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Operator
Good day and welcome to the Cannabis Company's fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would like to turn the call over to Asia Gilbert, Director of Investor Relations. You may begin.
Asia Gilbert
Thank you, Operator. Good morning, and thank you for joining the Cannabis Company's fourth quarter and full year 2023 earnings conference call. With me today is Chief Executive Officer David Hart, President Jesse Shannon, Chief Financial Officer Derek Watson, and Senior Vice President of Capital Markets and Investor Relations Leanne Evans. Earlier this morning, we issued a press release reporting our fourth quarter and full year 2023 results. A copy of this release is available on the investor section of our corporate website, where you will also be able to access a replay of this call for up to 30 days. Certain remarks we make today regarding future expectations, plans, and prospects for the company constitute forward-looking statements within the meeting of applicable Canadian and U.S. securities laws. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors which we disclose in more detail in the risk factor section of our annual Form 10-K for the year ended December 31st, 2023, which will be filed with applicable regulatory authorities. Any forward looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may update any such forward looking statements in the future, we specifically disclaim any obligation to do so except as otherwise required by applicable law. Also, please note that on today's call, we will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. The cannabis company considers certain non-GAAP measures to be meaningful indicators of the performance of its business in addition to, but not as a substitute for, our GAAP results. A reconciliation of such non-GAAP financial measures to their nearest comparable GAAP measure is included in our press release issued earlier today. With that, I will turn the call over to David Hart to get us started. David?
David Hart
Thank you, Asia. Good morning, everyone, and thank you for joining us today. We're pleased to discuss the results for Q4 and the full year 2023, and more importantly, share how our team is driving this business forward in 2024 and beyond. I'm excited to be here at the helm as CEO, joined by a dedicated management team who's passionate about representing our outstanding employees across our 15 US markets. We remain confident in the value of our strategic position and our focus on sweating our assets to deliver for our customers, partners, and shareholders alike. You may recall that in Q3 of last year, once we were free to operate as a standalone company following an arduous 16-month process, we undertook a number of initiatives to best position the company going forward. During 2023, we announced and continued to implement our balance sheet improvement plan, which has already resulted in a decrease in interest expense, reduced leverage, and positioned us to satisfy upcoming maturities, including $13 million remaining in May 2024. As part of that effort, We took steps to increase inventory monetization, reduce working capital needs, and drive cash flow. This work continued in the fourth quarter as we monetized certain excess inventory, which had a temporary impact on margins, but contributed to a healthier cash position at year end. We completed the fourth phase of a previously announced corporate restructuring program, contributing to annual life savings of over $38 million. We began to optimize our stellar portfolio of assets with a focus on those markets that will drive growth and profitability going forward. To date, we've exited markets such as Missouri and Utah, and we look to lean in where we believe we can drive the most value. We launched our dedicated wholesale effort to capitalize on our national footprint and cultivation potential, which Jesse will discuss in more detail. We rebranded the company from Columbia Care to The Cannabis Company, and we leverage our expansive retail presence, rolling out purpose-driven new products and brands across our shelves as we prepare for additional markets to transition to adult use, such as Ohio, Delaware, and Pennsylvania. We are committed to continuously improving our operations, implementing changes in our systems to increase efficiencies wherever possible, and building a winning culture to exit 2024 in a much better position to succeed as a team. We're being thoughtful about our footprint, and where we can best capitalize on the tremendous opportunity before us as we see more of our markets transition to adult use. One of the first and most important steps to success has been to ensure that we have the right people and the right jobs with the right tools. This is something that Jesse and I are highly focused on as we understand the importance of winning at the hyper-local level. To that end, Jesse and I have been meeting with local executives across the company to root out inefficiencies, hear from the front lines on how to improve our processes, and empower them for success. You will hear more about these initiatives in the coming quarters and should see the evidence of positive changes in each of our facilities. Next, as we look to maximize our existing cultivation and manufacturing footprint, we've reworked our organizational structure and go-to-market strategy for wholesale. Wholesale has been underrepresented as a portion of total revenue for the company, at 12% of total revenue in 2023, and we are looking to change that. Over time, we have invested significant CapEx dollars in creating an enviable portfolio of assets throughout our markets. We are built for adult use and ready for those transitions with little to no additional CapEx required as those markets flip. However, at present, many of our largest facilities are underutilized, creating a significant drag on our gross margin, which we've discussed in prior quarters. To address that, you should expect to see us strategically ramping up wholesale across the portfolio and continuing to engage in key partnerships that will complement our own in-house brands to complete our product mix in retail and strengthen our wholesale product offering. You've seen a number of partnership announcements from us to date, and there are more to come. While 2023 was the year of transition for the cannabis company, we produced consistent top-line revenue of $511 million with an improvement in adjusted EBITDA over 2022. This year, 2024, is not about chasing top-line growth. We are focused on margin improvement, cash flow generation, and long-term sustainability. Our primary goals for 2024 are to materially improve our financial profile and company culture so that we can capitalize on the massive opportunities ahead for the cannabis industry. we're still in early innings and we will be positioned for long-term success. To reiterate, the first step is to have the right team in place. That task is completed and I could not be happier than to be working with the team that we have. The energy, commitment, and frankly, pure grit in our organization is absolutely inspiring. We have great leaders and great people on the front lines driving continuous improvement. As we move forward, we're focused on four key initiatives. Number one, Enhancing the customer journey for existing medical and adult use customers today, as well as for the new customers of tomorrow as cannabis transitions to adult use in more of our markets. Number two, capturing supply chain inefficiencies and sweating the retail, cultivation, and manufacturing assets that we already have invested in. We will leverage the underutilized capacity through wholesale growth and selected partnerships with winning brands. And number three, capitalizing on the next chapter of cannabis evolution as adult use adoption leads to increasing TAM and the creation of new market segments. And number four, continuing to improve our capital structure to ensure our ability to grow responsibly over time. The successful execution of this strategy will result in leaner operations, improved inventory management, and enhanced cash flow, ultimately driving sustainable profitability and shareholder value. Before I turn the call over to Jesse, let me just recap where the cannabis company is going. We're exceptionally well-positioned in markets that are poised to transition to adult use with states like Ohio, Delaware, and Pennsylvania all on the cusp. We've made the necessary investments in cultivation, manufacturing, and retail, and the opportunity remains to sweat those assets to drive returns with very little additional tap-backs required. We have incremental opportunities and additional product brands to complement our assortments, and turning our wholesale business into a value creation machine and empowering our team members on the front line to focus on providing the best customer service and experience possible. Broadly, we are reevaluating every aspect of our business. If something isn't working, we will address the issue head on. With that, I'll now turn the call over to Jesse to give you more color in some of the play-by-play. Jesse?
