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spk00: Morning, my name is Carla
spk01: and I will be your conference operator today. At this time, I would like to welcome everyone to High Tide Inc. third quarter of 2023, an audited financial and operational results conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. Instructions will be provided at that time for you to queue up for the question and answer session. I will now turn the call over to your host, Crystal Defoe. Please go ahead when you're ready.
spk00: Very good. Thank you, operator. Good morning, everyone. And welcome to the High Tide Inc. quarterly earnings call. Please note that all earnings discussed on this call are presented on an unaudited basis. Joining me on the call today are Mr. Raj Grover, president and chief executive officer, and Mr. Sergio Patino, chief financial officer. On September 14th, 2023, the company released unaudited highlights from its financial and operational results for the third quarter that ended July 31st, 2023. Before we begin, please let me remind you that during the course of this conference call, High Tide's management may make statements, including with respect to management's expectations or estimates of future performance.
spk04: Everything is in the numbers.
spk00: Other than the statements of historical facts constitute forward looking information or forward looking statements within the meaning of all applicable securities laws and are based on assumptions, expectations, estimates and projections as of the date hereof. Specific forward looking statements include without limitation all disclosures regarding future results of operations, economic conditions and anticipated courses of action. For more information on the company's risks and uncertainties related to forward looking statements, please refer to the company's press release dated September 14th, 2023, our latest annual information form and our latest management discussion and analysis, each filed with securities regulatory authorities on Cedar.com or on Edgar at inc.com, which are hereby incorporated by reference herein. Although these forward looking statements reflect management's current beliefs and reasonable assumptions based on the current information currently available to management as of the date hereof, we cannot be certain that the actual results will be consistent with the forward looking statements in the future. There can be no assurance that actual outcomes will not differ materially from these results. Accordingly, we caution you not to place undue reliance upon such forward looking statements and results. For any reconciliation of non-GAP measures measured and discussed, please consult our latest management discussion and analysis filed on Cedar Plus and Edgar. It is now my pleasure to introduce Mr. Raj Grover, President and Chief Executive Officer of Hightide. Thank you. Mr. Grover, you may begin.
spk04: Thank you, Crystal, and good morning, everyone. Welcome to Hightide, Inc's Financial Results Conference call for the third quarter ended July 31st, 2023. I will begin with some big picture comments regarding the quarter and our strategy before Sergio and I dig deeper into the numbers. Those of you who have tracked our company for some time have seen our execution and that time and time again, we do what we say we are going to do. We have a long history of under promising and over delivering in a big way at Hightide and it was no different this time. Specifically, early this year, we publicly stated our goal to be free cash flow positive by the end of the calendar year. Last night, we announced that we achieved this goal in a meaningful way with $4.1 million in free cash flow. And with this being the July quarter, we reached this milestone five months ahead of schedule. Not only is this a very impressive feat in its own right, but being free cash flow positive considerably insulates us from whatever the capital markets bring and it is rare for companies in this industry on both sides of the border to achieve this significant milestone. Over the past several years, we have proven that we know how to grow. We have put up strong same store sales numbers above our peers, organically built dozens of locations and entered into a lot of M&A along the way to building the largest business by revenue and market share in Canadian cannabis. This has been driven by our continuous innovative thinking, which led to the launch of our unique discount club model two years ago, our elite paid membership tier almost a year ago. And as announced yesterday, the unveiling of Cabanalytics Consumer Insights. CCI is an extension of a highly successful Cabanalytics business and Data Insights platform, which subject to relevant provincial and federal regulations, we expect will provide another high margin opportunity for our company to targeted ad revenue generation. This should also help further solidify our relationship and loyalty loop with our club members, product innovators, brand manufacturers and licensed producers. We have never posted a sequential decrease in revenue while now generating 14 straight quarters of positive adjusted EBITDA. Last night's results prove that our existing operations can also generate meaningful free cash. And now that we have clearly demonstrated this, we plan to shift a little further across the spectrum towards growth this quarter and into 2024. We plan to remain free cash flow positive going forward, although the amount may fluctuate in any given quarter as we pick along the spectrum of growth and cash flow generation, as well as keeping working capital changes in mind amongst other considerations. We also made another promise to the market at the beginning of the year that our annual revenue run rate would exceed half a billion dollars by the end of the fiscal year. While we were almost there during Q3, our current run rate has us exceeding that threshold today. Once again, ahead of our previously communicated timeline. Our same store sales have been very strong and continue to outpace our peers with no acquisitions this quarter or last quarter. I highlight that these results were generated entirely from our organic operations. Further, while the market added close to 100 locations since the end of April, we only added four stores, yet we maintained our national market share of nine point five percent, excluding the province of Quebec in Q3. Putting it all together, our stores in Ontario, Canada's largest cannabis market, generated three point four times the revenue of our provincial peers in June. Nationally, our stores were on a run rate of two point eight million dollars in June, compared to the national average of our peers, excluding Quebec of just one point two million dollars. Our customer reach continues to expand as we now have over one point one million loyal Cabana Club members, which remains by far the