Goodness Growth Hldgs Inc

Good day, everyone, and welcome to the Goodness Growth Holdings Third Quarter 2023 Results Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply place star 1 on your telephone keypad. If you would like to withdraw your question, it is star 1 again. I would now like to turn the conference over to Sam Gibbons, Investor Relations. Please go ahead.

Thank you, Lisa, and thanks to everyone for joining us. With me on today's call are our interim CEO and CFO, Josh Rosen, and our president, Amber Shimpa. 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 in today's earnings release, which is also available on our website. Before we get started, we'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 Josh.

All right. Thanks, Sam. And thanks, everyone, for joining us this afternoon. I'll begin today with some business highlights from the third quarter and the progress we're making against our cream and fire strategy. And then Amber will run through some updates in our core markets and key performance indicators before we open up the call for any questions. As a reminder, our strategy name of Cream and Fire refers to the famous phrase, cash rules everything around me, as well as our focus on producing fire cannabis products that delight our customers. Please turn to slide three of today's presentation, which is available in the quarterly results and events and presentation sections of our investor relations website. As we've discussed previously, 2023 is an important year of transformation for the company, and our third quarter results represent meaningful progress and are a solid indication that our decentralized reorganization initiatives are working. Total revenue, excluding discontinued operations, increased 44% year over year and 28.2% sequentially. Performance was driven by the combined benefits of our recent operational improvements initiatives and the launch of adult use sales in Maryland on July 1st. I want to take a moment to talk about how I think about evaluating performance and supporting operations when markets are first activating, like what we've witnessed in Maryland in the third quarter. In what's still a relatively immature industry, it's hard to evaluate performance with precision. Our focus is initially on how we're doing compared to the industry trends. Then, secondarily, with a constant eye on how we're positioned for long-term success as markets inevitably get more competitive. Although early numbers can be noisy on the initial metric of how we're doing compared to the industry, we appear to have captured incremental market share when adult use was activated, which can be seen in comparing our relative growth, both sequentially and year-over-year, with the state's published numbers. I'm pleased to see this initial performance. As for how we are positioned for long-term success, that requires being honest about your strengths and weaknesses and understanding the dynamics of inevitable pricing and supply chain normalization, something that's different in every market but often rhymes. When pricing is elevated with limited supply, there are surplus profits being captured, and it's our job to win now and in the future as things get more competitive. It's probable that margin profiles will come down and the better operators that don't overextend will hold serve much better in these environments. It's the job of our local team and our version of the COO, our wheat hustle office, to make sure we're a long-term winner. Not many folks talk about surplus profits in this industry, and I'd like to see that change. As Amber will detail momentarily, we are continuing to see improvements in our key performance indicators resulting from our recent operational improvement and cost control initiatives, as well as our partnership with Grown Rogue that has continued to drive strong improvement in harvest yields despite a challenging summer climate in our Minnesota greenhouses. While we still have much hard work in front of us over the course of the next several quarters, we've been very pleased with the performance of our team in adapting to our new decentralized operating structure. As we've discussed consistently for the past few conference calls, growing into a better credit by improving our ability to generate cash flow has been the most fundamental focus of our operating strategy this year. So we're very pleased to be able to demonstrate clear improvements in these areas. One of the most important milestones for us in achieving the success, however, relates to our ongoing efforts to simplify our business with strategic asset divestitures. And we discussed last quarter the divestiture of our former New Mexico operations and also disclosed that we have an LOI in place to divest our New York assets and operations. While the New York divestiture process has taken a bit longer than we anticipated, we're optimistic we'll have definitive documents before the end of this year, at which point we could begin the license transfer application process. We can't say much else on this for now, but this would be a key event for us on our path toward improving our cash flow generation. And we look forward to sharing additional details regarding our future profitability expectations once this process is complete. Please turn to slide four, where we've provided a refresh of the highlights we discussed last quarter regarding the progress of our cream and fire operating strategy. Last quarter, we discussed how the qualitative components of the strategy outlined on the left side of the slide were beginning to gain traction. But this quarter, we provided some additional specificity with a couple of quarterly key financial metrics dating back to the third quarter of last year. Meaningful progress is evident in both the trajectory of our SG&A as a percentage of sales and EBITDA performance. We've also included comparisons on these metrics for both the year-to-date periods from this year and 2022. We're pleased to showcase the improving trend in these metrics, and we're optimistic about our ability to sustain leaner costs. Although it's not a metric that is conducive for industrial communications, internally, we have the team looking at incremental margins as an important tool for decision-making. We've been very transparent that securing a strong independent future for the company depends upon our ability to grow into a stronger credit and produce meaningful cash flow. Our results today demonstrate that we've simplified our business and improved the efficiency of our operations to support longer-term profit growth. But we're still maneuvering through some exceptionally challenging circumstances that were created by Verano's wrongful termination of our arrangement agreement in October of last year. This includes having little choice but to divest New York. As a reminder, earlier this year, we gained additional financial flexibility to execute our plan for the year by amending our credit facility and closing out a convertible loan, which provides us with incremental monthly support while we remain in ongoing litigation with Verano. And as we've discussed previously, we have the potential to extend the maturity date on our credit facility into 2026 with the satisfaction of performance-related milestones. We've characterized in the past that these aren't easy milestones for us, but that we view them as achievable. We believe that the inflection to producing more meaningful operating income in the third quarter, despite a meaningful drag from New York operations, has increased the likelihood we attain these milestones, and at a minimum, put us into a much better credit profile. That concludes my prepared remarks, and I'll now hand the call over to Amber Schimpa for some additional business updates and review of our third quarter key performance indicators.