Jesse
Thanks, David. In 2023, we made considerable progress as a company that enabled the clear direction we have now. as we engaged in detailed examination of our business, looking for ways to optimize our portfolio of assets and take advantage of the improvements we made during our corporate restructuring. In addition to rebranding at the corporate level to the cannabis company in late 2023, we made strides on the product branding front, expanding the reach of our in-house brands in markets like Virginia and Florida, and reengaging with third-party brand and product partners. In the fourth quarter, we saw sales of our in-house brands increase once again to 51% of retail sales. New brand launches in 2023 included heady edibles across our markets, feed and strain, and classics in Florida, as well as 777 in Virginia. We also standardized and expanded our edibles offerings under our national heady brand with products such as effect-based edibles. Customers can expect to see more unique and creative products like this as we continually strive to ensure that there is something for everyone on our shelves. During the fourth quarter, we also announced several strategic commercial partnerships, launching collaborations with Old Pal in Maryland and Virginia, Aero Brands in Delaware, and then an expanded partnership with Buttercake, introducing its cannabis-infused edibles to New Jersey. These partnerships expand our product offerings to customers and create additional revenue streams while increasing our manufacturing capabilities and efficiency. We are very encouraged by the customer reception of these brands and the demand they've generated as they enter new markets. In short, it's working, and we look forward to what's coming next. While I'm proud of the progress we made in 2023, we have so much more ahead of us. Our focus going forward is building a better business, not just a bigger one. We are working to enable our business from the ground up. This means empowering our team members who are closest to the customer. We are shifting our approach to how we operate in retail, how we make decisions in our facilities, how we solve for addressing customer needs, and most importantly, how we interact with our biggest assets. people and i can tell you today we are putting in the work to ensure this commitment is felt and seen throughout the entire business to put it bluntly we are committed to doing a better job operating within our four walls our dedication to providing an elevated customer experience in both retail and wholesale has not changed and this requires a bit of agility on our part we want our customers to view us as a trusted partner that can help them make educated decisions about the products we have to offer which will be increasingly important as we see the next waves of cannabis normalization coming. This next chapter for the cannabis company requires a thoughtful approach to decision-making and entrusting the subject matter experts, our people, to play a greater role in our success. In our gardens, we're using the increased efficiency and quality of our facilities to produce some of the best products we've ever made. We're thrilled about what we've seen coming out of our cultivation and manufacturing facilities, and we look forward to bringing these products to market through our reinvigorated approaches to wholesale and retail, with purpose-driven products that we know are in demand. The way we have historically viewed wholesale has changed as we shift our approach. We're encouraged by the progress we're seeing in wholesale prices, thanks in part to our higher quality products and a shift in product mix, and we look forward to providing updates on our growth in market share in 2024. In retail, finding a balance between a loyal customer base that wants a more engaged and educational shopping experience while not alienating the customer that prefers a more hands-off approach is our North Star. And our retail associates serve as an incredible source of information we can leverage to get closer to that objective. By attracting, retaining, and empowering talent that is passionate about their work, the company and the plant will gain in-depth, hyper-local knowledge of customers' preferences and market dynamics. Using the insights we gain from retail, we can re-envision the way we commercialize our internal brands and approach the strategic commercial partnerships and deliver purpose-driven products based on consumer demand. are partnering with flagship brands that fit our product portfolio and that customers will love these collaborations can help us create an unmatched product offering that addresses the needs of every aspect of the market we want the cannabis company to be the preferred platform for growth serving as a trusted partner in evolving the cannabis market present and future the second half of last year forced us to reflect and in 2024 we are improving the way we do business the execution has already begun we're evolving as a company and prioritizing long-term strategic initiatives that will yield the best results for the business and our shareholders. As I like to say, the trend has to be your friend, and we are working to ensure that we future-proof the organization and can successfully navigate the many phases of growth that still await this industry. With that, I'll turn the call over to Derek to discuss our financials.
