Goodness Growth Hldgs Inc

Ladies and gentlemen, thank you for standing by and welcome to Goodness Growth Holdings Incorporated second quarter 2021 earnings conference call. At this time, all attendees are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. And to ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. Thank you. Now I would like to hand it over to Mr. Sam Gibbons with Investor Relations. Sir, please go ahead.

Thank you, Ruel. Thanks to everyone for joining us. With me on today's call are our Chief Executive Officer, Dr. Kyle Kingsley, and our Chief Financial Officer, John Heller. Today's conference call is being webcast live from the Investor Relations section of our website. Dial-in and webcast details for the call have also been provided on slide three of today's presentation, which is also available on our website. Before we get started, I'd like to remind everyone that today's conference call may contain forward-looking statements within the meaning of U.S. and Canadian securities laws. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in such forward-looking statements. For more information on forward-looking statements, please refer to cautionary note regarding forward-looking statements in today's earnings release. Now I'll hand the call over to Dr. Kingsley. Thanks, Sam.

Good morning, everyone, and thank you all for joining us today, and to all of you who attended our Investor Day events in June for the unveiling of our Horizon Strategy. For those interested in watching the webcast replays and viewing our Investor Day materials, you may do so via the investor section of goodnessgrowth.com. We'll discuss our progress on several of the initiatives announced at Investor Day during today's call, but I'll begin on slide four of today's presentation, where we've provided a summary of highlights from the second quarter. Second quarter revenues were in line with our expectations, and we achieved record gross margins during the quarter through continued operating improvements and greater scale across our core markets. Total revenue of $14.2 million grew 16% compared to quarter two last year, with continued organic growth across each of our markets, excluding contributions from our former Pennsylvania and Ohio subsidiaries. Second quarter revenue grew 45% and 8% sequentially compared to quarter one. As we discussed on last quarter's call, the move to our new 110,000 square foot cultivation facility in Massey created some temporary impacts on our wholesale performance during the first and second quarters. However, we recorded our first wholesale sales from the new facility in June, and we expect our combined operations in Maryland to be back to normalized production levels by the end of the third quarter. The additional 75,000 square foot expansion of cultivation in Massey remains on track to be completed by the end of the third quarter. And once finished, we'll be one of the largest-scale producers of biomass and manufactured products in the Maryland market. Our green goods dispensary in Frederick is continuing to grow sales each month. We believe there's still upside for this location as we introduce new products and form factors from recent upgrades to our processing facility in Herlock, Maryland. As a reminder, this facility will enable us to offer a full suite of medical to more adult-use-leaning products, including live resin concentrates like shatter and wax, as well as gummies and hard candy edibles. We're also looking forward to contributions from our second dispensary in Maryland through our pending acquisition in Baltimore, which we announced at the end of last month, which remains subject to regulatory approval and other customary closing conditions. This dispensary is currently a lower revenue-generating store than our green goods in Frederick, but we're excited by the opportunity to increase retail sales in the Maryland market. Given our substantial increase in production capacity, we expect this acquisition to improve our profitability in the state once the acquisition is closed and we transition to the green goods brand and shift the product mix in the store more toward our manufactured products. The SKU pipeline we're developing in Maryland represents the widest selection of products across our portfolio. And we were very pleased by the recent review of our green goods dispensary in Frederick by Maryland's Leaf Magazine, which noted that the quantity and quality of our selection of concentrates is one of the best in the state. Profitability during the first half of the year has been impacted by an increase in expenses that will support future growth across our portfolio. As a reminder, we're operating four new green goods stores in Minnesota this year and have increased G&A to support our expansion projects in Arizona, Maryland, and New Mexico. We've also increased marketing expenses as we prepare to introduce new recreational use products and brands across our footprint. As we progress through the second half of the year, we should begin seeing operating leverage materialize as the additional biomass production in Maryland and Arizona come online, and our new dispensaries in New Mexico ramp up to their full potential. As a reminder, in New Mexico, our recently completed 13,000-square-foot cultivation expansion is now fully operational, and we're looking forward to the expected commencement of adult-use sales next spring, pending development of operating regulations. Our two new green goods dispensaries in Las Cruces and Albuquerque have received regulatory approval and are now operating, bringing our total number of operational dispensaries in New Mexico to four. In Minnesota, the state recently approved the addition of flour to the medical program in spring of next year, and we're in the process of ramping up production capacity to capitalize on this growth opportunity in our home market. Our cultivation teams across our footprint are focused on flower production and increasing flower strain variety and quality as we prepare for transition to adult use markets and for the addition of flower in Minnesota. We've recently improved the strength of our cultivation teams with new growers in multiple markets that we've hired from recreational markets like Colorado and Arizona. And these teams are focused on building strain portfolios to have at least 20 flagship strains with higher THC content in production at all times. We plan to have additional strains in rotation at smaller scale. to rotate into our dispensaries throughout the year. These strains include both workhorse commercial strains and more boutique strains at lower level of production. By the end of 2021, we expect to have a wide array of strains that we can produce with consistent quality and content in each of our markets, which will give our sales and marketing teams much more flexibility with product offerings than we've had historically in these predominantly medical markets. From a development standpoint, the addition of a second nine-acre outdoor shade house in Arizona is on time and should be completed by the end of the third quarter. We expect that additional biomass from the new field will help accelerate the trajectory of revenue growth in Arizona in late quarter four and into next year. As many of you know, as we've discussed in Vestor Day in New York, we recently received regulatory approval from the state to significantly expand our cultivation and processing capacity to There have been some delays in the formation of the state's oversight board for the recreational use program, but over the next several weeks, we expect to be in position to announce more details regarding the timing of the beginning of construction of the new facility, which we will build on the additional 96 acres of land we purchased adjacent to our existing site near Albany. Our retail team has also been busy working to identify and secure locations for our new dispensaries in the state. We're looking forward to sharing details of these locations in the coming months. We have a lot of exciting opportunities and growth in front of us, and we're looking forward to a stronger second half of fiscal year 2021 as the first portion of our expansion projects come online. We're confident that our efforts to scale production and expand our retail dispensary footprint will drive even stronger financial performance through fiscal year 2022 as most of our core markets benefit from improving regulatory environments or transition to adult use programs. That concludes my prepared remarks, and I'll hand the call over to John for his review of the financials.