largest bricks and mortar cannabis loyalty program in the country. Elite signups have accelerated exactly as predicted as we continue to add more elite focused in-store offerings and related inventory into our retail network. We added 5300 elite members since our Q2 call, totaling over eighteen thousand eight hundred members today. Whereas on our Q2 call, we announced that we added four thousand members and similarly thirty five hundred members on our Q1 call. As a reminder, not only does elite help further solidify customer loyalty, but it represents a high margin recurring revenue stream for shareholders. Our innovation does not stop at elite. Continued innovation is in our DNA. Yesterday morning, we announced that we have taken the core of our Cabanalytics business and data insights platform and launched Cabanalytics Consumer Insights, a digital monthly publication. CCI will consist of a magazine style extensive report which highlights market trends, analyze multiple different ways, providing data driven insights regarding what brands and products are trending in our international ecosystem by category, price point, potency, etc. As well as educational and blog style features relevant to cannabis enthusiasts and the curious alike. And this will be provided for free to our customers every month. CCI will also feature product innovation from LPs, the hottest consumption accessories and cannabinoid brands throughout each issue and eventually other aspects of the cannabis ecosystem, such as cannabis seeds, growing equipment and hydroponics. Subject to regulatory approvals, we expect that we will be able to over time charge these companies to advertise to reach this captive and targeted extremely relevant base of 1.1 million users and growing. Eventually, we plan to roll this out to our 4.6 million total customers worldwide, including 3 million customers in the US. As you can see, while most operators are trying to play catch up, we are constantly innovating, seeing how else we can leverage our strengths and points of differentiation and have it create more benefits for both our customers and our shareholders. Another obvious point of differentiation in our unique ecosystem is Fast Tender, which we will touch upon shortly. So big picture, you can see that we are doing great in Canada due to our model and the strength of our team. Now that there is the prospect of very real reform in the US, we are excited to one day, hopefully soon, successfully export our innovative discount club model with all of these innovative and exciting features there as well. I will now go over the highlights from the financials and Sergio will do a deeper dive. Revenue for the quarter was one hundred and twenty four point four million dollars, just shy of a five hundred million dollar annual run rate and up 30 percent year over year and five percent sequentially led by our same store sales, which were up eight percent sequentially. Over the last seven quarters, our same store sales are up a tremendous hundred and fourteen percent. Consolidated gross margins were twenty eight percent in Q3, whereas there were twenty seven percent in each of the preceding four quarters. Once again, it was the margins in our bricks and mortar cannabis business in Canada, which gained again for the sixth straight quarter. You will recall that we highlighted the results of our meaningful cost controls during last quarter's conference call. These efforts to constantly tighten our ship are ongoing. Our .N.A. as a percentage of revenue has fallen in each of the past three consecutive quarters, from seven percent in Q4 twenty twenty two to just five percent in Q3 twenty three. At the same time, the investments we have made in deploying our proprietary fast tender technology are bearing fruit. Increasing adoption of fast tender has contributed towards reducing our salaries, wages and benefits as a percentage of revenue to just eleven point one percent this quarter, down from twelve percent a year ago and eleven point eight percent sequentially. All these percentage points add up as they flow down to a stronger EBITDA figure. Adjusted EBITDA for the quarter was a record ten point two million dollars. For context, we generated adjusted EBITDA of fourteen point six million dollars during all of fiscal twenty twenty two. We are tremendously pleased with this figure and note that it is up one hundred and forty percent year over year and fifty five percent from Q2, which was already a record level at that time. Note that this includes a one time benefit from the elimination of the social responsibility fee in Manitoba of two point four million dollars this quarter. Even without this figure, adjusted EBITDA would have been seven point eight million dollars, still a record level. Finally, our loss from operations, which I note includes eight and a half million dollars of non-cash depreciation and amortization was only six hundred and sixty two thousand dollars this quarter, within striking distance of breakeven. This was also a big improvement from four point seven million in Q3 last year and two point six million in Q2 of this year. Competition continues to create struggles for many of our peers, more of which are unfortunately going out of business. Accordingly, opportunities large and small keep coming our way, some of which have been quite high profile. We have shown over the past several years that whether companies are thriving, just alive or in creditor protection, we know how to buy businesses intelligently on terms that best suit our needs, making sure that we make moves that make sense for our shareholders and not chase and do whatever it takes to always be the highest bidder at any cost. With next month marking the fifth anniversary of cannabis legalization in Canada, we expect that such opportunities will only accelerate. So we believe there will be ample M&A candidates out there, many of which are worth buying at attractive and accretive multiples. Accordingly, we expect to be more active in M&A in the coming months. Once again, we have proven that our existing business has the scale and strength to generate meaningful free cash flow. Looking ahead, it's time to responsibly step a little harder on the gas towards organic growth while still remaining free cash flow positive. We have signed several high quality leases, particularly in Ontario, including many in the new and exciting market of Mississauga, which we are currently building out, supported by this internal free cash generation. These quarterly results, which were best in our history and the robust outlook for our business, could not have been achieved without the dedication of a strong team. In particular, I would like to congratulate Sergio Patino, who was recently appointed as our permanent chief financial officer. I'm excited for what more we can do together. Sergio, over to you for your comments.