David
Thank you, Jesse, and good morning, everyone. I'll provide a summary of the key financial results for the fourth quarter and the full year, discuss key trends in our markets, and comment on continuing initiatives to strengthen our company. For the full year, we achieved $511 million in top line revenue, flat with 2022. Revenue in the fourth quarter was $128.4 million, down slightly sequentially from Q3, and up 2% year over year. We continue to see a decline in average basket size caused by ongoing pricing pressures, offset by transaction volume growth over the prior quarter and the prior year. Wholesale revenue increased 4% quarter over quarter, now representing 13% of total revenue in Q4. For the full year, wholesale revenue was 12% of the total, down from 14% in 2022. We're actively working to recover and improve our wholesale part of the business, as we've already outlined. Adjusted gross profit in the fourth quarter was $44 million, down from $50 million in the prior quarter and $47 million in Q4 of 2022. Our adjusted gross margin of 34% in the fourth quarter was down from 39% in Q3 and 37% in the prior year, a result of a deliberate inventory reduction strategy undertaken as we transitioned away from the Crespo transaction. Our inventory reduction was achieved through higher discounting, both through retail and wholesale channels, and has the desired effect of increasing operating cash flow despite the lower margins. We continue to experience absorption accounting from underutilized facilities with five percentage points of gross margin impact due to the underutilization of our cultivation sites. Increasing utilization remains a key opportunity to recapture gross margin in 2024, and while it won't materialize overnight, we're already seeing some progress. Adjusted EBITDA in Q4 was $12.5 million, contributing to the full-year total of $70 million. Adjusted EBITDA down markedly quarter over quarter nevertheless represented a 3% increase over the full-year total in 2022. The fourth quarter decline was primarily a result of clearing through aging and excess inventory, as we've discussed, temporarily depressing both gross and EBITDA margins. Concurrently, we saw a strong improvement in cash flow operations in the fourth quarter, with $9.4 million generated in Q4 compared to $1.8 million achieved in Q3. Prioritizing cash flow was a strategic initiative for us in 2023, achieving positive operating cash flow one quarter ahead of schedule and posting a large sequential increase in Q4. During the fourth quarter, we did not open any additional retail stores and ended the year with 86 active locations. That figure stands at 85 today, given the completion of our Utah divestiture, which we announced earlier today. We anticipate four new store openings in 2024, one in Maryland, one in New Jersey, and two in Virginia, to reach our maximum license caps in each of these states. During 2022 and through the second half of 2023, we announced a series of cost reduction initiatives, including the integration of the prior GLEFA acquisition, facility closures, and the reduction of corporate overhead that we expect to generate a net $38 million in total annualized cost savings. As one indicator of this progress, in 2023, we achieved a 24% reduction in our corporate overhead expense compared to the prior year. We anticipate a full year's benefit of cost savings going into 2024, offset slightly by minimal investments to support our strategic initiative in growing the wholesale business, investing in technology, and expanding our manufacturing capabilities. Onto our liquidity. We ended the year with $39.3 million in total cash. This was achieved after paying down $30.6 million of senior debt in the fourth quarter, $25 million to redeem the bulk of our 13% notes due May 2024, and $5.6 million to fully settle the convertible note that matured in December of 2023. Capital expenditures in the quarter were $1.7 million, consistent with our CapEx guidance. For 2024, we expect a continuation of CapEx at these manageable levels in the range of $2 to $3 million per quarter, as we've already invested in the bulk of our more capital-intensive infrastructure. In 2023, we executed on a number of measures to strengthen our balance sheet. During the year, we retired approximately $35 million of net debt, including the $30 million of CNO notes in the fourth quarter and a net $5 million to settle all but one of our remaining seller notes. In 2024 so far, we've again reduced leverage through the exchange of $10 million of our 6% convertible notes due 2025 to equity and anticipate a further $15 million to exchange by the middle of this year, consistent with the transaction agreement we announced in January. Today, we announced the closing value to our divestiture for $6.5 million in gross proceeds, and we'll continue to target initiatives to improve cash flow, further de-level the balance sheet, and reduce interest expense. I would like to underscore our key financial priorities. They remain driving improvements in gross margin, EBITDA, and operating cash flow while continuing to proactively manage our balance sheet in what remains a challenging market for the cannabis industry. In the midterm, we are targeting to build to EBITDA margins above 20% sometime during 2025. We don't expect the path to be linear, but the team remains focused on executing against that goal. With that, let me turn the call back to David Hart for final comments. David.
David Hart
Thank you, Derek. Before we take questions, I want to leave you with this. Make no mistake, We appreciate that there is a lot of work ahead of us, and we relish the opportunity to capitalize on our strengths in 2024 and exit the year in a materially stronger financial position. I fully expect that this year will require persistent blocking and tackling to ensure we strengthen our foundation and position the company to achieve its potential in the years ahead. You will see us make the necessary changes to right the shift, so to speak, after an arduous 2023. I have committed to the team that this business will look very different by the end of 2024. and we are evaluating everything from our portfolio of assets to company culture and putting in the effort to make sure we deliver. We are committed to fostering a positive and inclusive work environment to ensure we set the strategic direction, align the organization, and mobilize leadership. We're fortunate to have a great team that is committed to success, and I am privileged to work alongside them. Operator, please open the line for questions.
Operator
Thank you. If you'd like to ask a question, please press star 1-1. If your question has been answered and you'd like to remove yourself from the queue, then please press star 11 again. Our first question comes from Aaron Gray with Alliance Global Partners. Your line is open.
Aaron Gray
Hi, good morning, and thank you very much for the questions here. First question for me, how much of an impact did you guys have from some of the lower margin sales you mentioned? Could you just quantify that maybe in terms of the margin impact and Do you feel the inventory is better positioned today? Should we still expect some impact heading into the first quarter or just some updates in terms of the actual impact from that inventory and where we can think in terms of the near term on the margins? Thanks.
David
Good morning, Aaron. This is Derek. I'll take that. So the impact of the gross margin decline was taking our Q3 margin from 39% down to 34% in Q4. So all of that, aside from the five percentage point overhang we previously talked about in underutilized assets, that is the impact of clearing out the inventory. To the second part of your question, we're mostly through that. There's a small amount left going into 2024, but that's mostly behind us. And again, this was referencing back to breaking from the transaction in Q3, took a couple of quarters to get through that old aged inventory.
Aaron Gray
uh okay great thanks um second question for me you guys um talked a lot about wholesale strategy and prepared remarks um you've announced a number of newer expanded brand partnerships recently so talk to us a little bit high level in terms of your thoughts on the strategy with your own branded products versus third party and you know how you're looking to entrench yourself more in wholesale opportunities and some of the markets where there's already existing players um so you either you know, displace some others and increase your own shelf space or maybe just increasing the velocity. So maybe the overall strategy in terms of how you're looking to really expand that wholesale with some more detail. Thank you.
Jesse
Hey, Aaron, it's Jesse. I'll take that. So a couple of thoughts there. I mean, we've spoken previously and continue to speak about the fact that we're obviously heavily invested in building out both an organization as well as systems and processes to support a more focused effort in wholesale in general. When we took a look at it at a high level, though, we understood there were a couple of things thematically that we need to fix. Number one, we need to continue to convert more of the existing capacity that we were utilizing into finished goods versus low margin bulk trades. And then the second was obviously just increasing the throughput utilization of those facilities in general. We saw expansion of our first-party brands continuing to lean in and build those, obviously, as one path forward. We also identified those third-party partnerships that you mentioned as another opportunity to be an immediate shot in the arm with regards to that increased velocity in sales. And I think so far we're incredibly excited about what we're seeing there. That is all part, again, of a larger strategy of making sure that it's not just that we're increasing the top line of the wholesale business, but that we're building a better wholesale business that's ultimately going to contribute to the strategy for the organization moving forward. And a big part of that story is brand building and getting product into finished goods, creating more strategic relationships, not only with MSOs, but also all accounts across the markets that we serve. and making sure that those are ending up on shelves. So I think that is the focus right now. We continue to see advancement and results in that direction. But the third-party brands help us to do that quickly. And so I think you'll continue to see that moving forward.
