Cls Holdings Usa Inc

Good afternoon and welcome to CLS Holdings USA in third quarter 2022 conference call. My name is Tawanda and I'll be your conference call operator today. At this time, all participants will be in a listen-only mode. Before we begin today's call, I'd like to remind everyone that this conference call is being recorded as well as broadcast live via a webcast. Additionally, today's call will be available via webcast replay later today and accessible by visiting the Investor Relations section of the CLS Holdings website at www.clsholdings.com. Now I'd like to turn the call over to Jamie Dickinson with CLS Holdings USA, Inc. You may begin.

Thank you. Good afternoon. And thanks, everyone, for joining CLS Holdings' third quarter 2022 conference calls. Our earnings presentation and prepared remarks include references to non-GAAP measures, such as EBIT. We use these non-GAAP measures to provide greater transparency and a more meaningfully efficient comparison to prior year's results. Our non-GAAP and reconciliation from the GAAP measures to the non-GAAP measures are available in our earnings release. Statements in this conference call that are not historical facts are forward-looking statements. Words such as anticipate, estimate, expect, predict, project, and other similar words or phrases, such as goals, are intended to identify forward-looking statements. Examples of forward-looking statements include but are not limited to our estimates of future market position, market share, revenue, number of units sold, gross margin, profitability, number of transactions at our dispensary, and average order size, the timing of the first harvest for our tribal venture, and the commencement of manufacturing operations for our pre-roll joint venture, the number of products expected to be produced each month, and how long it will take the pre-roll joint venture to achieve expected monthly sales. the acceptance of our joint venture products by customers, whether other companies will enter into license agreements to have our pre-roll joint venture produce pre-rolls for them, and whether our New Mexico venture and other licensing opportunities will lead to expansion in other states. Examples of risks that could impact our forward-looking statements include, but are not limited to, the impact of the COVID-19 virus on our business, the results of our initiatives to retain our employees and strengthen our relationships with our customers and community during the pandemic, the effect of our initiatives to expand market share and achieve growth during and following the pandemic, the risk of unanticipated future events, and the effectiveness of our business practices during the pandemic. Forward-looking statements made during this conference call speak only as of today's date, and CLS Holdings specifically disclaims any obligation to update or revise any forward-looking statements to reflect new information, future events, or circumstances, or otherwise. The matters discussed on this call and in our presentation that are forward-looking statements are based on current management expectations involving risks and uncertainties that may result in these expectations not being realized. Actual events, outcomes, and results may differ materially from what is expressed or forecasted and from goals that we desire to achieve due to numerous risks and uncertainties, including but not limited to the risks and uncertainties described in this conference call. Our presentation filed with the SEC today and other filings made by the company with the SEC from time to time. Now, I would like to turn the call over to CLS Holdings Chairman, Jeffrey Binder.

Thank you. Good afternoon. My name is Jeff Binder and I am the chairman of CLS Holdings USA Inc. I would like to thank you for all participating in our call today and I look forward to our team sharing some of the accomplishments since we purchased the company three plus years ago. We operate in what is arguably the most competitive cannabis environment in the US. To witness the extraordinary growth and high level of execution that has been achieved gives me great pleasure. We have consistently grown revenue, dramatically narrowed our losses and maintained our margins. With our two new wholly owned operating divisions online, we're poised to grow revenues dramatically and achieve profitability this year. Given all the extraordinary events that have affected our country, the way our team stepped up to serve our customers gives me great pride. What a great accomplishment for cannabis to be deemed an essential industry. The team in Nevada has shown exceptional dedication to the company and more importantly, has dedicated themselves to providing outstanding customer service and awesome products to the roughly 850 plus people a day that visit our dispensary. Our CityTrees division has shown incredible resiliency by meeting the demands of all cannabis consumers with the production of the finest tinctures, vapes, and concentrates in the industry. You will hear today about the financial accomplishments which include narrowing our losses by approximately 95% and achieving a compound annual growth rate of 35% for the period January 1st, 2019 through December 31st, 2021. We will continue to operate this business respectfully and thoughtfully, keeping in mind that it is indeed a privilege, not a right to be able to operate in this rapidly growing industry. I would also like to point out that part of our DNA of our company and incredibly important to me is to give back and serve the community that we operate in. Not only have we donated $20,000 to various charities this year, we have participated in numerous events to help those in need along with those who have suffered under today's antiquated and outdated cannabis rules and regulations. Additionally, we continue to grow our program with the Ann Arbor Day Foundation by planting trees with the purchase of certain City Trees products. I hope that the legacy we leave behind provides for a healthier environment and a much more civil place for all of us. I look forward to more of these calls and I can assure you that we will try our best to represent our financial partners, shareholders, and our awesome customers that visit our dispensary and utilize our City Tree products available in over 70% of all the dispensaries in Nevada. The future for CLS is high. At this time, I would like to turn the call over to Charlene Soko, Executive Vice President of Finance for CLS USA, Inc.