Thanks, Josh, and thanks, everyone, for joining us. I'm going to start on slide five of today's presentation, where we've provided an update with our Q3 core market key performance indicators. We've made great progress so far this year to improve the productivity of our facilities, as well as the quality being produced, which is allowing us to lower prices with higher quality products that our dispensary employees can then share with the customer. As you can see, the trajectory of total harvest yield and percentage of A flower over the course of the last year remains favorable. Our goal is to drive more sell-through of higher-quality products at better value for customers, and we believe that our results to date on these important operational KPIs serve as strong indicators that we are positioned to have continued success achieving these objectives. Today, we'd also like to highlight our retail same-store sales performance, which beginning this quarter, we will be providing on a state-by-state basis with incremental disclosure in our quarterly results press releases and presentations. On a consolidated basis, theme store sales increased approximately 37%. This performance reflects some continued challenges in the New York market, but we were pleased to see continued growth in Maryland and Minnesota of approximately 230% and 15% respectively during the third quarter. As we anticipated, our inventory turns on a consolidated reported basis improved sequentially as compared to Q2, largely driven by the anticipated launch of adult use sales in Maryland. I'd also remind investors that significantly improved productivity in Minnesota has resulted in an unfavorable inventory turns comparison in Minnesota. Inventory turn data has some natural variability attached to production timing, but we do expect to see improvement in this metric over time, especially once adult use sales begin in Minnesota in early 2025. And we also have a few plans in the works currently for more immediate improvement. Moving on to some state market updates on slide six. Our whole market of Minnesota continues to grow following the commencement of flower and edible sales in 2022. We've also experienced a strong increase in patient enrollments of about 10% since July, which we believe has been helped by the recent changes to the medical program that have made access and affordability easier for all Minnesotans. Lastly, we remain encouraged by continued improvements in productivity levels despite a very challenging summer growing season in our greenhouse environment. In New York, as we previously mentioned, we are under an LOI to divest of our business there and look forward to providing investors updates on this process when possible. We continue to balance internally our need to control cash burn with a need to sustain operations in anticipation of a divestiture. In Maryland, we've been very pleased with the revenue performance of our two green goods dispensaries since the launch of adult use sales. And also, our recently executed consulting, licensing, and wholesale agreements with two additional dispensaries have helped grow our presence in the market. As a reminder, as part of our licensing agreements with these two additional stores, we anticipate them being rebranded under the Green Goods name once regulations allow. Existing Green Goods customers are already able to shop these two new stores through the Green Goods website, and we also secured an option to acquire these stores when regulations allow. We have made significant improvements in the quality and depth of our product offerings in Maryland this year, and we're really proud to launch our new HiAF brand of vapes during the third quarter. This brand was intended to build on the success of our high-color branded gummy products that were launched last year. We've been especially pleased to see our revenue growth outperform the market average in Maryland for the past two quarters. According to the state's disclosures, the total market in Maryland was up about 116% year-over-year in Q3. Our retail revenue was up 229% and wholesale was up 119%, representing total growth of over 180% year over year for us. While it's still the early days of Maryland's adult use market, we've been very encouraged by our performance so far. Before we conclude today's call, we remind investors that our former CFO, John Heller, recently left the company in the beginning of the fourth quarter to accept another career opportunity, and Josh is currently serving as interim CFO. Following John's departure, we've been very impressed by the responses of finance team members, Joe Duxbury, Aaron Garrido, and Brandon Van Aspen, as they've each taken on increased leadership responsibilities. And we'd also like to recognize our VP of Operations, Brennan Sweeney, and EVP, Patrick Peters, for the phenomenal work they've been doing to drive our early success in Maryland's markets. Rather than Josh review the financials, we've provided our customary financial detail slides for reference throughout the remainder of today's presentation. Slides 7 and 8 provide summaries of our core market revenue performance and key financial metrics from the third quarter, and slides 9 through 12 contain summaries of our balance sheet, debt outstanding, share capitalization, and EBITDA reconciliation. For a complete review of state-by-state revenue performance, including non-core markets and discontinued ops, please refer to our Form 10-Q, which will be filed with the SEC later today. I'll now hand the call back to Josh for some closing comments.

Thanks, Amber. And thanks to everyone for participating on today's call.