Aaron
Okay, great. Thanks. I'll jump back in the queue.
Operator
Thank you. Our next question comes from Frederico Gomez with ATB Capital Markets. Your line is open.
Frederico Gomez
Hi, good morning. Thank you for taking my questions. Just on the comment on the underutilization you have in some of your facilities, could you remind us about which states you have that in terms of being more material? And then in terms of ramping that capacity, as you look into 2024, where do you think that could happen faster? You know, which states you see the the most attractive opportunity here. Thank you.
Yellow King
Yeah, so this is Derek. Let me start with the canopy utilization.
David
And we've mentioned this on previous calls, the five percentage point overhang in gross margin from underutilized cultivation assets. And that's cultivation capacity that we've built, investment that we've put into a number of facilities around the country where it's just a period cost until we ramp those facilities up. The investment was made in anticipation of adult use coming that hasn't yet fully materialized. So it's places like Pennsylvania, places like New York, that's the bulk of the facilities that are impacting that. A few others around the country because we continue to have capacity to be able to turn on and use the expansion in wholesale and expansion in adult use to suck that up, which we're hoping to do. It won't be immediately, but we're ramping that up. There are early signs in 2024 for that overhang to come down, and we expect it to continue into quarters into the future.
spk14
David, I would just add that the first two that come to mind are New Jersey and Pennsylvania, where we're actually adding capacity right now. So we're putting more plants under lights early in 2024. Thank you.
Frederico Gomez
And then in terms of your footprint expansion, you mentioned new stores in Maryland, New Jersey, and Virginia. Just any color on the cadence of these store openings this year?
spk14
So we're not going to give any guidance in terms of which queue they're going to open up. They're all under development. They will all be opened in 2024. You know, the one that's probably front and center for us to get done is New Jersey, given the opportunity there in that market to have the third door. But I think I've mentioned on previous calls, we've mentioned It's never easy to get a door open, so it is the top priority for us.
Frederico Gomez
Thank you very much. I'll hold back. Thank you. Thanks.
Operator
Thank you. Our next question comes from Andrew Semple with Eklon Capital Markets. Your line is open.
Andrew Semple
Hi there. Good morning. First question, how much did inventory liquidation actually contribute to operating cash flow in Q1 – or sorry, Q4?
David
Yep, so just to give you a scale, the inventory reduced over the quarter by about $6 million, over the year by about $16 million. So that's the working through of inventory that's taking place with a significant reduction. The adjustments that we made during Q3, we had some inventory write-down provisions. So there's an element of the cash, but it's mainly the inventory reduction numbers I think would would be best used to highlight how much that's gone down.
Andrew Semple
Got it. Okay. And then I just want to go back to the guidance that was issued in November. The Q4 results would look similar to Q3. And at that time, you'd also commented on inventory liquidation that would be occurring in Q4. Just wondering what changed since then with EBITDA down in the fourth quarter relative to the third. Did you actually find that you had to be more aggressive on price to actually move some of the older inventory than you would have previously thought, or are there other factors that were at play?
David
Yes, so the outlook that we were referring to in Q3 was focused on operating cash flow positivity, which we achieved in Q3, and that increased in Q4. The revenue, as you've heard, was relatively flat between Q3 and Q4, down marginally, and less so than we'd normally expect from a seasonal reduction. And so the margin and EBITDA impact was all through reducing the inventory and essentially clearing it out at lower margins. So in revenue, pretty stable quarter over quarter. The cash focus is what we described in Q3, and that really was the focus to liquidate that inventory and get the cash in the door.
David
Got it. Thank you for taking my questions.
Operator
Thank you. Our next question comes from Yuan Kang. with Canaccord Genuity. Your line is open.
Yuan Kang
Hi, good morning, everyone. Thank you for taking my question. This is Yellow King on behalf of Matt Bottomley. I wanted to ask about the sequential uptick in SG&A costs this quarter. Obviously, the financial statements haven't released yet, so it's hard to see kind of what's behind this figure, but we noticed that there is a significant uptick in SG&A costs this quarter. Wanted to ask if what kind of impact that this had on, you know, the sequentially lower adjusted EBITDA margin this quarter. And wanted to ask if this number also included any potential impairments of, you know, the retail assets that you guys might have invested. Thank you.
Yellow King
Yeah, this is Eric. I'll take that. And good call out on SG&A.
David
So there are one-time items in Q4. that include the impairments that you've alluded to. So we will be filing our 10-K later today, and you'll see the detail there. But we had over 18 million of write-downs between goodwill and intangibles, as well as some small fixed asset write-downs. So that's driving the increased quarter over quarter. The core SG&A costs, again, primarily corporate overhead, they are on a downtick based on the restructuring that we've implemented. And that over 20% decline year over year is really driving that core, more recurring SG&A that you'll see quarter by quarter.
Yuan Kang
Great, thank you. And if you could just provide some color behind the EBITDA margin target of above 20% sometime in the next year. Is there any specific initiatives that you guys are currently planning or have already implemented in the past to achieve this?
spk14
This is David. I'll take that. I think there's, you know, I think the asset base, the portfolio that we have speaks to the opportunity for margin enhancement as we continue to drive incremental throughput through those assets. There's a number of AU conversions coming down the pipeline for us as well, which will, again, drive further opportunity for increased utilization of our back of house canopy in manufacturing. And I think there's a number of operational execution in front of us, even on the retail side, whether it's centralized purchasing and a number of other initiatives that will drive incremental opportunities. So I think there's plenty for us to chew on and go after, given the asset base we have, and that's why we wanted to basically communicate where we think we're heading in the sort of midterm.
David
Great. Thank you so much.