Thank you, Kyle, and thanks to everyone for joining us on today's call. Please turn to slide five, where I'll begin with a review of the highlights from the quarter. Please keep in mind that all numbers stated refer to U.S. dollar amounts unless otherwise noted. Total revenue, including our former Pennsylvania and Ohio subsidiaries, increased 16% to $14.2 million compared to Q2 of 2020. Ohio during 2020, revenue increased 45% as compared to Q2 of last year and 8% sequentially compared to Q1. Retail revenue excluding Pennsylvania and Ohio in the second quarter was $11.3 million, an increase of 36% compared to Q2 of last year with growth in each of our markets. Wholesale revenue excluding Pennsylvania and Ohio increased 93%, driven by strong growth in Arizona and New York where we've begun to increase our focus on improving our wholesale sales channel penetration ahead of the advent of adult use in New York, which we still believe could begin toward the end of next year. Gross profit in the second quarter was $6.9 million. We achieved record gross margin of 48.6% through improved operating efficiencies and greater scale in our core markets, which drove lower fixed unit costs. Gross profit in the second quarter of last year was $3.6 million, or 29.4% of revenue. Total operating expenses in the second quarter were $10.2 million, a reduction of $5.5 million compared to $15.6 million in the second quarter of last year. The decrease in total expenses was attributable to a decrease in equity-based compensation expenses partially offset by increased general and administrative expenses, which were driven in large part by operational buildouts in Arizona and Maryland, resulting from the ongoing cultivation and manufacturing expansion projects in these markets. On a GAAP basis, SG&A expenses of $8.3 million increased 32% compared to Q2 of last year and reflected 58% of sales compared to 51% of sales last year. As we've mentioned previously, we do anticipate seeing improvements in SG&A as percent of revenue as sales continue to ramp up across our footprint through the remainder of the year. Net loss in Q2 was $5.5 million, compared to a loss of $16.1 million in the second quarter of last year, with the improvement driven by the increase in gross profit and lower operating and other expenses, partially offset by increased income tax expense. Total expenses were $1.3 million in the second quarter, an improvement of $2.4 million, compared to $3.7 million in Q2 of last year, with a decrease primarily attributable to a gain on derivative liability of $1.5 million during the quarter. Loss from operations in Q2 was $3.2 million compared to a loss of $12.1 million in the second quarter of last year with the improvement driven by the increase in gross profit and lower operating and other expenses. Adjusted EBITDA was a loss of $1 million in Q2 as compared to a loss of $1.8 million in Q2 of 2020. The favorable variance was driven by increased sales and higher gross margin, partially offset by the increase in operating expenses supporting future growth. We ended the quarter with total current assets of $42 million, including cash on hand of $20.8 million, following the payment of roughly $7 million in taxes in May and roughly $6 million in CapEx spend, primarily related to the projects in Maryland and Arizona during the quarter. As we discussed at our Investor Day event in June, as these expansion projects are completed and we continue executing our horizon strategy, we expect to experience substantial improvements in revenue growth and profitability over the next Variability in our performance will depend on the timing of completion of the projects we've discussed, as well as regulatory approvals in our markets, including the expected commencement of adult use sales in New York and New Mexico and flower sales in Minnesota next year. As of now, we're confident in the regulatory timelines in New Mexico and Minnesota and believe there's still a possibility for rec sales to begin in New York toward the tail end of next year, program. Total current liabilities at the end of the quarter were $16.1 million, with $1.1 million in debt due within 12 months. As of June 30, 2021, there were 126,021,801 equity shares issued in outstanding on an as-converted basis, and 154,346,560 shares outstanding on an as-converted, fully diluted basis. That concludes our prepared remarks. Ruel will now open the line to analyst questions.