Thank you, Jeff. Good afternoon, everyone. My name is Charlene. Today, I have the pleasure of highlighting our fiscal third quarter financial information. Q3 fiscal year ending 2022 recognized $5,588,266 in revenue. This represents a 23% increase compared to Q3 fiscal year ending 2021's revenue of $4,544,082. Our consolidated gross margin for the quarter was 51.7%, an increase from 45.2% from quarter three fiscal year ending 2021. On a more detailed look, CityTrees, our wholesale subsidiary, contributed $2,255,037 in revenue, a 94.4% increase to the same quarter of the prior year at $1,159,943. The subsidiary's gross margin increased to 56% from 39.5%. Oasis contributed $3,333,229 in revenue, a slight decrease of 1.5% when compared to the prior year, which recognized $3,384,138. The Nevada dispensary's gross margin stayed consistent with a marginal increase from 47.2% to 48.7%. Oasis saw a 5.2% increase in the number of transactions serviced, 66,016, up from 62,754 compared to last year. When comparing the nine months ending February 28, 2022, CLS Holdings USA Inc. recognized revenue of $16.5 million, a 24.7% increase to the nine months ending February 28, 2021. which had revenue of $13.2 million. The company's consolidated gross margin saw a slight uptick from 51% in the prior year to 51.6%. I would now like to hand over the call to our president and COO, Mr. Andrew Glashow.