Operator
Thank you. There are no further questions. This does conclude the question and answer session. Thank you for your participation. You may now disconnect. Everyone, have a great day. you Thank you. Thank you. Thank you. Good day and welcome to the Cannabis Company's fourth quarter and full year 2023 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would like to turn the call over to Asia Gilbert, Director of Investor Relations. You may begin.
Asia Gilbert
Thank you, Operator. Good morning, and thank you for joining the Cannabis Company's fourth quarter and full year 2023 earnings conference call. With me today is Chief Executive Officer David Hart, President Jesse Shannon, Chief Financial Officer Derek Watson, and Senior Vice President of Capital Markets and Investor Relations Leanne Evans. Earlier this morning, we issued a press release reporting our fourth quarter and full year 2023 results. A copy of this release is available on the investor section of our corporate website, where you will also be able to access a replay of this call for up to 30 days. Certain remarks we make today regarding future expectations, plans, and prospects for the company constitute forward-looking statements within the meeting of applicable Canadian and U.S. securities laws. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors which we disclose in more detail in the risk factor section of our annual form 10K for the year ended December 31st, 2023, which will be filed with applicable regulatory authorities. Any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may update any such forward-looking statements in the future, we specifically disclaim any obligation to do so except as otherwise required by applicable law. Also, please note that on today's call, we will refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. The cannabis company considers certain non-GAAP measures to be meaningful indicators of the performance of its business in addition to, but not as a substitute for, our GAAP results. A reconciliation of such non-GAAP financial measures to their nearest comparable GAAP measure is included in our press release issued earlier today. With that, I will turn the call over to David Hart to get us started. David?
David Hart
Thank you, Asia. Good morning, everyone, and thank you for joining us today. We're pleased to discuss the results for Q4 and the full year 2023, and more importantly, share how our team is driving this business forward in 2024 and beyond. I'm excited to be here at the helm as CEO, joined by a dedicated management team who's passionate about representing our outstanding employees across our 15 US markets. We remain confident in the value of our strategic position and our focus on sweating our assets to deliver for our customers, partners, and shareholders alike. You may recall that in Q3 of last year, once we were free to operate as a standalone company following an arduous 16-month process, we undertook a number of initiatives to best position the company going forward. During 2023, we announced and continued to implement our balance sheet improvement plan, which has already resulted in a decrease in interest expense, reduced leverage, and positioned us to satisfy upcoming maturities, including 13 million remaining in May 2024. As part of that effort, We took steps to increase inventory monetization, reduce working capital needs, and drive cash flow. This work continued in the fourth quarter as we monetized certain excess inventory, which had a temporary impact on margins, but contributed to a healthier cash position at year end. We completed the fourth phase of a previously announced corporate restructuring program, contributing to annualized savings of over $38 million. We began to optimize our seller portfolio of assets with a focus on those markets that will drive growth and profitability going forward. To date, we've exited markets such as Missouri and Utah, and we look to lean in where we believe we can drive the most value. We launched our dedicated wholesale effort to capitalize on our national footprint and cultivation potential, which Jesse will discuss in more detail. We rebranded the company from Columbia Care to The Cannabis Company, and we leverage our expansive retail presence, rolling out purpose-driven new products and brands across our shelves as we prepare for additional markets to transition to adult use, such as Ohio, Delaware, and Pennsylvania. We are committed to continuously improving our operations, implementing changes in our systems to increase efficiencies wherever possible, and building a winning culture to exit 2024 in a much better position to succeed as a team. We're being thoughtful about our footprint, and where we can best capitalize on the tremendous opportunity before us as we see more of our markets transition to adult use. One of the first and most important steps to success has been to ensure that we have the right people in the right jobs with the right tools. This is something that Jesse and I are highly focused on as we understand the importance of winning at the hyper-local level. To that end, Jesse and I have been meeting with local executives across the company to root out inefficiencies, hear from the front lines on how to improve our processes, and empower them for success. You will hear more about these initiatives in the coming quarters and should see the evidence of positive changes in each of our facilities. Next, as we look to maximize our existing cultivation and manufacturing footprint, we've reworked our organizational structure and go-to-market strategy for wholesale. Wholesale has been underrepresented as a portion of total revenue for the company at 12% of total revenue in 2023, and we are looking to change that. Over time, we have invested significant CapEx dollars in creating an enviable portfolio of assets throughout our markets. We are built for adult use and ready for those transitions, with little to no additional CapEx required as those markets flip. However, at present, many of our largest facilities are underutilized, creating a significant drag on our gross margin, which we discussed in prior quarters. To address that, you should expect to see us strategically ramping up wholesale across the portfolio and continuing to engage in key partnerships that will complement our own in-house brands to complete our product mix in retail and strengthen our wholesale product offering. You've seen a number of partnership announcements from us to date, and there are more to come. While 2023 was the year of transition for the cannabis company, we produced consistent top line revenue of $511 million with an improvement in adjusted EBITDA over 2022. This year, 2024, is not about chasing top line growth. We are focused on margin improvement, cash flow generation, and long-term sustainability. Our primary goals for 2024 are to materially improve our financial profile and company culture so that we can capitalize on the massive opportunities ahead for the cannabis industry. we're still in early innings and we will be positioned for long-term success. To reiterate, the first step is to have the right team in place. That task is completed and I could not be happier than to be working with the team that we have. The energy, commitment, and frankly, pure grit in our organization is absolutely inspiring. We have great leaders and great people on the front lines driving continuous improvement. As we move forward, we're focused on four key initiatives. Number one, Enhancing the customer journey for existing medical and adult use customers today, as well as for the new customers of tomorrow as cannabis transitions to adult use in more of our markets. Number two, capturing supply chain inefficiencies and sweating the retail, cultivation, and manufacturing assets that we already have invested in. We will leverage the underutilized capacity through wholesale growth and selected partnerships with winning brands. And number three, capitalizing on the next chapter of cannabis evolution as adult use adoption leads to increasing TAM and the creation of new market segments. And number four, continuing to improve our capital structure to ensure our ability to grow responsibly over time. The successful execution of this strategy will result in leaner operations, improved inventory management, and enhanced cash flow, ultimately driving sustainable profitability and shareholder value. Before I turn the call over to Jesse, let me just recap where the cannabis company is going. We're exceptionally well-positioned in markets that are poised to transition to adult use with states like Ohio, Delaware, and Pennsylvania all on the cusp. We've made the necessary investments in cultivation, manufacturing, and retail, and the opportunity remains to sweat those assets to drive returns with very little additional capex required. We have incremental opportunities in additional product brands to complement our assortments, and turning our wholesale business into a value creation machine and empowering our team members on the front line to focus on providing the best customer service and experience possible. Broadly, we are reevaluating every aspect of our business. If something isn't working, we will address the issue head on. With that, I'll now turn the call over to Jesse to give you more color in some of the play-by-play. Jesse?
