The Cannabist Co Hldg

Good day and thank you for standing by and welcome to the Cannabis Company 3rd Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. If there is a question, please press star 1-1 again. And please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Bian Evans, Senior Vice President of Capital Markets.

Please go ahead.

Good morning, and thank you for joining the Cannabis Company's third quarter 2024 earnings conference call. With me today are Chief Executive Officer David Hart, President Jesse Shannon, and Chief Financial Officer Derek Watson. Earlier this morning, we issued a press release reporting our third quarter 2024 results. A copy of this release is available on the Investors 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 meaning 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 Factors section of our Annual Form 10-K for the year ended December 31, 2023, and in our subsequent quarterly filings. 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. Reconciliation of such non-GAAP financial measures to their dearest 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?

Thank you, Leigh, and thank you to everyone who has joined us on the call today. On each of the previous earning calls since Jessie and I were appointed to lead the cannabis company in mid-January, you've heard us clearly outline our objectives and the actions that we are taking to build a better performing business to create a sustainable economic model and to drive value for all of our stakeholders over time. We've made it very clear that this company will look materially different by the end of 2024, and we, along with everyone in the organization, continue to work aggressively to make this happen. We remain hyper-focused on driving increased profitability, rationalizing our geographic footprint and corporate expense profile, as well as proactively implementing the changes required to strengthen our balance sheet, to adequately meet our debt obligations, and to set the company up for sustained growth and profitability in 2025 and beyond. I'm pleased to say that during the third quarter, we continue to make solid progress towards each of our initiatives, and at this time, I'd say we are over halfway through the transformation of the company with our end destination coming into clear view each day. It is our expectation that over the next two quarters, we will have completely repositioned the company. We will be leaner, we will be more agile, and we will be profitable, and we will retain scaled operations in many of the best cannabis markets in the country. During Q3 and thereafter, we completed a number of critical actions. the opportunistic sale of our assets and operations in Arizona and in eastern Virginia to Verano for total proceeds of $105 million. By selling one of our two licenses in Virginia and by exiting Arizona, we immediately solved near-term liquidity needs and simultaneously positioned the company to begin tackling its future debt maturity obligations. We retained a strong position in Virginia, but we have one additional dispensary to open in the Richmond area while transforming our balance sheet. To that end, we continued to advance the divestiture of our Florida operations. In addition, as part of continuing to rationalize the overall footprint, we also made significant progress on shuttering and divesting our DC operations, and on October 1st, we closed our Boston location, which was underperforming relative to our Massachusetts portfolio. In Q4, we have now also implemented further operational improvements and additional cost-cutting initiatives in both the front and back of house to drive further efficiencies, accelerating decision-making, and improve cash flow. We are bolstering our wholesale team and creating a more focused sales approach to our largest accounts. And lastly, we will continue to evaluate the opportunity to further rationalize our geographic footprint, exit underperforming locations, make changes to our field leadership structure to better streamline and standardize operations, and to capture incremental cost-saving opportunities at the corporate level. I continue to be impressed by what our team has accomplished in very short order. That said, we will remain mindful that our industry and our company still face certain challenges and so our coordinated and calculated efforts to drive change will continue in the days, weeks, months, and quarters ahead. For our company, our financial results reflect some temporary timing challenges, as during Q3, we exited a portion of our higher-margin Virginia operations while still working to close the disposition of our loss-making Florida operations. So that put some temporary pressure on the bottom line. Among other things, this created a bit of noise in our Q3 results, which Derek will discuss in a few minutes. Across the industry, operators are contending with the slow yet measurable progress towards rescheduling and the continued pressures on liquidity from the punitive 280E taxation model, as well as very limited and expensive access to investment capital. That being said, we have charted a clear course forward to reposition the cannabis company as a smaller but stronger and more agile company with scaled operations in many of the best and most promising markets in the U.S. Upon completion of the processes to exit Florida and D.C., we will have a footprint of 12 states. We are making progress and will continue to make progress on our transformation plans, including additional success in building a better wholesale operation, which Jesse will take you through in just a moment. As we remove unprofitable and non-strategic assets and implement our operational improvements, the opportunity to drive incremental profitability is significant. We continue to target achieving a 20% adjusted EBITDA margin in 2025. We will continue to make additional changes through the balance of 2024 as we remain focused on achieving that goal in 2025. Today, after much effort in the first 10 months of 2024, we find ourselves at an inflection point on the path to building a sustainably profitable business. This year, we will have significantly streamlined our operations, made enormous progress towards exiting underperforming markets, enhanced our go-to-market strategy in both retail and wholesale, partnered with amazing brands, strengthened our balance sheet with fresh capital, and reduce our overhead and operating costs. Much has been accomplished. Much remains to be done. But again, we are over halfway there with the end goal squarely in our sights. With that, let me turn the call over to Jesse to drive a bit into our operational results and initiatives. Jesse?