spk03: Thank you, Raj. And hello, everyone. Q3 was another fantastic quarter for high tide and thrilled to be part of the team that continues to execute so well on his objectives, including now meeting the critical goal of becoming free cash flow positive to the tune of $4.1 million, marking a significant improvement versus the prior two quarters. We kept growing the top line with industry leading results while highlighting that these revenues can flow to generate more and more cash to shareholders. Let's take a deeper dive into the numbers. As Raj mentioned, revenue for the quarter was $124.4 million, up 30 percent year over year and 5 percent sequentially. The primary driver of this growth was the strength of our same store sales, which is the lifeblood of any retail business. Same store sales went up 19 percent year over year and 8 percent sequentially. Even taking into account the higher number of days this quarter versus Q2, our daily our average daily sales were up 5 percent sequentially, representing an annualized rate exceeding 20 percent. As mentioned, consolidated growth margins tick higher this quarter to 28 percent versus 27 percent in each of the past four quarters. Putting it all together, consolidated growth margins dollars rose by 10 percent sequentially to $34.6 million, double the 5 percent revenue growth and amplifying our overall profitability. Once again, our cost controls were very apparent this quarter. While growth margins increased by $3 million sequentially or $600,000, excluding the benefit from the Manitoba SRF change one time impact, total expenses, excluding fixed and non-cash costs such as depreciation, amortization and share based compensation went down by $600,000. In particular, professional fees fell by $893,000 sequentially as we did more work in house and didn't enter into any M&A this quarter. Operational efficiency as well as increasing adoption of fast tender by our customers resulted in salaries and wages and benefits also falling by $110,000 sequentially, despite the higher revenue and three more days in the quarter. Salaries, wages and benefits also fell to 11.1 percent of revenue in Q3, a percentage of revenue, down from 12 percent in Q3-22 and from 11.8 percent sequentially. G&A expenses as a percentage of revenue have been on a declining trend over the past seven quarters. They represent 5.2 percent of revenue in Q3, equal to Q2 levels, and down from 6.6 percent in Q3 last year. Adjusted bid in Q3, which included a one-time benefit of $2.4 million from the elimination of the social responsibility fee in Manitoba, was $10.2 million this quarter. This was up 140 percent year over year and 55 percent sequentially. Cash flow from operations before the impact of non-cash working capital was a record of $8.4 million, up 258 percent year over year and 63 percent sequentially. Investments in non-cash working capital were just $850,000 this quarter, which was lower than our usual average versus an investment of $4.1 million in the prior quarter. Which was higher than our typical level. Without receiving any external funding, our overall cash balance grew by $3.2 million over the course of Q3, ending the quarter at $25.7 million, which is the most we have had at the end of the quarter in two years. Our total debt stands at $37.7 million, which is just 1.4 times the $27.3 million in adjusted EBITDA we generated over the last, over the past four quarters. You will know that we recently refreshed our CHELS prospectus after our All One Heart Spire. This includes a $3 million ATM supplement. I stress that this doesn't mean that we plan to raise all these funds immediately. This is a good facility to have set up as it allows us to obtain financing when and as needed. Investors will recall how we were very disciplined last time with our all ATM program having expired after 25 months with about three quarters of others being unused. In closing, Q3 was not only another record, but also the best quarter in high-tie history. The future looks bright, both regarding our core Canadian bricks and mortar business, as well as regarding prospects to take our winning model into the U.S. down the road. With that, I will now turn the call over to the operator to open the lines for the question and answer session.