Jesse
Thanks, David. In 2023, we made considerable progress as a company that enabled the clear direction we have now. as we engaged in detailed examination of our business, looking for ways to optimize our portfolio of assets and take advantage of the improvements we made during our corporate restructuring. In addition to rebranding at the corporate level to the cannabis company in late 2023, we made strides on the product branding front, expanding the reach of our in-house brands in markets like Virginia and Florida, and reengaging with third-party brand and product partners. In the fourth quarter, we saw sales of our in-house brands increase once again to 51% of retail sales. New brand launches in 2023 included heady edibles across our markets, feed and strain, and classics in Florida, as well as 777 in Virginia. We also standardized and expanded our edibles offerings under our national heady brand with products such as effect-based edibles. Customers can expect to see more unique and creative products like this as we continually strive to ensure that there is something for everyone on our shelves. During the fourth quarter, we also announced several strategic commercial partnerships, launching collaborations with Old Pal in Maryland and Virginia, Aero Brands in Delaware, and then an expanded partnership with Buttercake, introducing its cannabis-infused edibles to New Jersey. These partnerships expand our product offerings to customers and create additional revenue streams while increasing our manufacturing capabilities and efficiency. We are very encouraged by the customer reception of these brands and the demand they've generated as they enter new markets. In short, it's working, and we look forward to what's coming next. While I'm proud of the progress we made in 2023, we have so much more ahead of us. Our focus going forward is building a better business, not just a bigger one. We are working to enable our business from the ground up. This means empowering our team members who are closest to the customer. We are shifting our approach to how we operate in retail, how we make decisions in our facilities, how we solve for addressing customer needs, and most importantly, how we interact with our biggest assets. people. And I can tell you today, we are putting in the work to ensure this commitment is felt and seen throughout the entire business. To put it bluntly, we are committed to doing a better job operating within our four walls. Our dedication to providing an elevated customer experience in both retail and wholesale has not changed. And this requires a bit of agility on our part. We want our customers to view us as a trusted partner that can help them make educated decisions about the products we have to offer, which will be increasingly important as we see the next waves of cannabis normalization coming. This next chapter for the cannabis company requires a thoughtful approach to decision-making and entrusting the subject matter experts, our people, to play a greater role in our success. In our gardens, we're using the increased efficiency and quality of our facilities to produce some of the best products we've ever made. We're thrilled about what we've seen coming out of our cultivation and manufacturing facilities, and we look forward to bringing these products to market through our reinvigorated approaches to wholesale and retail, with purpose-driven products that we know are in demand. The way we have historically viewed wholesale has changed as we shift our approach. We're encouraged by the progress we're seeing in wholesale prices, thanks in part to our higher quality products and a shift in product mix, and we look forward to providing updates on our growth in market share in 2024. In retail, finding a balance between a loyal customer base that wants a more engaged and educational shopping experience while not alienating the customer that prefers a more hands-off approach is our North Star. And our retail associates serve as an incredible source of information we can leverage to get closer to that objective. By attracting, retaining, and empowering talent that is passionate about their work, the company and the plant will gain in-depth, hyper-local knowledge of customers' preferences and market dynamics. Using the insights we gain from retail, we can re-envision the way we commercialize our internal brands and approach the strategic commercial partnerships and deliver purpose-driven products based on consumer demand. We are partnering with flagship brands that fit our product portfolio and that customers will love. These collaborations can help us create an unmatched product offering that addresses the needs of every aspect of the market. We want the cannabis company to be the preferred platform for growth, serving as a trusted partner in evolving the cannabis market, present and future. The second half of last year forced us to reflect, and in 2024, we are improving the way we do business. The execution has already begun. We're evolving as a company, and prioritizing long-term strategic initiatives that will yield the best results for the business and our shareholders. As I like to say, the trend has to be your friend, and we are working to ensure that we future-proof the organization and can successfully navigate the many phases of growth that still await this industry. With that, I'll turn the call over to Derek to discuss our financials.