Thank you, sir. We will now begin the question and answer session. And as a reminder, if you wish to ask a question, simply press star, then the number one on your telephone keypad. Once again, that is star one on your telephone keypad. Your first question is from the line of Eric Deslawiers. Your line is now open.

guys and congrats on the strong quarter and record margins here. I guess first, drilling in on New York. So obviously great to hear you guys have the regulatory approval there. Can you just remind us of the type of facility that you guys are looking to build out there, you know, whether it's sort of a greenhouse hybrid or indoor and any other details on that facility? And maybe as a follow-up to that, just how your conversations with real estate partners are going for New York as well as some of your other buildouts here. Thanks.

Hey, Eric. Yeah, to remind everybody, in New York we're building optimized, you know, indoor facility here. with highest quality environmental controls, and that this is not hybridized greenhouse. Given the likelihood of some sort of canopy limit in New York, we've opted to really focus on maximizing production and quality, and that's definitely the way to do that. So this is very much an optimized indoor facility. I'll kick it over to John here for comments on real estate partners.

Yeah, we are in ongoing conversations with multiple real estate partners, and we believe we have commitments to fund the New York project. And, again, we feel we're close in our other markets as well. But we will certainly keep everyone posted when those deals are closed and executed.

Okay, great. And then one other one for me here. So I was impressed with that gross margin improvement in the quarter here. I know you guys have been doing a lot of work in your production facilities and hiring some new personnel. So I was wondering if you could kind of talk to some of the personnel that you guys have brought on to manage those cultivation operations and maybe how those changes might have contributed to the gross margin beat in the quarter or if we should think of that as more on the retail side of things. We just hope to get some more color on how you guys are looking to scale production here, how that's going from a personnel level and how that may have impacted gross margins in the quarter. Thanks. Thanks.

Yeah, I can touch on the high-level, Eric. So we've brought in, particularly in Arizona and Maryland, some really high-caliber cultivators from mature adult-use states. And in addition to them really sort of optimizing the, you know, Arizona and Maryland, obviously that cross-pollination and working with other team members has been pretty huge. We also have a Colorado cultivator in Minnesota, and he's been with us for quite some time, so he's not a new addition. But, yeah, just... Their contributions really can't be overstated. It's been amazing to have those guys added. We're laser-focused on optimizing sort of our capabilities with indoor cultivation in New York right now, and I would anticipate that may include some additional hires here over the coming quarters to further drive home what we see as advantages with these new experts. Do you have anything to add, John? No, I think that's good. We have yet to see a lot of these expert cultivation improvements kind of trickle through in our numbers. But the biggest thing there, as you guys know, is as you increase sort of the breadth of quality strains that you bring to bear, that's going to kind of increase the velocity on the wholesale side. We really equate sort of strain diversity to liquidity. And the other thing is just it's all about genetics and flower quality when it comes to the quality of your concentrates that you produce. We're laser-focused on that, really focused on adult use production here, which, again, amazing team members that we brought on to help with this.

Your next question is from the line of Matt Bottomley from Canaccord, January. Your line is now open.

Just wanted to stay on that topic of the gross margins and maybe even adjusted EBITDA. Just given the 2022 guidance of inflecting into free cash flow in the second half of the year, you know, you're adjusted EBITDA hovering around break even now for a couple of quarters. Just given some of the other dynamics we've seen with other U.S. operators that have scaled facilities the way that you guys have in some of your, I guess, your non-primary markets right now, We've seen that have a pretty, maybe not significant, but notable impact on margins and EBITDA. So just going from Q2 to, I guess, the first half of next year, how significant do you think we could see some volatility in both of those metrics and just trying to understand, you know, what the underlying fundamentals of the business will look like as you transition to a much bigger enterprise over the next year or so here?