spk01: Thank you. If you'd like to ask a question today, you may do so by pressing start, followed by one on your telephone keypad. To revoke your question, please press start followed by two. And when preparing for your question, please ensure your phone is unmuted locally. For today's Q&A, we will follow up question only. We will take our first question from Matt Bossomley from Cannacord Genuinity. Matt, your line is now open. Please go ahead.
spk07: Good morning. Thanks for taking the time for some questions. Yeah, I just wanted to get maybe a little more granular if you have any insights on, you know, when you say putting your pedal to the metal on some of these store openings and some of the opportunities that may happen on M&A. So, you know, you have a high level goal of reaching about 250 locations. It's about 60% higher than today. So just any commentary on the cadence of that may be what we should expect in calendar Q4 for the potential and the mix of M&A versus maybe organic lease openings.
spk04: Good morning, Matt. Thank you for your question. So Matt, so far this calendar year in eight months, we've opened six stores, which is very much not like typical high type what we've done previously. But we've remained very disciplined, Matt, as you know, because our focus has completely been on free cash flow generation. And, you know, now that we've proven that our stores can generate meaningful cash, we're going to go back to growth, but in a very disciplined and responsible way. But, you know, we're coming pretty close to the end of the year here and getting building permits is, you know, I like to work at lightning fast speed sometimes, but it doesn't always happen that way. Sometimes it can take one to two to three months to just get building permits. So we feel we can get another four to six locations organically by the end of this calendar year. And going forward next year, we're definitely going to up the ante on the pace of the stores organically. I can tell you that we have secured over 14 to 16 leases, high quality leases, about five of them in Mississauga, actually six of them in Mississauga now already in our hands. But we're going to pace out this development because, you know, when you open up these stores, they don't start generating EBITDA right away. And you have a bit of an EBITDA burn for the first three to four to six months. And again, we want to be responsible about free cash flow generation. So we're going to pace out this growth. But as our cash grows and as the environment, the macro environment, overall gets healthy, we can totally increase the pace a lot more. So to just wrap this question up, four to six stores by the end of this calendar year. And then going forward organically, we think we can build another close to 15 to 20 next year. And we are back onto M&A. We have a very exciting location coming up in BC. We think it's going to be our number one location in British Columbia. We know that BC might open up the market further from eight stores to 12 to 16 stores. So we are going to start getting active on M&A because as you know, you know, fire and flower opportunity was one with a lot of stores, but there's many of the operators that are facing hardships. And we have some really good opportunities to pick up these stores that are attractive and accretive multiples.
spk07: Kind of appreciate that. And then just one more for me on the margin profile. So you know, some of your outlook commentary suggesting that, you know, the cost savings initiatives and some of the other things you've done in store, like with the kiosks are expected to help continue, you know, incremental margin improvement, just maybe it's more housekeeping. But the 2.4 million that came in from Manitoba this quarter, if you kind of normalize for that, because I assume it's not happening again, it seems like EBITDA, and I'm assuming, you know, everything flows down to adjusted EBITDA. I'm assuming it's 100% margin for that refund. If you normalize for that, I calculate you guys did about a six to six and a half percent EBITDA margin. Do you think that is sustainable going forward as a new base, or would you expect some volatility on that on that metric?
spk04: So great question, Matt. Let me tell you that I'm super excited about our EBITDA margin trajectory. So if you go back five quarters, our EBITDA margin was just sitting at about 3%. And again, you know, that was, we're dealing with NASDAQ related expenses and Canadian market is tight when it comes to gross margins in general. And then, you know, our innovative discount club model, we're a value focused operator. So margins we have to very tightly control our margins. But I'm very excited about the fact that we've gone up from just 3% in EBITDA margins to if you know, if you take the normalized margins after the 2.4 million SRF fee that we got included this quarter, our EBITDA margins have risen to 6.3%. And if you include that fee, our EBITDA margins have gone up to 8.2%. So you know, we are on an exciting trajectory for EBITDA margins. We think we can take this to 10 to 12% long term. At least that is our goal. We've announced CCI, which will be a high margin opportunity in time. Fast tenders will also contribute once we can start licensing that. And I would like Sergio to touch a little bit on our gross margin trajectory. Sergio, do you want to talk about the gross margins a little bit? Yes.
spk03: So I guess from a projection point of view, somewhere around 26, 27 going forward would be a guideline. And as you properly mentioned, the adjusted gross margin this quarter was about 26% removing the Manitoba SRF, which is slightly lower than the prior two quarters, which were more on the mid 26. So 26 to 27% would be a good trajectory going forward. I should also mention that the new couple of new components that were highlighted in the CCI, the consumer insights and fast tender licensing becomes, those two products become some reality with big margins to start picking up upwards steadily and help us to get to that 27 points.
spk07: All right. Thanks both for all the color.
