8/7/2025

speaker
Operator
Conference Operator

Good day, and thank you for standing by. Welcome to the Cannabis Company Second Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lee Evans, SVP, Investor Relations. Please go ahead.

speaker
Leigh Evans
SVP, Investor Relations

Good morning, and thank you for joining the Cannabis Company Second Quarter 2025 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 results. A copy of this release is available on the Investors section of our corporate website, where you will also be able to access the 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, 2024, 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 some role 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?

speaker
David Hart
Chief Executive Officer

Thank you, Leigh, and thank you to everyone who has joined us on the call today.

speaker
David Hart
Chief Executive Officer

As we consider the results of the first half of 2025, our priorities remain unchanged. We are focused on liquidity and balance sheet management while continuing to make operational improvements, including taking costs out of our business. As we begin, I want to highlight some of the transformational initiatives that have been completed and those that are underway. First and foremost, we want to emphasize the completion of the debt restructuring transaction that we announced on February 27th and closed on May 29th. extending the maturity of all $271 million of our senior debt obligations until at least December 2028. As we simplified the business, we made strides with footprint optimization and bringing cash onto the balance sheet. During the quarter, we closed on the sale of our remaining license in Florida and are now focused on divesting our loan remaining asset in Florida, a cultivation facility. During Q2, we also closed on the sale of two retail locations in California. And as of July, our manufacturing facility in California is now under MSA. as we continue to make progress on our exit of that market on a facility-by-facility basis. As we have noted previously, we are also working on divesting our business in the state of Illinois, which consists of two dispensaries and a cultivation facility. And as a new update, we are announcing today the signing of a transaction in Pennsylvania that will result in the sale of three retail locations for roughly $10 million, as we pivot to a wholesale business model in Pennsylvania in order to better utilize the cultivation and manufacturing facility and to retain exposure in a market that should see an adult-use transition in the future. Once we complete the Florida, California, and Illinois market exits, as well as the wholesale shift in Pennsylvania, the cannabis company will be active in 10 markets, down from as many as 18 in the past. On the operational front, we succeeded in taking costs out of the business in the quarter. As Derek will discuss shortly, we generated roughly 30 sequential basis points of improved adjusted EBITDA margin in Q2, despite pervasive and persistent headwinds in the sector. Lastly, I want to highlight some of our recent wins with a very successful launch of adult use sales in all three of our retail locations in Delaware on August 1st. I want to thank the team for getting Delaware AU off to a great start. Furthermore, we anticipate new stores opening in Ohio during the third and fourth quarters, and we look forward to further strengthening in our core markets like New Jersey and Virginia.

speaker
David Hart
Chief Executive Officer

With that, let me turn the call over to Jesse to discuss our operational results and initiatives in more detail. Jesse?

speaker
Jesse Shannon
President

Thanks, David. During the second quarter, the operations team continued its relentless efforts to simplify and optimize our business, focusing on the right products in the right locations to drive efficiencies, reduce costs, and meet our customers' needs. While the industry continues to battle pervasive headwinds, we achieved a number of positive outcomes. In Q2, our top five markets by revenue and EBITDA, in alphabetical order, were once again Colorado, Maryland, New Jersey, Ohio, and Virginia, with New Jersey and Colorado achieving the biggest sequential revenue growth. Maryland, New Jersey, and Ohio saw the largest increases in adjusted EBITDA sequentially. In New Jersey, we kicked off adult use sales in our third Garden State dispensary in April. During the second quarter, we completed the sale of two retail locations in California, and we have one dispensary remaining in San Francisco. We ended the quarter with 53 operational retail locations compared to 55 at the end of Q1. We currently have three stores in development in Ohio and one in Virginia. We expect our Norwalk, Ohio store to open during the third quarter. I'm pleased to note that our first party brands continue to resonate with our customers and achieve strong growth in the second quarter. The cannabis portfolio of brands saw revenue growth of 17% sequentially in New Jersey with seed and strain leading the pack, followed by 777. Across all markets, 777 was up 10% sequentially, driven by markets like Colorado, Maryland, and New Jersey. Seed and strain is also a bright spot for our portfolio in Ohio, up marginally sequentially and over 74% over the prior year. Growth in the vape category for seed and strain in Ohio is a perfect example of our progress in aligning the product portfolio to meet the market demand in top-selling product formats. As for brand partners, during Q2, we launched Coast Edibles in Maryland and plan to add additional markets soon, as we're already seeing excellent results. Coast launched in June and quickly became the number one brand for the Maryland wholesale portfolio. We also saw revenue growth out of our other brand partners, led by Bloom and Old Pal. Our efforts to methodically rationalize our SKUs and pricing architecture at the retail level continued in the quarter, and we expect additional progress in the second half of 2025. As Derek will detail, during the quarter, we executed an initiative to clear obsolete wholesale inventory, which had a significant impact on margins in the quarter. I'll wrap up my comments by taking a moment to express my profound thanks to the entire cannabis team for their hard fought efforts and continued commitment to serving our patients and customers with the highest experience. Lastly, a special shout out to the team in Delaware for a fantastic adult use launch last week. Now, let me turn the call over to Derek to dive into the financial results. Derek.