Yeah, I think that's going to depend on the timeline of the completion of the projects. Obviously, if you bring on these large projects early on before they, you know, once the door opens and you're in, you know, a plant-fetching and growing state pre-revenue, that will likely have somewhat of a drag on margins, but, you know, rapidly recover once you... you know, can bring that product to market. So it'll depend on the timing of those projects.

And, Matt, obviously this very substantial facility that we're bringing on in New York is going to be dependent on the regulatory timeline there. And when that happens, when we can actually start sales in New York. We're bullish on that. The recent changes with Cuomo are definitely a positive thing, and we're hopeful that we're going to see adult use mid to late next year in New York with a substantial facility operational at that point.

Okay. And in New York, what's the exact – I guess we're already in a point in time now with sales of flour in New York and the sort of incremental bill that was put there and that's been – I understand it's still sort of sitting on – I guess it was Cuomo's desk. Now it's changed. Just your thoughts on where that sits and timing for any changes on that part of the segment of the state.

Yeah, we anticipate pretty rapid movement here after Labor Day for appointment of the regulatory board in New York. And then there's several different components. We're excited for flour in the medical program. Right now, only ground-metered flour is allowed in New York, which has basically been – ground-to-dust, and it's definitely an inferior product compared to just unground flour. So we're excited to really work with regulators in New York to make that happen quickly. And then obviously the other thing is just the regulations and sort of go-live date on adult use, and we're more bullish now, absent Cuomo, that that can still happen next year. Our intent is to have our facility operational, you know, late quarter one, early quarter two of next year, so we can get a few turns through that before we go live with adult use. But, yeah, just generally bullish on New York, and we think we have it timed fairly well. It still could be summer of next year that we see adult use. You know, worst case, it could be into early 2023 that we see adult use, but I think our best guess is still mid to late next year.

Great. And then just one more quick one for me is just if you could give some general commentary on your thoughts on your current cash balance and balance sheet, given, you know, a lot going on, a lot of facility expansions. So just, you know, the sufficiency of the $21 million versus the initiatives you guys are currently and planning on undergoing.

Yeah. So our Arizona and Maryland expansions are nearly complete. We'll have a little more going out the door for those here in Q3. But I would refer you to, you know, the guidance that we gave in our Investor Day materials, which said, you know, net of our real estate partners, we expect net capex of, you know, $15 to $20 million over the next, you know, six quarters as we execute. But we, you know, we think we're in, you know, decent shape with liquidity. given what we expect to execute with our real estate partners.

Okay. Thanks again. Congrats on the quarter. Chat soon. Thank you.

Your next question is from the line of Grimey Grangler from Eight Capital. Your line is now open.

Thank you for taking my questions here. Just a follow-up with respect to questions on New York and timing. As that relates to the horizon strategy and the revenue and EBITDA targets you set out there, I'm just curious how much sensitivity is there? I believe those initial targets set a New York rec start for summer of 2022. If we did see things flip into early 2023, What would that look like with respect to the targets on revenue and EBITDA given out in 2022? Thank you.

Yeah, Graham, we didn't get into specific states, and we did give wide ranges to really sort of account for these potential different outcomes in New York. I do want to emphasize that major revenue drivers for us late this year and early next year are actually going to be the significant crop-tober that we expect in Arizona with 18 acres of outdoor harvest in addition to the hoop houses coming We should have the entire apparatus up and running in Maryland. And then lastly, we'll have flour implemented no later than March 1st next year in Minnesota, which could have fairly substantial effects in the Minnesota market. So New York's important, but there's a reason we gave broad ranges, and that's really to account for different outcomes in New York. I think, again, our best guess is that we're looking at mid to late next year for adult use. That's definitely our best guess for when our first sale occurs in New York. Okay, understood.

So just to clarify, then, the $40 million range on the revenue guidance provided does account for potentially New York slipping later into 2022?

Correct.

That's the reason for the broad ranges, yep. Okay, perfect. I appreciate the clarification there. Then just as another follow-up, since the Investor Day and really shining more of a spotlight on our resurgent biosciences and the variance initiatives, going on there. I'm wondering what the reception has been so far. Have you had any additional inbounds from various parties, cannabis or otherwise, who are interested in working with you? Or have there been any other significant developments since that time, since you've given research? It's a bit more of a spotlight in the public eye. Would appreciate any thoughts. Thanks.