spk01: Appreciate it. Thanks, Matt. We will now take our next question from Andrew from Stiffel. Andrew, your line is now open. Please go ahead.
spk02: Hi, thanks for taking my questions and congrats on the great quarter here. Just wanted to talk a little bit about the competitive environment. You know, you talked about other operators, you know, having some challenges. I'm wondering, have you started to see any store closures around your existing store locations yet? And if so, how do you think that's benefiting your same store sales growth? You know, how do you see that going forward? Would it be fair to assume that we're really in the early innings here and it could
spk04: continue? Hi, Andrew. Thank you for your question. So, Andrew, our same store sales trajectory has been on, you know, rapid, rapid growth over the last seven quarters or so. As I highlighted in my prepared remarks, we've grown our same store sales by 114% over the last seven quarters. And you're absolutely correct with the five-year legalization anniversary coming up. A lot of these leases are not to do so. And, you know, suddenly find out that one of our locations that start operating, you know, more optimally and we look and, you know, there's an independent that shut down or a smaller operator that is not in business anymore or even these days major change like fine flowers that are not, you know, meaningfully around anymore and ownerships are changing. So, I think that is going to continue, Andrew. You know, good gauges that we grew our same store sales at a rate of 5% when calculated daily. It was exactly the same thing this quarter. Sequentially, we grew our same store sales by 8%. When calculated daily, we grew by 5%. Compounded, it's still 20% annual growth. So, you know, any retailers, if this is any retailer's dream come true, if this continues, I will be happy if I was growing at half that rate. It is still very positive growth. But again, we know that more opportunities are coming in this regard. But I would be, I can be very certain to put an exact number in front of you. But like I said, we go down to 2%, .5% same store sales growth. That is still a victory in my mind since we've already grown 114% over the last seven quarters. And we still have at least 100 store opportunity in Canada alone. This is all before we even enter the US market. So, as those 100 stores get built or get acquired and they start to grow, then, you know, the same store sales growth engine is going to start working again.
spk02: Thanks for that color. And then maybe switching gears, you know, you outlined, you know, the US opportunity. And of course, now seems to be topical. Could you outline any kind of catalyst or conditions that you're looking for to enter to the US? And as well, you know, what are the things that you would not compromise on to enter the US, such as maybe a listing?
spk04: Yeah, Andrew, let me say from the start, okay, we are not going to compromise our NASDAQ listing, you know, it's a price listing. It's every operator's dream to one day trade on the NASDAQ. Well, we've been trading on the NASDAQ for the last three years. And we're not about to put it at risk today just to enter the US market. We've got a lot of growth ahead of us in Canada alone. Let me tell you this, that I cannot express my excitement enough or what our business would look like when we can enter the US. And this may happen, you know, in the medium term. Now, again, you know, I like to be cautious instead of making big statements. I'm confident about my business model. But again, we are at the mercy of, you know, rescheduling happening and the Safe Banking Act for us, NASDAQ exchanges such as NASDAQ to allow plant touching businesses and the same can happen with rescheduling as well. So we're very, very hopeful these things can take place. But we're not absolutely counting on it because we've got another hundred store growth ahead in Canada alone. But to answer your question, we are not going to sacrifice our NASDAQ listing. You know, NASDAQ gives us that liquidity that we are very excited about. And given all of the momentum in the US, we might very well get this opportunity sooner than what we were hoping originally. So, you know, we are very, very focused. Our government relations team is closely monitoring the progress of both rescheduling and the Safe Banking Act through our membership in the National Cannabis Industry Association and discussions with other industry players and media. It's ongoing. So we're keeping a close eye. We'll see how this whole thing pans out. But we're excited one way or the other. You know, we don't do anything in the US for the next two years. We can probably add two to three hundred million dollars in Canada alone.
spk02: Appreciate that color. I'll get back in the queue.
spk01: Thank you, Andrew. We will now take our next question from Scott Fortune from ROF MKM. Scott, your line is now open. Please go ahead.
spk05: Yeah, good morning and thank you for the questions. Congratulations on continuing to execute as you said going forward here. But I wanted to continue on the US side since we're down here in the US and focusing on that positive momentum. You know, you mentioned, you know, the Schedule 3 potential rescheduling there, the Safe Banking. If we get Garland memo that can kind of maybe open up the up listings to the US. But more importantly, kind of how do you prioritize? Let's say this does come on board in 24 or you have that opportunity moving US. How do you look at it strategically moving into the US with replicating your model you've done in Canada and then prioritizing, you know, the opportunity of continued growth in Canada with the opportunity in US? Just kind of give us some thoughts of what you're thinking about for the future there, Raj. That'd be great.