Thanks, David. As David mentioned, over the past 10 months, we've been executing our plan to rationalize our geographic footprint, root out inefficiencies, perfect our assortment of flour and finished goods, implement process improvements at both retail and wholesale, improve margins and cash flow, and strengthen our presence in the best markets, particularly those that are transitioning to adult use. We know we have additional opportunities to execute against where we can capture margin by improving operations. Our Q3 results reflect continued progress on our initiatives. In particular, I would point out that wholesale revenue increased 2% sequentially to 19.5 million, and that is despite the impactful divestitures in Virginia and Arizona. We continue to work toward improved pricing, discounting, and promotion across the organization and our brand architecture. We implemented further changes in our operations, enhanced our wholesale and retail demand planning, and undertook reformulations of our pre-roll product to enhance margins. We saw stabilization in key markets such as Colorado, and in New Jersey, we are moving into the pricing maturity curve that we were expecting. We have terrific manufacturing operations in Jersey. which leads to a better cost basis, and we are very much looking forward to opening our third dispensary in the state, which is expected to open doors around the end of this year. Our top five markets by revenue and adjusted EBITDA were once again alphabetically Colorado, Maryland, New Jersey, Ohio, and Virginia, with Ohio demonstrating the largest increase in revenue and adjusted EBITDA quarter over quarter, thanks to the launch of adult use. We should note that New York was behind Ohio with the second largest improvement in revenue sequentially, as we're seeing progress in the wholesale market. One of the most exciting developments in the third quarter was the transition of the Ohio market to adult use. Recall that on our last earnings call, I had just returned from day one of AU in Ohio, which was indeed electric. That energy has continued, and we've seen some strong results and encouraging trends. We have five great stores in Ohio, and volumes on average nearly doubled. We have had a huge influx of new customers, achieving a new customer rate nearly nine times greater than what it was prior to the transition of adult use. We're supporting the surge in customers and volume with a 50% increase in production throughput in Ohio. This was driven by increased utilization in preparation for AU launch, as well as improved cultivation. With more biomass and a higher potency rate, we were well prepared to serve all of the customers coming into our stores. This has led to substantial increases in the sale of both first and third party products, as well as substantial increases in both flour and manufactured items. We have also experienced a positive mixed shift on flour towards our own production. I want to note that Ohio is still in the process of implementing their final AU rules. Once implemented, the caps on the quantity of flour sold per customer per day will more than double, and we will have a greater product assortment available, including combustibles. We're also working on additional store openings, the first of which we expect to see in first half 2025. There's a lot of positive momentum in Ohio, and I'd like to take a moment here to thank the incredible Ohio team for all of their hard work to prepare for and execute the transition of adult use, which was our best transition as a company to date. With each market transitioning to adult use, we get better, and we look forward to Delaware converting in 2025, as well as longer-term conversion opportunities in several of our other markets, namely Virginia and Pennsylvania. As we look out over the next few quarters, we will continue to aggressively position ourselves with the best footprint in the best markets, with the best products and brand assortment, and continue to work towards the best execution to build a strong and sustainable business. With that, let me now turn the call over to Derek to cover the financial results in more detail.

Derek? Thank you, Jesse, and good morning, everyone.