Yeah, we've had a very good reception and definitely additional inbounds for potential partners on the resurgent side. Nothing that we've disclosed here publicly to date, but that's been very encouraging. As you guys know, we announced a foray into psychedelics on the IP side, sort of non-plant, non-fungus-touching endeavors there. You know, the bulk of our inbound and focus on Resurgent remains sort of in the cannabis realm, and that's where we've seen most of sort of inbound interest in potential partnerships and synergies. So I can't get more granular than that, but it's been well-received. And, again, you know, Resurgent is predominantly an IP company focused on the cannabis space, and that remains the case. A lot of fun developments. It's an exciting little aspect of our business.

Okay, understood. Appreciate it. That's it for me. Thank you very much, and congrats on the quarter. Thanks, Rob.

Your next question is from the line of John DeCourcy from Viridian. Your line is now open.

Hey, guys. Congratulations on the quarter. Not a lot out of me since some other questions have been asked, but the two questions primarily are, you know, in Arizona with you guys and other operators coming online for additional cultivation, how do you see the pricing dynamics in the state kind of reacting?

Yeah, we've seen, you know, Fairly strong pricing here that's been relatively stable. We anticipate that should persist through this fall. I would not be surprised if you see a little bit additional downward price pressure here going into next year. As you guys know, there's significant production that takes place into Croptober. We are one of the most cost-effective scaled operators with now 18 acres of outdoor grow capability. That puts us in a pretty good spot. But yeah, there is going to be a lot of raw material coming online through this year, but mainly into next year. I think that's safe to say.

Okay. And then secondly, regarding the Minnesota flower expansion, you just referenced that it could be significant, but could you give a little more color on how we should sort of think about that opportunity, maybe as comparable to other states or You know, are we talking about kind of a 2X opportunity from the addition of flour, or is it, you know, something even more significant than that?

Yeah, John, that's a really tough question. And obviously we spent a ton of time really delving into previous examples of what that's looked like. And there aren't that many examples of sort of markets that have really run a long ways with, you know, extract-only products and then transitioned to flour. Florida is probably one case. And basically what you saw there is almost immediately there was sort of a step function of about 30%. You then saw ongoing growth of both extract products and flour without a huge reduction in extract sales. So, you know, 2 to 3x seems very reasonable. I could see it being higher than that, but our working assumption is that we're looking at 2 to 3x over the few quarters following implementation of flour. Now, there are some variables. Obviously, kind of the regulatory setup is really critical. And, you know, the other limit in Minnesota is there are fewer dispensaries. We do have eight of the 13 in the state. But we're cautiously optimistic that flour is really going to change the dynamic here. We have a very substantial illicit flour-focused market in the state to the tune of many hundreds of millions of dollars by most estimates. And that is sort of the default path for anybody who wants to use flour in either an adult use or even a medical setting in the state is they have to go to the illicit market. So excited for that to change. Again, the law in Minnesota that has to be completed by March 1st. We'll be providing to patients by then. But hopefully we can outperform and have that happen sooner.

Okay. And then one last question on Minnesota, and it's is there any – of the – there are currently only 13 dispensaries. Are there any – is there any progress happening in terms of the opening and licensing of new dispensaries? Or is it going to continue to be that limited kind of number here in the near term?

Yeah, current law of the land is eight per manufacturer with two manufacturers, so an upper limit of 16. We've hit our statutory limit of eight. We're always looking to optimize and put those facilities in even better locations as we transition from an early cannabis real estate market to something that's a little bit more open-minded. But right now the law of the land is a max of 16. I don't know a timeline as far as which legislative session that could change moving ahead, but certainly increased number of dispensaries is something that's interesting for the state of Minnesota.

Okay, great. Well, thanks, guys. Appreciate it. Thanks, John.

Once again, if you wish to ask a question, simply press star, then the number one on your telephone keypad. Your next question is from the line of Paul Piotrowski from M Partners. Your line is now open.

Hey, good morning, guys. With a few of your expansion projects either near completion or being completed, do you expect significant variability in the margin quarter-by-quarter, or can there be some stability in the current range?

Yeah, there'll be, as we just discussed a few minutes ago, as these new cultivation projects come online next year, you're going to see some variability in But in the short term, I think you're going to see similar trends.

Okay, got it. Yeah, I was talking specifically about probably the next quarter, not so much into next year.

Yeah, I think you should see similar trends for the rest of the year.

Okay. All right. Okay, that's it for me. Thank you.

Thanks, Paul. or further questions, I would like to hand it back to Dr. Kyle Kingsley. Sir, please go ahead.

Thanks again for joining us this morning. We look forward to speaking to you again over the coming weeks and are hopeful we'll be able to resume in-person meetings on the conference circuit later this year. Thank you.

And with that, this concludes today's conference call. Thank you for attending. You may now disconnect.