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spk00: Everyone, welcome to the parent company quarter 2021 conference call for the three-month period ending September 30, 2021. Listeners are reminded that certain matters discussed in the conference call or answers that may be given to questions as could constitute forward-looking statements that are subject to the risk and uncertainty relating to the parent company's future financial or business performance. Any such forward-looking information is based on certain assumption and is subject to risk and uncertainty that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information. including the risk factor details in the parent company's continuous disclosure feelings that can be accessed via the U.S. Accreditation and Exchange Commission website at www.sec.gov or seda.com. Forward-looking information provided in this call speak only as of the date of this call and is based on the plan, leave estimate, projections, expectations, opinions and assumptions of management as for due date. There can be no assurance that forward-looking information will provide to be accurate. and you should not place until reliance on forward-looking information, the parent company undertakes no obligation to update such forward-looking information whether as a result of new INS. In addition, during the course of this call, there may also be reference to certain non-GAAP financial measures including reference to adjusted EBITDA. which do not have any standard meaning under GAAP and therefore may not be comparable to similar measures presented by other companies. For more information about both forward-looking information and non-GAAP financial measures, including a reconciliation of adjusted EBITDA to the most directly comparable GAAP measures, please refer to the parent company quarterly reports on Form 10Q, including management discussions and analysis available on the SED website and SEDAR. Now, I would like to remind everyone that this call is being recorded today, Monday, November 15, 2021. Now, I would like to introduce Mr. Troy Thatcher, Chief Executive Officer of the Parent Company. Please go ahead, sir.
spk04: Thank you, and good afternoon, everyone, and thank you for joining us today for today's call. With me today, I've got Chief Financial Officer Mike Basil, our Chief Financial operation officer Dennis O'Malley, and also joined by Steve Allen, our head of corporate development, for our Q&A session later at the end of the call. I'm pleased to be speaking with you today on my first quarterly results call since joining the company in early September. Without a doubt, it's been a whirlwind of learning over the first couple of weeks for me, and during that time I've met with many members of the team across all functions in the organization. And I'm encouraged by the talent and the strategy that is driving our business, and I'm excited by the significant potential that lies ahead. During today's call, I'll share recent success developments against our strategic priorities, as well as a brief review of financial results. Briefly looking at our results for the quarter, our Q3 2021 net sales were $39.7 million. In the quarter, the wholesale cannabis market pricing challenges increased which has impacted the entire California cannabis industry, came into focus resulting in sequential decline in our top line revenue. While we cannot control external pricing conditions, we can focus the areas of our business that will drive long-term value. And I'm pleased to report that our direct-to-consumer side of the business grew 7.6% sequentially and is up 22.8% Q3 year over year. Significantly expanding our direct-to-consumer presence in California is one of our key growth strategies. We are doing this through the expansion of our retail storefront footprint, as well as pickup and delivery options for customers. One of our goals is to ensure customers have ease of access to high-quality products, and with this three-pronged approach, we ensure that meeting our consumers where they are, how they prefer to shop, is our objective. On that front, we recently announced the acquisition of two new retail dispensaries, Jane's Journey and Calma, which together with our existing footprint have quadrupled our California retail presence in just four months. Our new Calma store is in the Los Angeles metro area, which has an adult population of approximately 13.5 million people and is licensed for both storefront and delivery. While Jane's Journey is in Modesto, and further increases our reach by approximately 1.25 million adults. In August, we opened our last, latest Deli by Calibra location in Hanford. This Deli location is an expansion into Hanford where we previously served consumers via our delivery service. Our Deli locations provide customers with in-house expert consultations, and in addition, by offering Deli by Calibra products They also carry company product lines such as Monogram and Kaleva, as well as many popular third-party brands. With this new location, customers in this area will now have the expanded option of shopping in-store or pickup in addition to delivery. We also launched new customer delivery hub in the greater San Diego metro area, which serves approximately 2.7 million adults. In the next few months, we'll be further enhancing our delivery in this area with the addition of of our express delivery service, providing delivery in under an hour for select products from a predetermined menu. In addition to San Diego, in August we announced we had acquired a hub in Sacramento. This hub will cover the Sacramento metro area, consisting of approximately 1.8 million adults, and will offer our entire suite of high-quality products for delivery. And lastly, we announced in October that we executed definitive agreements to acquire the Coastal Holding Company, a retail dispensary license holder and operator with six licensed retail locations with five currently operating and two delivery depots in Santa Barbara and San Luis Obispo. The retail dispensaries are located in Santa Barbara, Pasadena, West Los Angeles, Stockton, and Vallejo, with construction engaged for a sixth retail license in Northern California. Upon the close of the coastal transition, our in-state consumer reach will expand to over 80% of the California adult population with 11 retail stores and six delivery depots, which positions us as one of the largest retail and delivery hub operations in the state. This puts us well ahead of our previous forecasted objective to achieve 75% coverage by the end of Q3. All of these recent developments ensure that we continue to be at the forefront of the premier customer service in the largest cannabis market in the state of California, delivering on our mission to ensure customers have superior experiences when accessing our products and further engaging our direct-to-consumer operations. We have maintained one of the strongest balance sheets in the industry and will continue to evaluate opportunities to expand to add both depth and scale to our California operations. Our criteria for acquisitions is strict, and we continue to focus on potential transactions that align with our strategic priorities while also being accretive to our business. I'd also like to take an opportunity to provide an update on an initiative that I believe is important to the work we're doing in this industry, and that is our Social Equity Ventures Program. The opportunity for the cannabis industry to aid those that have been most significantly disenfranchised and economically disadvantaged by historical cannabis legislation is immense. We believe it is our duty to invest in these organizations to ensure a more equitable and diverse cannabis market. Our first investment, Josephine & Billy's, a black and women-led business, opened its first retail location just two weeks ago in the Los Angeles market. And I look forward to joining the team at its official grand opening, which is scheduled for later this week, November 18th. Josephine & Billy's carries a wide range of products owned by women and entrepreneurs of color, along with favorites from our expansive product Our second investment, the Peaks Company, has been performing well through both in-store and online shopping options with select Peaks strains available for sale on Kaleva.com and at our retail locations. Peaks has made a name for themselves with their intuitive grasp of cannabis culture, premium indoor genetics from well-respected cultivators, and a limited product run. We look forward to working together with our current and future partners through this program and will continue to evaluate opportunities for investment in consultation with our Social Equity Advisory Committee. Before I hand over the line, I'd like to take a brief moment to thank one of our colleagues, John Figueroa, sorry, I call him Figs, so John Figueroa for his service. As we announced in today's earnings release, John has stepped down from his position as president of SISU, where he oversaw a bulk wholesale division. John will remain with us until the new year to facilitate a smooth transition, but on behalf of the entire team, we wish John much success and best wishes and for future pursuits. We've completed several important deliverables since early 2021, and our recent expansion efforts combined with our strong balance sheet has built a solid foundation for us to emerge as one of the leaders in California, strongly positioned for long-term growth. I look forward to speaking with you again on our progress as we continue to execute over the coming months and quarters. And at this point, I'd like to turn it over to Mike, who will discuss the financial highlights for the quarter. Mike.