I'll provide a summary of the key financial results for the third quarter, discuss trends in our markets, and comment on our continuing initiatives to strengthen the balance sheet and improve profitability. For the third quarter, we achieved $115 million in revenue, down 8% from the second quarter, primarily as a result of the sale of Eastern Virginia and Arizona businesses, which closed in mid-August. As David mentioned, the divestitures and other related actions have created some noise in our reported results. However, excluding the impact of divestitures in both Q2 and Q3, revenue would have essentially been flat quarter over quarter. We saw a slight decline in gross margin in the quarter, down 35 basis points to 38.2%. Wholesale increased 2% over the second quarter, as Jesse mentioned, and represented 17% of total revenue, up from 15% of total revenue in Q2 and 12.5% in Q1. We saw a slight improvement in the ongoing overhang from unabsorbed overhead and underutilized production facilities, now representing a 4.1 percentage point impact on gross margin, down from the 5 percentage point impact we experienced during 2023. We expect this overhang to continue, gradually declining, particularly as we exit the Florida market and as additional capacity is utilized in other markets, such as New York. In mid-June, we announced incremental corporate restructuring actions targeting a further 10 million in annualized cost savings, and we are targeting a further 5 million in cost savings during Q4. Adjusted EBITDA in Q3 was 14 million, down from 17.5 million in Q2, with an adjusted EBITDA margin of 13% compared to 14% in the second quarter. The sequential contraction in adjusted EBITDA and adjusted EBITDA margin is also a result of the sale of our higher margin businesses in Virginia and Arizona. As we've disclosed, our Florida operations have been loss making and continue to be a drag on adjusted EBITDA in Q3, while pending completion of our market exit there. Cash from operations was negative 18 million compared to negative 3 million in the second quarter and negative 6 million in the first quarter. This was a result of catching up on previously deferred payments and several one-time items related to divestitures and our ongoing restructuring efforts to transform the company. CapEx in the quarter was $1.5 million, primarily to support retail locations that are in development, including our third New Jersey store that is scheduled to open around year end. As before, we continue to expect CapEx over the longer term to average around $2 to $3 million per quarter, primarily supporting new store openings and enhancements to our manufacturing capabilities. We had 73 active retail locations at the end of the third quarter after the sale of assets in Arizona and eastern Virginia, as well as the closure of our Boston location. We continue to have new retail locations in development, one in New Jersey, one in Maryland, one in Virginia, and now three in Ohio, in order to reach our maximum license caps in each of these states. We ended the third quarter with $31.5 million in cash after making an interest payment on our 9.5% notes due 2026, with a balance up from $22 million at the end of Q2. Our share of net cash proceeds received in the quarter relating to the Arizona and Eastern Virginia divestitures was $31 million, with future proceeds to be received in the form of monthly payments. This excludes our share of equity in Verano, which had a mark-to-market value of $33 million as of September 30th. Lastly, a comment on 280E and the related tax impact. Despite progress to date, the timing of federal rescheduling remains uncertain. As we've previously disclosed, if 280E were to no longer apply, our current annual income tax liability would be expected to decrease by around $30 million. In mid-October, we submitted an amended tax return and refund claim associated with 280E for our 2020 tax year to the sum of $5 million. This will be fully reserved for in our year-end financial statements, and we'll continue to assess the benefits of filing additional amended tax returns for later tax years. As David and Jesse have highlighted, our key financial priorities remain rationalizing our operational footprint, executing on improvements in both growth and EBITDA margins and driving operating cash flow to support proactive management of our balance sheet. We continue to pursue adjusted EBITDA margins above 20% over the longer term with our stated target of sometime during 2025. With that, I'll turn the call back to David for final comments.

David? Thank you, Derek.

Before we take questions, I want to touch upon the news we shared this morning. As we discussed, we are in the midst of simplifying our business to focus on core markets that will drive profitability and help to create a sustained economic model going forward. As part of that process, we are exiting the loss-making operations in Florida. We are pleased to have closed on the sale of 14 retail locations and two cultivation facilities in Florida, which we announced this morning. We look forward to closing the transactions for one additional facility and the remaining license in the near future. As we've emphasized, there is more to do, and we will continue to transform this company and position ourselves to succeed in 2025 and beyond. We'll now take your questions. Operator, please open the line.

Thank you so much. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To answer a question, please press star 1-1 again, and please stand by while we compile the Q&A roster.

Your first question comes from the line of Aaron Gray of AGP. Your line is now open.

Hi, good morning, and thank you very much for the question. So first question for me, Derek, I think you did allude to a little bit, but just in terms of pro forma basis, how the company fared in the quarter. So if you maybe provide trend-wise how you did 2Q versus 3Q, if you account for all the divestitures or just how much of an impact, you know, the divestitures had on it so we can get a better sense of how we come into 4Q. I think that color would be appreciated because we can help layer in that cost type that you guys just announced. Thank you. Derek, would you like to take that?

Yeah, happy to. Good morning, Aaron, and fair question. You're right, we did in the prepared remarks comment on the pro forma impact of Q2 to Q3. So essentially without the impact of those divestitures, In either quarter, our revenue would have been flat quarter over quarter. In terms of the pro forma go forward, obviously Q4 will have the impact, full quarters impact of those divestitures being out. And as David has just mentioned, we'll have the impact of the Florida divestiture also out in Q4. So to fast forward to the pro forma impact going forward, We're not yet ready to provide guidance on that, but obviously a lot of noise in Q3. We've tried to highlight, and once we've completed the process of the Florida divestitures, we'll, I think, be in a better position to provide pro forma going forward.

Okay, great. Then just quickly, did you offer any color on the EBITDA? So I know sales class, so I should have clarified the first part, but for EBITDA, did you comment on that?

We did not, but again, a lot of noise in the quarter. Eastern Virginia, high-margin business, Arizona as well. Again, we're still working through the loss-making Florida operations in the quarter. And as we've mentioned also, there's additional cost-cutting that's being implemented in Q4. So again, a lot of noise in both quarters. Once we're through completion of those, we'll be in a better position to provide an ongoing pro forma for you. Okay, great. Thanks. I appreciate the comment there.