I'm excited as we see our cream and fire initiatives continuing to gain traction, made possible thanks to the continued hard work and dedication of our team. There's a growing sense of optimism within our organization supported by the execution on the ground in our Minnesota and Maryland operations. which point to a bright, independent future. But I know from experience, we need to stay diligent with our local teams and market in order to grow our profits and be successful long-term. We're continuing to focus on executing what's within our control amidst a challenging landscape, but we're pleased with our progress to date in simplifying our portfolio of assets and positioning the business for stronger cash flow generation and long-term success. Our litigation with Verano and the divestiture of our New York business remain extremely important activities for us, and we expect to have additional updates on both processes in the coming months. With that, I think we're ready for Q&A.

Thank you. If you would like to ask a question on the phone lines today, that is star 1 on your telephone keypad. We'll take our first question from Eric Delorier with Craig Hallam.

Great. Thanks for taking my questions, and congrats on the impressive operational progress here. My first question relates to the pretty significant gross margin expansion here. Understood Maryland adult use obviously having a significant impact. You also kind of called out operational improvements in Minnesota. I'm just wondering if you could kind of help us perhaps quantify how much Maryland versus Minnesota has impacted the gross margin expansion. And if you're able to kind of talk to the impact of retail velocity versus increased production capacity utilization, that'd be helpful as well, just trying to sort of understand the underlying drivers here. Thank you.

Yeah, I appreciate it. There's a fair bit to unpack there. I'll be a little bit anecdotal to start, and then if you have kind of follow-ups, feel free. The core is, in Minnesota, performance has been just steadily improving, pretty consistent. I think you kind of have that as an underlying assumption for yourself. And so if you looked at the corporate side of improvement in gross margin, there's obviously a little bit of a hit for business mix in terms of just how much Maryland grew in the third quarter. And then with that, the improved margin profile in Maryland. And so on the corporate side, you're seeing demonstrable improvement driven by the Maryland side of the equation. From an internal process standing decision-making standpoint, I mentioned this concept of incremental margins. I mean, a big part of being more productive in the cultivation and manufacturing operations and having that translate through to sell through is one of the most profitable things you can do as an organization, right? Pricing being the first most profitable thing you can do and improve productivity out of existing operations and having that flow through, it's kind of the second most profitable thing you can do. And so the incremental margins we were able to attain in Maryland with the revenue growth was what we were positioned for and what we were really pleased to see. And so the short answer to that is, a lot more Maryland than Minnesota, as you might expect, just given the relative growth when it comes to kind of that underlying gross margin performance you referenced.

That's very helpful. That's exactly what I was looking for. Thank you. And it's kind of just a housekeeping question, but the Maryland service revenues, I'm assuming that's the licensing agreements you have with these two additional stores. Should we expect this sort of, you know, few hundred thousand dollars a quarter level going forward? Is that just, yeah, I guess anything you can give us to sort of help understand how to model that going forward?

Yeah, I mean, what I would say first, yes, that is what you described. Second part of this is it's still early for us in that relationship. And so trying to give specificity, I don't have a better answer than taking what we've got thus far and rolling forward with it for now. But I'd expect a little bit of volatility there as we get our sea legs with that relationship and operations. And so that's as good as we can do for now from an expectations standpoint.

Okay, that's helpful. Moving on to New York. So understanding that the definitive docs are kind of taking a bit longer than anticipated here. Just wondering how the IIPR lease amendment kind of factors in here. Is that sort of a sign that maybe things are speeding along? Is that maybe a sign that things are slowing down and you're looking to, you know, kind of prepare for maybe having to run this longer than expected? Just kind of wondering how that lease amendment factors in here.

Yeah, and relative to what you were looking for, I don't think the lease amendment factors into those criteria. The lease amendment was more a function of, you know, for everybody's interest, finishing that building is important. And relative to the timeline, it became more urgent as the need to winterize the building became present. And so, yeah, it just became a timing-driven issue on that front more than anything else.

Okay.

By winterization, I don't think. Go ahead. I was just going to clarify what I meant by winterization. It's not the most common term. It's fairly self-explanatory once I explain it, but just preparing that the building did not have HVAC, etc. It was not ready for the winter of northern New York.

Makes sense. Last question for me here. Just wondering what we might be able to expect from timeline perspective with the Verano lawsuit here. You know, obviously, there's much uncertainty associated with this, but any sense of timelines or perhaps even next steps would be helpful.

Yeah, I mean, not too much more to add with any real context attached. I mean, what I would say is, I guess I'd say shame on me relative to having To extend expectations again on my own end, I was thinking that we would have something in the third quarter on this front and we continue to be close. But the timeline is stretched a bit on us. But as has been articulated, it's an incredibly important, as I stated before, important asset from my vantage point and something that we want to make sure we get right. While the timeline is important, getting it right is also just as important to us.

Yeah, absolutely. That makes sense to me. Well, thanks again for taking my questions. Certainly. As a reminder, that is star one to ask a question. All right.

And there are no further questions at this time. And that concludes the Goodness Growth Holdings third quarter 2023 results call. Thank you for your participation. You may now disconnect.