Thank you, Charlene. Good afternoon, everyone, and thank you for joining our first quarterly conference call. I'd like to start with giving a big thank you to all the men and women that work for this outstanding cannabis company. We view the right to be able to sell a full line of cannabis products as a privilege, and we will continue to provide really outstanding medicine and incredible service every day. As I look back at the roughly three and a half years since this management team has been intimately involved with the operation, A lot of meaningful accomplishments have been achieved. When we first got involved with the business, we were seeing at our dispensary approximately 200 customers a day. Fast forward to today, we see approximately 850-plus customers a day, a roughly four-fold increase in three and a half years. At our CityTrees manufacturing and production facility, we've seen an increase in revenue from approximately $100,000 a month to $700,000 a month, a roughly 7x improvement in revenue since we took over management in January of 2018. In addition to our line of products sold in roughly 70% of dispensaries statewide, we also are producing products from many of the other outstanding brands in the state of Nevada. We continue to remain optimistic and excited with the belief that we can continue to increase revenue in our dispensary and increase revenue through our manufacturing and production facilities. Our aim is to become a consistently profitable entity that does not lose sight of our continued efforts to give back to the community that we directly impact. We have invested substantial amounts of money into improved efficiency, along with millions invested into plant property and equipment. Our largest investment continues to be in the people that make these things happen every day. Because without these people, the results that we have achieved would not be possible. I invite everyone to come visit our store and see how people are treated and the enthusiasm of the great team that serves our 850-plus customers a day. One of the strategies that we've embarked on is our continued relationship with so many of the terrific companies in Nevada that supply our retail store with the great products we sell. We think giving consumers as many choices as possible is what's best for a healthy market. Purchasing has been a key initiative of ours. In a highly inflationary environment, our aim is to work closely with our partners to be able to provide outstanding products at price points that make sense for the customer base and the community we serve. Very simply put, best damn deals. We understand people have less money to spend on a variety of items, including cannabis, and it's our job in this environment to meet those needs. We really do view our vendors as partners, and as such, we work hard to make sure that these fine people and their companies are paid on a timely basis. These relationships continue to allow us to provide outstanding cannabis products at price points that are respectful and consistent of our customers' needs. As I look out into the back half of calendar year 22 and beyond, We have a number of opportunities that should be meaningfully accretive. This includes our first harvest in Q3 and Q4 of 2022 from our recently announced tribal partnership and the automation of our pre-roll manufacturing division. We anticipate harvesting 20 to 25,000 pounds of high quality sun-grown cannabis at wholesale prices in excess of a thousand dollars a pound. Additionally, We will be formally introducing and expanding our line of Naked City pre-rolls in May. We believe we are well positioned with our fully built out and operational manufacturing facility in North Las Vegas to meet the needs of our customers today and into the future. This manufacturing facility is currently producing some of the finest concentrates, tinctures, and vapes in the Nevada marketplace for other highly respected brands. As we look into the future, it is our goal to embark on an asset-light model that includes co-branding, joint ventures, and continually rolling out relevant products for the Nevada marketplace in New Mexico. And finally, I believe it's important to highlight that all our growth to date has been generated organically. We have not made any acquisitions and have attempted to prudently manage our balance sheet and avoid unnecessary dilution for our shareholders. I'm now going to run through a few slides that I hope put some of our successes in perspective and touch on some of our future growth opportunities. Some of our accomplishments have been a 4X improvement in packaging throughput through some material updates. Material updates also proved a 90% cost saving on production. In 2021, we landed over $500,000 in savings through cost control, such as the packaging changes mentioned above. Additionally, in order to help us avoid supply chain issues, we have solidified a number of air freight trade agreements, which have been extremely helpful to us in mitigating the supply chain issues. Some future goals include an additional 20% cost reduction on vapable hardware, turnkey inventory backstop to enable us 48-hour turnaround time on all orders, decrease our hydrocarbon live resin extract production time, Our goal is to reduce production time by 50% through extraction tech solutions, upgrades, and process efficiencies. Our THCA production increased through mechanical separation techniques, improved ethanol filtration via in-depth conversations with our vendor partners, resulting in consistent 90% plus THC distillate. We've increased our staff by 3x for our hydrocarbon extraction via third-party manufacturer and on-site training. We've hired a head cultivator for our outdoor harvest. We released our chocolate agave espresso, 750 milligram in New Mexico. We grew our brand share from 4.4% to 6.3%, and we ranked second in out of 70 brands in the category of vape, dabable format, and sales in units sold. We're going to research and new product development department was created. We will launch between one and three jointly approved innovative products every 90 days. Our Sauced Vape line has been released. Our Jakua partnership has been solidified. Our New Mexico SKU expansion is on the way, and we did a soft launch of our Naked City pre-rolls in February, and we sold out. Some additional CityTrees goals. With the ramp-up in penetration rate, our current projection goal is to sell 180,000 units in the next 90 days to represent a 1,132% increase in units sold quarter-to-quarter. We're going to increase market share in 2022. Our pre-roll automation is scheduled for June 1st, and we anticipate selling 150,000 units a month. We're going to continue to build out the inventory team, and we're launching our one gram live resin disposable on 7-10. At Oasis, in the month of February, of 22 versus 21, we saw a 3% increase in revenue. We view that as a major accomplishment as we saw the marketplace deteriorate at about 10 or 15%. We've helped our partners move their quality products by offering our best pricing ever. And we continue to serve those 850 customers with an average cost of $51. Our goals are simple. We want to increase our market share and serve 1,000 customers a day. We want Oasis to become a household name and a Las Vegas icon. We're planning for our biggest one day ever on 420. If anybody is in Vegas, we believe we're throwing the party of all parties. We'd like to outperform 21. We want to meet our customer needs. We want to supply a large selection of products for multiple vendors. We will continue with aggressive pricing, and we will stick to what has worked for us, which is to be local, local, local. Some opportunities. To get to 150,000 units a month in pre-rolls starting in calendar year Q3. To execute on our tribal grow to harvest 25,000 pounds in Q3 and Q4. and to continue to expand our presence in the now recreational and medicinal market of New Mexico. And we anticipate adding our full product line into the marketplace this year. I now would like to turn the call over to the moderator, who may have some questions for me.