spk04: Hi, Scott, and thank you for your question. So, Scott, look, Canada is the immediate focus and we have a lot of growth ahead of us and I don't think US happens tomorrow morning or overnight. But let's just say it was to happen, you know, mid next year sometime. We have built some great relationships in the US. We've been cannabis operators, you know, for the last 15 years almost. And we know all of the players, you know, big, medium and small size operators in the US. We've been speaking to multiple operators to execute on an option style agreement, but we've held on to it very responsibly because we didn't want to, you know, issue more equity or raise dilutive capital right now just to put a deposit down on a portfolio of stores. But I can very confidently tell you that we've more than a couple of operators in our Rolodex that we can execute on and enter the United States and convert all of those existing stores into our winning discount club model. So that will be our approach going into the US. We're not going to wait, you know, building stores in the US organically one at a time. We've got a better strategy and I don't want to, you know, give up a whole bunch of that strategy on this call today, but I can tell you that we remain very, very confident for when the US opportunity arises, US will take priority for us because that is the most exciting market for us. Absolutely. But in the meanwhile, we're going to continue to crush it in Canada and continue to build more momentum in Canada because the more size and scale we get in this country, the more we're able to, you know, we've tried, tested and perfected our model here. So now it's plug and play for us in the US. We know exactly what to do. We are fighting at half the growth margins here in Canada and winning. Given, you know, once we get that opportunity to plant a plant, I think we'll be, we'll be exceeding expectations, but we'll leave it up to when that actually happens, but we will prioritize US growth over everything when that opportunity arises.
spk05: Got it. Appreciate that color. That's helpful. And then real quick, the shift on, you saw good acceleration on the elite member growth. Obviously that pickup is continuing going forward. Is that primarily tied to expanding the product offering for those elite customers? Just a little bit of color on what's driving the pickup and kind of future cadence or target describers that you look, you can come on board with the lead offering there.
spk04: Yeah, absolutely, Scott. So, you know, over the last couple of calls, we've mentioned that elite signups cannot grow overnight because, you know, one to 2% of our existing inventory at that time, let's just take last quarter, for example, were reflecting elite products. So, you know, when you have such cool products in the stores and, you know, you're showcasing these member prices versus market prices and you just have 1% of elite inventory, yes, the ramp up is going to be slow and steady, but as we continue to focus on elite, which remains a major focus for our company, you know, last quarter we signed 5,500 members instead of 4,000 the prior quarter, and I believe roughly 3,500 the quarter before, and this was because we added more elite focused inventory, more elite focused in-store store offerings, which is making very difficult, you know, for our customers to say no to elite memberships, and we're also incentivizing our bartenders to do so, which they are very excited about. So, we feel that this momentum is going to continue and we will have more and more signups going forward, and again, I want to remind the listeners and our investors that elite remains to be over a 70% gross margin opportunity for our companies. So, as these signups grow and we get this cash in advance for the entire year from our customers, it is also going to help our margins and cash flow going forward.
spk05: I appreciate it. Congrats again. I'll jump in the queue.
spk01: Thank you, Scott. Our next question is from Frederico Bones from APB Capital Market. Your line is now open. Please go ahead.
spk06: Hi, good morning. Congratulations on a great quarter. Thank you for taking my questions. Just still on capital allocation, I guess, you know, now that you have reached the cash flow target, how are you looking at that use of cash that you're going to build? You know, you mentioned plenty of M&A opportunities I had. So, does that mean that, you know, you plan to do those using cash instead of shares as you have done in the past? And then, I guess, just what sort of cash, you know, cash in your balance sheet are you looking to build and you would be comfortable with? Thank you.