And then on Ohio, you guys offered some commentary then, you know, being a highlight for the quarter. For some stakeholders, it seems like it was not as much of a lift as some had hoped. Obviously, you didn't have access to some of the marketing and form factors. So just any expectation in terms of the Ohio market going forward, when you might expect adult use regulation. And also maybe on the broader pricing environment, too, just given it is a neighboring state of Michigan where there's a lot lower pricing there. So how do you think those different dynamics have impacted the release launch, which could potentially provide further upside down the road? Thank you.

Jesse, do you want to take that one? Yeah, happy to.

Hey, Aaron. So, look, in Ohio, I think we were on the conservative side. from the beginning with regards to what our expectations were for that lift. I think we were out there publicly saying that we expected to be around that two times. And that's essentially more or less where things have fallen in for us. We've been, I think, less impacted than others based on just the location of the stores, right? So just the geographic footprint of our stores that are currently operating, having less of an impact. Our border stores are more in the West Virginia range than the Michigan range. So I think that's led to our ability to control some level of the pricing. Overall, we're excited by what we see in Ohio. I still think it's a good market that's heading towards great, to your point, as we see the introduction of the full adult use regs. It's very difficult to uh effectively operate in an adult use market when you can't really engage with your consumers minus those advertising regs and the loosening of those of those in uh regs on engagements so we're excited to be able to start to communicate to be able to start to drive uh volume and campaigns like we do in other markets and we're also you know waiting for those rights to be able to open up the limits for uh consumers right daily limits going up uh with regards to their purchases what they can buy, and then also the introduction of additional form factors and combustibles. So overall, good market, but we feel confident heading towards great.

Okay, great. I'll go ahead and jump back in the queue.

Thank you so much. And our next question comes from the line of Yoan Kang of Canaccord Genuity. Your line is now open.

Hi, good morning. This is Yoan Kang on behalf of Mount Bottomley. Thank you for the question. Just my first question is on the cash flow from operations. That was negative $18 million this quarter. I think you alluded to some of the put and takes that occurred throughout the period that have contributed to this sequential downswing. Could you provide maybe some additional granularity on the events that occurred that led to this? Thank you.

David, would you like me to cover that?

Yes. Thanks, Derek. So, yes, an 18 million negative cash from operations relative to a 3 million negative in Q2 and 6 in Q1. So there's, again, noise in the quarter with the impact of the divestitures, some other one-time items related to the 10 million restructuring that we've executed on earlier in the year. There are still ongoing payments associated with that as well. And the other comment I'd make is there was some catch up on some deferred payments in previous quarters. I think that the growth in our wholesale, which we didn't necessarily call out, we've got sequential growth in our wholesale business not uncommon in the industry as we're increasing the revenue quarter over quarter, that becomes a bigger component of our overall revenue. We're obviously not collecting all of that cash. That also contributes to the negative cash from operations because we're in a higher growth mode on a receivable balance that doesn't all get collected in the quarter. So again, a lot of components is part of that, driving that amount in the quarter, as well as the large interest payment that we make on our 26 notes. That's a six monthly payment that gets factored into the cash from operations. So fully expecting that will come down in the fourth quarter. It's based on timing of those one-time items and interest payments and some of those other factors we've mentioned.

Great. That's very helpful. Thank you. And just on my second one here is obviously this morning you guys announced the completion of the disaster of 14 dispensaries in Florida. Obviously, previously, you guys have alluded that you guys are looking to sell the production facilities there, and a large chunk of the consideration will come from that transaction. So just wanted to ask how you're thinking about your capital allocation plans post receiving that consideration going forward. Would it be more weighted towards some of the growth initiatives that you guys have planned, or would it be towards delivering the balance sheet? Thank you.

Maybe I'll start, and then I'll hand it over to you, Derek. Great question. We continue to be focused on putting cash under the balance sheet and delivering both in 24 and 25. We've outlined, I think, the CapEx plans going forward are very light. I think we said $2 million to $3 million per quarter. So we've spent a lot of the required CapEx for the growth opportunities that we see in front of us, and it's really about putting cash on the balance sheet and preparing for continuing to deliver. But, Derek, I'll let you weigh in as well.

Yeah, thank you, and completely agree. We've stated for a long time that we're looking to delever the company, and obviously cash proceeds from divestitures are going to support that. That will be the primary use of funds in the capital deployment. But there's also some growth initiatives. So we've got the new stores that are opening that we've mentioned, the first of which will be New Jersey around the end of the year. We've got the new Ohio stores that are opening. And the Ohio regulations, as they evolve, there'll be different form factors that we will invest money in manufacturing there and in other markets as well. So there's still capital deployment, but again, to the first comment, de-levering is the primary objective for the use of funds.

That's great, Colleen. Thank you very much. I'll pass on the line.

Thank you so much. And there are no further questions at this time. And this concludes today's conference call. Thank you so much for participating. You may now disconnect. Have a great day.