David
Thank you, Jesse, and good morning, everyone. I'll provide a summary of the key financial results for the fourth quarter and the full year, discuss key trends in our markets, and comment on continuing initiatives to strengthen our company. For the full year, we achieved $511 million in top line revenue, flat with 2022. Revenue in the fourth quarter was $128.4 million, down slightly sequentially from Q3, and up 2% year over year. We continue to see a decline in average basket size caused by ongoing pricing pressures, offset by transaction volume growth over the prior quarter and the prior year. Wholesale revenue increased 4% quarter over quarter, now representing 13% of total revenue in Q4. For the full year, wholesale revenue was 12% of the total, down from 14% in 2022. We're actively working to recover and improve our wholesale part of the business, as we've already outlined. Adjusted gross profit in the fourth quarter was $44 million, down from $50 million in the prior quarter and $47 million in Q4 of 2022. Our adjusted gross margin of 34% in the fourth quarter was down from 39% in Q3 and 37% in the prior year, a result of a deliberate inventory reduction strategy undertaken as we transitioned away from the Crespo transaction. Our inventory reduction was achieved through higher discounting, both through retail and wholesale channels, and has the desired effect of increasing operating cash flow despite the lower margins. We continue to experience absorption accounting from underutilized facilities with five percentage points of gross margin impact due to the underutilization of our cultivation sites. Increasing utilization remains a key opportunity to recapture gross margin in 2024, and while it won't materialize overnight, we're already seeing some progress. Adjusted EBITDA in Q4 was $12.5 million, contributing to the full-year total of $70 million. Adjusted EBITDA down markedly quarter over quarter nevertheless represented a 3% increase over the full-year total in 2022. The fourth quarter decline was primarily a result of clearing through aging and excess inventory, as we've discussed, temporarily depressing both gross and EBITDA margins. Concurrently, we saw a strong improvement in cash flow operations in the fourth quarter, with $9.4 million generated in Q4 compared to $1.8 million achieved in Q3. Prioritizing cash flow was a strategic initiative for us in 2023, achieving positive operating cash flow one quarter ahead of schedule and posting a large sequential increase in Q4. During the fourth quarter, we did not open any additional retail stores and ended the year with 86 active locations. That figure stands at 85 today, given the completion of our Utah divestiture, which we announced earlier today. We anticipate four new store openings in 2024, one in Maryland, one in New Jersey, and two in Virginia, to reach our maximum license caps in each of these states. During 2022 and through the second half of 2023, we announced a series of cost reduction initiatives, including the integration of the prior GLEFA acquisition, facility closures, and the reduction of corporate overhead that we expect to generate a net $38 million in total annualized cost savings. As one indicator of this progress, in 2023, we achieved a 24% reduction in our corporate overhead expense compared to the prior year. We anticipate a full year's benefit of cost savings going into 2024, offset slightly by minimal investments to support our strategic initiatives in growing the wholesale business, investing in technology, and expanding our manufacturing capabilities. On to our liquidity. We ended the year with $39.3 million in total cash. This was achieved after paying down $30.6 million of senior debt in the fourth quarter, $25 million to redeem the bulk of our 13% notes due May 2024, and $5.6 million to fully settle the convertible note that matured in December of 2023. Capital expenditures in the quarter were $1.7 million, consistent with our CapEx guidance. For 2024, we expect a continuation of CapEx at these manageable levels in the range of $2 to $3 million per quarter, as we've already invested in the bulk of our more capital-intensive infrastructure. In 2023, we executed on a number of measures to strengthen our balance sheet. During the year, we retired approximately $35 million of net debt, including the $30 million of CNO notes in the fourth quarter and a net $5 million to settle all but one of our remaining seller notes. In 2024 so far, we've again reduced leverage through the exchange of $10 million of our 6% convertible notes due 2025 to equity and anticipate a further $15 million to exchange by the middle of this year, consistent with the transaction agreement we announced in January. Today, we announced the closing value to our divestiture for $6.5 million in gross proceeds, and we'll continue to target initiatives to improve cash flow, further de-level the balance sheet, and reduce interest expense. I would like to underscore our key financial priorities. They remain driving improvements in gross margin, EBITDA, and operating cash flow while continuing to proactively manage our balance sheet in what remains a challenging market for the cannabis industry. In the midterm, we are targeting to build to EBITDA margins above 20% sometime during 2025. We don't expect the path to be linear, but the team remains focused on executing against that goal. With that, let me turn the call back to David Hart for final comments. David.
David Hart
Thank you, Derek. Before we take questions, I want to leave you with this. Make no mistake, We appreciate that there is a lot of work ahead of us, and we relish the opportunity to capitalize on our strengths in 2024 and exit the year in a materially stronger financial position. I truly expect that this year will require persistent blocking and tackling to ensure we strengthen our foundation and position the company to achieve its potential in the years ahead. You will see us make the necessary changes to right the shift, so to speak, after an arduous 2023. I have committed to the team that this business will look very different by the end of 2024. and we are evaluating everything from our portfolio of assets to company culture and putting in the effort to make sure we deliver. We are committed to fostering a positive and inclusive work environment to ensure we set the strategic direction, align the organization, and mobilize leadership. We're fortunate to have a great team that is committed to success, and I am privileged to work alongside them. Operator, please open the line for questions.
Operator
Thank you. If you'd like to ask a question, please press star 1-1. If your question has been answered and you'd like to remove yourself from the queue, then please press star 11 again. Our first question comes from Aaron Gray with Alliance Global Partners. Your line is open.
Aaron Gray
Hi, good morning and thank you very much for the questions here. First question for me, how much of an impact did you guys have from some of the lower margin sales you mentioned? Could you just quantify that maybe in terms of the margin impact and Do you feel the inventory is better positioned today? Should we still expect some impact heading into the first quarter or just some updates in terms of the actual impact from that inventory and where we can think in terms of the near term on the margins? Thanks.
David
Good morning, Aaron. This is Derek. I'll take that. So the impact of the gross margin decline was taking our Q3 margin from 39% down to 34% in Q4. So all of that, aside from the five percentage point overhang we previously talked about in underutilized assets, that is the impact of clearing out the inventory. To the second part of your question, we're mostly through that. There's a small amount left going into 2024, but that's mostly behind us. And again, this was referencing back to breaking from the transaction in Q3, took a couple of quarters to get through that old aged inventory.
Aaron Gray
uh okay great thanks um second question for me you guys um talk a lot about wholesale strategy and prepared remarks um you've announced a number of newer expanded brand partnerships recently so talk to us a little bit high level in terms of your thoughts on the strategy with your own branded products versus third party and you know how you're looking to entrench yourselves more in wholesale opportunities and some of the markets where there's already existing players um so you either you know, displace some others and increase your own shelf space or maybe just increasing the velocity. So maybe the overall strategy in terms of how you're looking to really expand that wholesale with some more detail. Thank you.
Jesse
Hey, Aaron, it's Jesse. I'll take that. So a couple of thoughts there. I mean, we've spoken previously and continue to speak about the fact that we're obviously heavily invested in building out both an organization as well as systems and processes to support a more focused effort in wholesale in general. When we took a look at it at a high level, though, we understood there were a couple of things thematically that we need to fix. Number one, we needed to continue to convert more of the existing capacity that we were utilizing into finished goods versus low-margin bulk trades. And then the second was obviously just increasing the throughput and utilization of those facilities in general. We saw expansion of our first-party brands continuing to lean in and build those obviously as one path forward. We also identified those third-party partnerships that you mentioned as another opportunity to be an immediate shot in the arm with regards to that increased velocity in sales. And I think so far we're incredibly excited about what we're seeing there. That is all part, again, of a larger strategy of making sure that it's not just that we're increasing the top line of the wholesale business, But that we're building a better wholesale business is ultimately going to contribute to the strategy for the organization moving forward. And a big part of that story is brand building and getting product into finished goods, creating more strategic relationships, not only with MSOs, but also all accounts across the markets that we serve. and making sure that those are ending up on shelves. So I think that is the focus right now. We continue to see advancement and results in that direction. But the third-party brands help us to do that quickly. And so I think you'll continue to see that moving forward.