spk04: Hi, Fred. Thank you for that question. So, Fred, let me tell you this. I'm very happy with our cash position where it's sitting today, but I'm absolutely thrilled about it. I've said it previously that, you know, a company our size that is generating half a billion dollars in annual run rate sales should have, you know, close to $50 million sitting in the bank, and we're not there today. And, you know, although we are very fortunate to have a bank line and connect for supporting us through that credit facility, which is extreme rarity in Canadian cannabis, I don't know of any other operator or many other retail operators that have secured such a line, it's not easy to get additional financing. And it's also restrictive in a way of due to financial covenants that, you know, we have to maintain minimum cash balances with the bank. In this case, we're sitting at around, you know, $9.5 million, $10 million that we cannot touch. So we're really only left with $10 million to $15 million. We have so many opportunities ahead of us and we want to remain disciplined. We had an ATM facility open for the last 25 months, and we only used 25% of that facility just to really manage, you know, dilutive capital versus non-dilutive. So when some of these M&A opportunities present, we are going to have to act in mostly stock. I am not sitting on a war chest today, although the intention is, as our equity prices grow and become stronger, yes, we want to act upon raising more capital, because we've proven we are successful operators. We know we have the best model in the country. Now all we need is a little bit of additional cash where we can start doing these things more comfortably. But because we've been responsible in the past, we want to do exactly that thread. Like I said, we have some restricted covenants because of the situation in the cannabis industry where banks are keeping it tight currently and we cannot touch $9.5 million to $10 million. Although that also gives us security because that money is just sitting in the bank, we don't have access to too much capital. So we may have to use shares going forward, but we are only going to touch opportunities that are going to yield tremendous value for our shareholders. We're not looking to just dilute our shareholders for anything that comes our way as I mentioned, the fine flower opportunity happened and we don't always want to be the highest bidder on the table. Whether we would have raised additional cash to facilitate that or paid it out in all stock, we know what we can get at this time and we've been very, very responsible with that. So going forward, it may be a little bit of a hybrid for both, but we're going to be very selective even when we're issuing stock, we're going to be selective on the best opportunities only. Let me just
spk03: add just one point here on the capital allocation. The main priority that we have right now, one of the key components is in addressing the debt, which is the ventures we're looking at amending the payment terms as priority one before we start allocating cash to different alternatives. And the second one is extending the maturity of the notes payable to about $30 million. So those are key components that we want to resolve here within the next 90 days or so before the end of the year.
spk06: Thank you. That's a great caller. And then just my second question just on margins. So when you look at the brick and mortar retail margins, I guess another impressive quarter, you have been expanding that at a pace of 1% every quarter, I guess for the past four or five quarters. Do you think this trend is going to continue? What are some of the levers there you're pulling to drive those increases? How much of it is maybe just increases in prices and how much of it is just related to some of your other measures in terms of right label products and the elite program? So just curious what you're doing to drive that increase. And I know that you mentioned a 26%, 27% gross margin. That's a good outlook. But just thinking about that brick and mortar retail expansion, maybe that's a little bit too conservative. So thanks for any caller there. Thanks.
spk04: Sure, Fred. So Fred, we're not going to be aggressively expanding. We've expanded 1% a quarter over the last six quarters now in our brick and mortar stores. And we've lost a little bit on the e-commerce business relevant for when we flick the switch again and we're back to e-commerce growth, we're just making sure that we can balance both at this time. But our members are really enjoying our concept. As you can see, we grew by another 6% in our membership base from 1,040 to ,100,000 Cabana Club members now. So we don't want to overly be aggressive on margin expansion. We will be actually slowing down a little bit and stabilizing our margins a little bit so we can continue to gain market share. Because what we've learned from our model, the more tighter we remain on the market, we see a lot of the noise and a lot of the smaller operators starting to get out of the race simply because they cannot compete. So if we sit on a horse and start expanding our margins, then we're not that competitive with everybody else. So we want to kind of remain stable. We have a lot of levers that we can pull, such as elite signups, which is also contributing towards the margin. We have white label offerings that are also contributing towards the margin. And then we're also increasing product prices. And we can always do that. And we are going to generate more exclusive elite inventory, which will also have house branded products, which will give us another margin expansion opportunity. But we have other levers to pull too when it comes to margin growth. Like Sergio mentioned, when fast tender licensing becomes a reality, and we can licensing in the US, we don't really need to push brick and mortar margins very aggressively. We can always go do that. We're also looking at our e-commerce margins right now, which we've had very, very tightly. We're going to slightly expand them as well. So we've got a lot of different levers we can pull and not only just keep pushing product prices up in our ecosystem, but as operators fail or cannot make it or don't renew their leases here in Canada, suddenly we're the
spk06: best at that. Thank you very much for your follow.
spk01: Thank you, Fred. Our next question is from Andrew Semple from Echelon Wealth Partners. Your line is now open. Please go ahead.
spk08: Hi there. Congrats on the strong beats and high tides first quarter of the year. You mentioned that with achieving positive free cash flow, you'd review the pace of, I guess, organic growth and store development. We recently saw three stores open in Ontario over the last month and a half. So it appears to be a pretty good sign that you're again, maybe perhaps accelerating your investments into stores. Could you maybe talk about your outlook for new store openings for the balance of this fiscal year and going into next year?