speaker
Derek Watson
Chief Financial Officer

Thank you, Jesse, and good morning, everyone. I'll provide a summary of the key financial results for the second quarter. the impact of our balance sheet restructuring completed on May 29th, and comment on our continuing efforts to enhance liquidity and improve profitability. For the second quarter, we achieved $87 million in revenue, a decrease of 1% from the first quarter, primarily due to the sale of two retail locations in California and ongoing pricing pressure the sector is experiencing. We ended the first quarter with 53 active retail locations compared to 55 at the end of Q1. On an adjusted basis, gross margin in the second quarter was 33% compared to 36% in the first quarter. The larger decline in our reported gross margin in the quarter was driven largely by inventory obsolescence, primarily in New York, as well as the wholesale inventory reduction initiative implemented across eight markets to clear all the products or SKUs we are sunsetting as we simplify the business. This initiative significantly reduced our quarter-over-quarter inventory balance, but also caused a large decrease in our reported wholesale margin as we sought to transact at market clearing prices for these specific products. Adjusted EBITDA in Q2 was $8.5 million, compared to $8.3 million in the first quarter, representing a 30 basis point improvement in adjusted EBITDA margin to 9.8% in the second quarter. On a pro forma basis, reflecting just the 10 continuing markets once our announced divestitures have been completed, we achieved an adjusted EBITDA margin of 11.7%. In the second quarter, wholesale revenue increased 16% sequentially to 18.4 million, compared to growth of 3.5% we reported in the first quarter, and driven by the inventory reduction initiative we discussed. As previously noted, this large increase in wholesale revenue was accompanied by a sequential decline in wholesale gross margin. Retail gross margin was also down in the quarter, driven by pricing pressure and a slightly higher level of discounting, including the annual impact of our promotions around 420. Wholesale revenue represented 21% of revenue in the quarter, compared to 18% in Q1 and 16% in Q4. The overhang from the unabsorbed overhead and our underutilized production facilities remain flat at around a four percentage point impact on gross margin. As our footprint is reduced, we're continuing to reduce overhead costs. In addition to the $23 million in annualized cost savings due to corporate restructuring we achieved during 2024, in the second quarter of 2025, we completed a smaller restructuring representing approximately $2 million in annualized labor savings expense. We plan to continue to take costs out of the business through the end of 2025. In the second quarter, operating cash flow was a positive $4 million, inclusive of a $10 million one-time receipt as a full and early settlement of a note receivable. CapEx in the quarter was $2 million, and we continue to expect CapEx to average less than $3 million per quarter, primarily supporting new store openings in Ohio and Virginia and enhancing our back of house capabilities. Together with proceeds from divestitures and almost $11 million in cost to complete our debt refinancing on May 29th, free cash flow in the quarter was negative $3.5 million. We ended the second quarter with $15.5 million in cash, compared to $18.9 million at the end of the first quarter. During Q2, we contracted for $7 million in divestitures from asset sales, approximately $5 million of which was received, and $2 million is still outstanding for payment at the end of the quarter. As we've announced today, we anticipate a short closing window for the sale of retail assets in Pennsylvania, which will add $10 million of gross proceeds to our balance sheet. This transaction will also provide us with new revenue streams in Pennsylvania through an incremental supply agreement and a related sublease transaction. As David stressed, liquidity management continues to be paramount, and we're continuing to work towards closing the pending divestitures in Florida, California, Illinois, and now Pennsylvania, and making further operational improvements to our business. With that, I'll turn the call back to David for final comments.

speaker
David Hart
Chief Executive Officer

Thank you, Derek. Thanks to everyone for joining.

speaker
David Hart
Chief Executive Officer

We look forward to providing additional updates on our key priorities as we focus on liquidity and balance sheet management while simplifying operations.

speaker
David Hart
Chief Executive Officer

And this concludes today's conference call. You may now disconnect. We appreciate you for joining.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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