Aaron
Okay, great. Thanks. I'll jump back in the queue.
Operator
Thank you. Our next question comes from Frederico Gomez with ATB Capital Markets. Your line is open.
Frederico Gomez
Hi, good morning. Thank you for taking my questions. Just on the comment on the underutilization you have in some of your facilities, could you remind us about which states you have that in terms of being more material? And then in terms of ramping that capacity, as you look into 2024, where do you think that could happen faster? You know, which states you see the the most attractive opportunity here. Thank you.
Yellow King
Yeah, so this is Derek. Let me start with the canopy utilization.
David
And we've mentioned this on previous calls, the five percentage point overhang in gross margin from underutilized cultivation assets. And that's cultivation capacity that we've built, investment that we've put into a number of facilities around the country where it's just a period cost until we ramp those facilities up. The investment was made in anticipation of adult use coming. It hasn't yet fully materialized, so it's places like Pennsylvania, places like New York, that's the bulk of the facilities that are impacting that, a few others around the country because we continue to have capacity to be able to turn on and use the expansion in wholesale and expansion in adult use to suck that up, which we're hoping to It won't be immediately, but we're ramping that up. There are early signs in 2024 for that overhang to come down, and we expect it to continue into quarters into the future.
spk14
David, I would just add that the first two that come to mind are New Jersey and Pennsylvania, where we're actually adding capacity right now. So we're putting more plants under lights early in 2024. Thank you.
Frederico Gomez
And then in terms of your footprint expansion, you mentioned new stores in Maryland, New Jersey, and Virginia. Just any color on the cadence of these store openings this year?
spk14
So we're not going to give any guidance in terms of which queues are going to open up. They're all under development. They will all be opened in 2024. You know, the one that's probably front and center for us to get done is New Jersey, given the opportunity there in that market to have the third door. But I think I've mentioned on previous calls, we've mentioned It's never easy to get a door open, so it is the top priority for us.
Frederico Gomez
Thank you very much. I'll hold back. Thank you. Thanks.
Operator
Thank you. Our next question comes from Andrew Semple with Eklon Capital Markets. Your line is open.
Andrew Semple
Hi there. Good morning. First question, how much did inventory liquidation actually contribute to operating cash flow in Q1 – or sorry, Q4?
David
Yep, so just to give you a scale, the inventory reduced over the quarter by about $6 million, over the year by about $16 million. So that's the working through of inventory that's taking place with a significant reduction. The adjustments that we made during Q3, we had some inventory write-down provisions. So there's an element of the cash, but it's mainly the inventory reduction numbers I think would would be best used to highlight how much that's gone down.
Andrew Semple
Got it. Okay. And then I just want to go back to the guidance that was issued in November. The Q4 results would look similar to Q3. And at that time, you'd also commented on inventory liquidation that would be occurring in Q4. Just wondering what changed since then with EBITDA down in the fourth quarter relative to the third. Did you actually find that you had to be more aggressive on price to actually move some of the older inventory than you would have previously thought, or are there other factors that were at play?
David
Yes, so the outlook that we were referring to in Q3 was focused on operating cash flow positivity, which we achieved in Q3, and that increased in Q4. The revenue, as you've heard, was relatively flat between Q3 and Q4, down marginally, and less so than we'd normally expect from a seasonal reduction. And so the margin and EBITDA impact was all through reducing the inventory and essentially clearing it out at lower margins. So in revenue, pretty stable quarter over quarter. The cash focus is what we described in Q3, and that really was the focus to liquidate that inventory and get the cash in the door.
David
Got it. Thank you for taking my questions.
Operator
Thank you. Our next question comes from Yuan Kang. with Canaccord Genuity. Your line is open.
Yuan Kang
Hi. Good morning, everyone. Thank you for taking my question. This is with behalf of Matt Bottomley. I wanted to ask about the sequential uptick in SG&A costs this quarter. Obviously, the financial statements haven't released yet, so it's hard to see kind of what's behind this figure. We noticed that there is a significant uptick in SGMA costs this quarter. So I wanted to ask what kind of impact that this had on the sequentially lower adjusted EBITDA margin this quarter. And I wanted to ask if this number also included any potential impairments of the Utah retail assets that you guys might have divested. Thank you.
Yellow King
Yeah, this is Derek.
David
I'll take that. And good call out on SG&A. So there are one-time items in Q4 that include the impairments that you've alluded to. So we will be filing our 10-K later today and you'll see the detail there. But we had over 18 million of write-downs between goodwill and intangibles as well as some small fixed asset write-downs. So that's driving the increased quarter over quarter. The core SG&A costs Again, primarily corporate overhead. They are on a downtick based on the restructuring that we've implemented. And that over 20% decline year over year is really driving that core more recurring SG&A that you'll see quarter by quarter.
Yuan Kang
Great. Thank you. And if you could just provide some color behind the EBITDA margin target of above 20% sometimes. in the next year. Is there any specific initiatives that you guys are currently planning or have already implemented in the past to achieve this?
spk14
David, I'll take that. I think there's, you know, I think the asset base, the portfolio that we have speaks to the opportunity for margin enhancement as we continue to drive incremental throughput through those assets. There's a number of AU conversions coming down the pipeline for us as well, which will, again, drive further opportunity for increased utilization of our backup house, canopy, and manufacturing. And I think there's a number of operational execution in front of us. even on the retail side, whether it's centralized purchasing and a number of other initiatives that will drive incremental opportunities. So I think there's plenty for us to chew on and go after, given the asset base we have, and that's why we wanted to basically communicate where we think we're heading in the sort of midterm.
Yuan Kang
Great.
Operator
Thank you so much. Thank you. There are no further questions. This does include the question and answer session. Thank you for your participation. You may now disconnect. Everyone, have a great day.
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