Thank you. Andrew, we have a few questions coming in that I'd like to read to you. The first question, your overall growth remains strong in the NV market, seeing some head wings right now. What is allowing you to take share in this type of environment in retail and in your wholesale business?

I think from our perspective, What we've been able to do by owning a dispensary, we get to see real-time data from our customers. And what we started to see around six months ago was the waning of the benefits of some of the stimulus money. So people did have less money. People now do have more choices as Vegas has opened up. And as a result of that, we've made a concerted effort to go to our partners, our vendors, and to get the finest cannabis products we could at price points that made sense for our customer base. And I'm very pleased to report that we are seeing increased traffic flow. And we continue to, I think, outpace the marketplace. And I think that's really a combination of us being able to purchase properly and, again, meet the needs of our customer base.

Great. Thank you. Can you describe what you have seen in the NB market recently in terms of demand and pricing? And do you believe the end market demand has bottomed? Why or why not?

No, I don't believe that the end product demand has bottomed. I think what has happened is that the customer base itself is much more hypersensitive to pricing. And I think that we have to realize that, again, our customers have more choices and And I think that our customers are facing the same dilemma that just about everybody's facing, higher prices on everything, whether it's housing, whether it's gasoline, whether it's clothing, et cetera, et cetera. So we just have to be cognizant. to be able to meet the needs of that customer base. And I think it's working because we're seeing increased traffic. Although our basket price is down about 5% or 6%, the amount of customers that we're seeing is actually up by about 5% or 6%. So we're cautiously optimistic that we've embarked on the proper strategy. And I would say that it is, for us, having our relationship with the vendors that we do And paying those folks in a timely manner has allowed us to, I think and I hope, cut some really good deals for our customer base.

Thank you. We have one final question. It seems like CityTree's momentum remains strong. What is driving that growth, and do you believe that to be sustainable? I'm sorry.

I do believe that our CityTree's momentum is sustainable. And I think the training, the team, and the technology that we've put in place, and again, I think we have one of the most beautiful production facilities in the state of Nevada. And I think that's allowing us to meet market demand. We probably are the most efficient and able to produce as inexpensively or more competitively, I should say, than anybody else in the marketplace. I think another thing, too, is while we are a relatively small operation, we command a lot of shelf space in the state. We are in over 70% of all the dispensaries. We see that growing. We see our order rate rising. We see our order size rising. And what we're beginning to see is the throughput. Um, the demand, uh, is, is coming to us. So consumers like our product, uh, and, um, uh, we continue to get substantial reorders with all types of folks, uh, in the, in the cannabis market. But, um, And additionally, what makes me proud is not only of our CityTrees brand, but I think I'm also really proud with the fact that we've got a number of other outstanding brands that have come to us and asked us to help produce their end product. And that's, I think, a testament to the fact that the lab is working very well and under the leadership of Dr. Dominic Monaco. The product that comes out of that lab is as good, or I would even say it's better than anything in Nevada. I think the future for city trees looks pretty gosh darn bright. At this time, if there are no further questions, I thank everybody for joining our call today, and I hope that this is the first of a consistent flow of of quarterly updates as well as annual updates. And I certainly do appreciate, again, everybody that joined us today. And I really do appreciate every single individual that works for this great little company. So thank you very much.

Ladies and gentlemen, thank you for joining us today. This concludes our webcast. You may now disconnect.