spk04: Hi, Andrew. Thank you for your question. So yes, the balance of this year, again, we only have three and a half, four months left now. Andrew, building permits is sometimes our biggest challenges. We've had the Mississauga leases for quite some time now, but we're waiting on building permits. We have six very attractive locations that we are waiting to build there, and that is high priority for us. But I don't even think we're going to be able to get to all this year. We maybe get two to three in Mississauga in Ontario and another two to three, one in BC for sure that we are working on. And I'm super excited to share that location with everybody and maybe one or two additional ones in Ontario. So overall, we think we can do four to six locations by the end of this year. And now that we have free cash flow generation, of course, we want to keep in mind that we're always free cash flow positive going forward. Although the quantum is going to vary. I was extremely happy that we got to $4.1 million this quarter, but I cannot sacrifice store growth going forward every quarter. And our whole recipe for success has been our size and scale. It's like the chicken and egg. If we wouldn't have built this fast, this efficiently, we wouldn't get to free cash flow today. We wouldn't have these exceeding EBITDA trajectory that we are on right now. So what we're going to do is we're going to very disciplined and responsible in our approach. We are going to look at some M&A so we can start getting momentum on both sides. You'll see about four to six locations added this year. And then you're going to see another 15, 20 organically next year, maybe a little more, but definitely another 10, 15, maybe an M&A next year.
spk08: Great, great. That's very helpful. And then just want to switch gears maybe with the loss of Fire and Flower in the marketplace. I'm wondering if you've seen any inbound calls from the LPs on your data licensing business, given it's now definitely one of the largest offerings in the industry. And maybe a bolt on question to that too would be whether you've received any early indications of interest from potential advertising partners for the new CAB Analytics Consumer Insights offering that you'll be launching here in the near term.
spk04: Sure, Andrew. So Andrew, CAB Analytics Business and Data Insights has been an extremely successful program for us. But unfortunately, some of our customers, which are licensed producers mostly, a lot of them are facing CCAA and there's a lot of pressure on that end. Initially, when we were opening stores, we can generate data from all of these stores and we were really ramping up on our Business Insights platform. Well, that has really slowed down now and stabilized, although I'm happy that it's not gone in negative territory because I can't control what happens on our customer side. So what we did is we decided to leverage our overall CAB Analytics ecosystem. We saw that we have 1.1 million members of the CABana Club. No one else does. We have 4.6 million international customers. No one else does. And the best way to solidify the loyalty loop with our members is by constantly reinforcing CABana's lowest price ecosystem that they've come to love and trust and also solidify our relationships with all of the brands and product manufacturers that would want to have a platform like CCI to showcase and promote their successful brands. So CCI is going to be a high margin business for us, of course, subject to federal regulations, because there's a lot of federal and provincial regulations in play when it comes to marketing advertising opportunities with licensed producers. But we can act on CBD. We can act on accessories today. We can act on seeds today. And we have so much consumer level data across the cannabis value chain through our diversified international cannabis ecosystem that this is going to be an exciting project for us. And I haven't been so excited about a project in a while since Elite. So this is going to be our next winning project. And I feel that this is going to further make LPs very excited to work with us and CBD and accessory companies very, very excited to showcase their success in this magazine style publication that we are launching.
spk03: Raj, I guess the first part of the question was about the wholesale business. We have seen any interest in the wholesale business due to Fire and Flower going out. And I guess I could answer the first part. And we haven't seen it. And one of the things that I should highlight as part of the diligence that we did through that potential acquisition, this is a line of business that we want to be very careful in terms of the margins, low margins, highest exposure to AR. So we are very, very careful there anyway. So you want to add something else there on that? No, you're
spk04: totally right, Sergio. Look, Andrew, the wholesale part of Saskatchewan is extremely tiny for us. It's really facilitating the existing stores that we have in Saskatchewan, but we're rapidly growing. But it's not our focus. And it's a low margin business. So we're not overly concerned one way or the other on this business coming our way in a very big way. And these assets were also purchased by a private operator, which was publicly disclosed. So it's not like that a wholesale business is shut down and the LPs have stopped doing business with them. We are still growing in our wholesale business in Saskatchewan, but it's a really tiny portion of our overall portfolio. And we've always been a retail-focused company, as you know, Andrew, from the very beginning. So it doesn't matter to us one way or the other. And we continue to focus in our retail operations.
spk08: That's very helpful. I'll get back into queue. Thanks for taking my questions.
spk01: Thank you, Andrew. As a reminder, if you'd like to ask a question today, please press start, followed by 1 on your telephone keypad. And when preparing for your question, please ensure your telephone is unmuted locally. We have no further questions at this time. So with that, I will turn the session back over to Hightide Chief Executive Officer, Raj Grover, for final comments.
spk04: Thank you, operator. And thank you to everyone for your interest and continued support for Hightide. We're very proud of what we achieved this quarter. And remain excited about the road ahead. With that, I will ask the operator to close the line. Have a great day,
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