one, and we understand very well how to operate in retail, how to operate distribution both in supermarket chains, small chains, coffee chains as well as pharmaceutical drug stores. We are in thousands of distribution points in Colombia already. Juan Valdez It’s just another major deal that we have inked inside the country and our strategy is key there, It’s very simple.

We know eventually regulation is going to catch up to what consumers are wanting and that means access to CBD from a wellness and lifestyle perspective, access to THC from a recreational perspective, the government is moving very efficiently through the debates and through the amendments to make that happen, but as we make that a reality, we knew we needed to have distribution everywhere because those are those companies that already have established a brand, have already established relationships with distribution have already established a relationship with consumers, are going to have an easier time introducing products that have CBD or THC in them.

So, to deal with Juan Valdez is a juice deal. We sell our Mamba juices there. When you go to a Juan Valdez store the only juices that they’re selling right now on their shelves are mamba juices. These are juices that we make in Colombia. That we manufacture with fruits that are endemic to the country and we work with communities to do so. So, it’s a very beautiful social equity story behind the brand and it connects really well with the Juan Valdez story inside Colombia and we expect that in the midterm we’ll have perhaps the opportunity to add products that have our cannabinoids inside of them.

Finance Colombia: Interesting. So, you mentioned that you’re in thousands of…you went from pre-revenue in 2019 to now you’re in thousands of retail points of distributions. You know companies can grow or they can be profitable. It’s extremely difficult to do both. Your profits are up almost 500 percent, 494%, which is astounding and gross profits of over $14 million on revenues of $37 million.

That’s a hell of a margin. How are you able to? Because you’ve got to invest in growth, you’ve got to build out your supply chain. Especially as a new company, you’ve got to ramp up production. You’ve got to build capacity. How is it that you’re able to grow rapidly but still maintain such a high margin and resulting of course in a high gross profit?

Luis Merchan: Yes, I would say that the answer to the margin question is we fail very fast. We should fail faster by the way, and that means that you know we put products to market and if the margins are not there, if they’re not turning, if the inventory turn out not adequate to what we’re expecting in terms of margin, then we fail very quickly and discontinue that product and then we moved two products or categories that actually have high margin contribution.

And an example of that, these are our Just Brands, product portfolio, our CBD gummies are the most some of the bestselling gummies in in the entire world, in the United States specifically, but by extension in the world. We have one of the best sleeping gummies out there selling multi millions of dollars on an annualized basis, but we innovate and like last year, a good example was that we a CBD plus line and that basically meant adding additional cannabinoids and the dosage of each one of our products. So, we could capture those consumers that tried CBD in the past, but they had bad experience with other brands.

We’re targeting those consumers and we’re getting some great results from a margin perspective, 60% margin, 65% margins on those categories. We just continued then those products that have 10% margin, 20% margin and move those dollars to the high margin contribution. Now there’s still work to be done in terms of operational efficiencies, but we certainly have been making a tremendous amount of progress as we continue to accelerate growth.

Finance Colombia: Now I don’t want to get you in trouble. But you’ve mentioned the kind of moves that the administration, the current Colombian administration is making. What has there been, you know, the country, the President right now has submitted a health bill. The Congress, the health bill is very controversial. A lot of people don’t like it because of things unrelated to the cannabis market, because of maybe the role of government in providing healthcare.

But what has the…how is the administration stance regarding cannabis products and also cannabis cultivation and exporting? How has that changed compared to the previous administration and what has your experience been now coming? Closing out the first year of the of the new administration, how is that? What’s the administration? What’s it been like working with the current administration?

Luis Merchan: You know it’s a great question and I’ll answer in a fair way. I would say there certainly is at the highest levels of government a tremendous push towards doing two meaningful things: supporting native communities that have been disproportionately impacted by the War On Drugs and by doing so, legalizing those drugs that have those plants that have been considered to be illicit drugs and for that reason, those communities have been disproportionately impacted.

So, it’s very clear that the government is working on that transition and supporting those native communities. You could hear that from the President, from the Vice President, from the highest levels of government,  but when you come down to the regulation and operating in today’s environment, Colombia has a company like mine has to deal with four or five separate regulatory agencies to put a product to market and that type of bureaucracy creates a tremendous amount of stoppage and bottlenecks that is not allowing companies to move as quickly and efficiently with go-to-market strategies as they as they should and that just means there’s a lot of confusion about what’s legal and not legal, some products that have licenses like last year don’t have licenses this year.

So, it’s very complex to operate in an environment where the mid-level government officials do not understand or have a clear perspective or point of view of how to support these companies and for that reason, it has been mixed.

Finance Colombia: Now you guys, I know that you guys over the past couple of years have made announcements. You guys have deals now all over the world. You have a strong and growing presence in Europe. Here we are kind of closing out the first calendar quarter. I know that the fiscal year runs differently. What can investors and consumers expect over, let’s just say over the next 12 months because you guys are kind of, I don’t know if it’s fair to call you a startup anymore even though the company’s not that old, you guys are really maturing and becoming a mover in the sector.

So, as you guys really gain a foothold and kind of solidify yourself as a presence, what can we expect? as you execute on your strategy, what’s that going to look like over the next 12 months, maybe from an investor and kind of corporate point of view, but then also let’s talk about because it’s also fun to talk about the new products and the new points of distribution because after all, that’s what the company does.

Luis Merchan: There’s a lot of things that we’re very excited about. The first one is our revenue guidance. We provided just a couple of weeks ago revenue guidance between $90 and $105 million USD. So that means already over 200% growth this year, year over year, we are going to become $100 million company potentially right between $90 and $105 million. That would put this in the top 25 ranking in terms of revenues for cannabis companies worldwide, which is a significant milestone that we that we’re looking for to achieve, so that’s number one.

We are diligently working on gaining efficiencies across our entire operation as we integrate our recent acquisition franchise, Global Health, which is a pharmaceutical distribution company out of Germany. That integration I’m very excited about because it provides us with the opportunity to move cannabis, high THC cannabis, from Colombia into Germany and other geographies around the globe.

The FGH network is 28 countries, so the possibility of exporting high THC flower out of Colombia to all these countries globally is very exciting. It should be something that investors should look forward to and then lastly, from a from a product perspective, it’s twofold.

We continue to innovate and we have some great products, the CBD plus line is something that I’m very excited about, because she’s allowing us to recapture consumers and expanding what we consider a very small substrate out what the total aggregate demand should be. We totally believe that there’s millions of consumers out there that have yet to give CBD and cannabis, either minor cannabinoids or THC, an opportunity and we have to put those products in front of them so they can actually experience the benefits and from a medical standpoint, our pharmaceutical grade products, our cannabis compound formulations are going to market now this week and it’s going to be very exciting to see how patient’s lives are going to improve because they will now have access to high quality cannabis medications.