spk05: Thanks, Troy, and good afternoon, everyone. As a reminder, the results I'll be going over today can be found in our financial statements in MD&A contained in our quarterly report on Forum 10Q. All figures are in U.S. dollars. Now that we're a U.S. registrant, our Q3 2021 financial statements were prepared in accordance with U.S. GAAP, whereas previously our financial statements were prepared in accordance with IFRS standards. Our Q1 and Q2 U.S. GAAP financial statements can be found on the Security and Exchange Commission website. Q3 2021 net sales totaled $39.7 million, representing a 26.8% decline compared to Q2 2021, revenue of approximately $54.2 million. As Troy mentioned, the sequential decrease was largely driven by a drop in pricing in our bulk wholesale and bulk oil during the quarter. Our Q3 2021 direct-to-consumer revenue grew 7.6% sequentially to 12.8 million or 32% of total net sales compared to 11.9 or 22% of total net sales in Q2 2021. On a pro forma basis, direct-to-consumer sales increased 22.8% year-over-year. Despite lower Q3 2021 net sales, Q3 2021 gross profit of 6.1 or 15% of total sales increased $1.3 million over Q2 gross profit. With continued expansion of our direct-to-consumer operations, we expect to see further improvements in gross profit and gross margin over time as our business shifts towards our higher margin product categories. Excluding impairment, our Q3 2021 operating expenses were $31.6 million, which included cash expenses of $9.9 million in general and administrative, $9 million in sales and benefits, salaries and benefits, $4.6 million in sales and marketing expenses, and $8.8 million in lease expenses. Q3 2021 cash operating expenses improved by $4.1 million over Q2 2021. 2021 non-cash expenses included stock-based compensation of 3.6 million and depreciation and amortization of 3.3 million. Our Q3 2021 adjusted EBITDA was a loss of 16.2 million and was primarily attributable to the ongoing operation of the company's core business, including the M&A activities that occurred during the quarter. In addition, Our Q3 2021 results included a non-cash goodwill and intangible asset impairment of $570 million. Based on softening of the California cannabis market during the three months ended September 30th, 2021, the company determined that an impairment test was appropriate. As part of the impairment assessment, the company's future forecast considered changes in cash flow estimates, due to lower flour and oil prices realized during the third quarter of 2021. And while the company remains optimistic that cannabis legalization will occur, our expected future cash flows reflect the current onerous tax and regulatory environment. The issues faced by the company are not unique to the operations as the entire California cannabis market has been significantly impacted last quarter. The company continues to focus on activities that will create long-term shareholder value, such as signing the coastal and common transactions. Furthermore, I'd like to highlight that of the consideration paid for the qualifying transaction, $232.7 million related to non-cash contingent consideration. This amount was potential additional consideration issuable if and when the stock price reached certain thresholds. And during the nine months, September 30th, 2021, the company recorded a gain on that contingent consideration of $221 million, which is reflective in our statement of operations. This impairment charge is an adjustment that does not affect the company's cash position or long-term strategy. There is no guarantee as to whether further impairment charges will or will not occur in the future. And please review the company's disclosure under the heading Risk Factors in the Company's Form 10-Q for the quarterly period ended September 30, 2021, which are available on the SEC's website and on CDAR. Before I hand over the line, I'd like to reiterate our previously filed registration statement, Form 10, with the United States Security and Exchange Commission recently became effective pursuant to the Security Exchange Act 1934 as amended. This is an important step into the advance of potentially being permitted to list the company's common shares and warrants on the New York Stock Exchange or the NASDAQ stock market upon regulatory advancement. Now I'd like to turn the line over to Dennis to discuss progress on our operational activities during the quarter.
spk07: Thanks, Mike. And good afternoon, everyone. As Troy and Mike mentioned, our direct-to-consumer revenue showed increases quarter-over-quarter and year-over-year. In addition to our direct-to-consumer revenue growth, our consumer packaged goods portfolio has also grown and expanded. You will see a focus in migrating our revenue mix to first-party, higher margin products through our direct-to-consumer channel. With 11 retail locations, six delivery depots, a mobile app and website, and eight first-party brands, we feel confident in this key growth strategy. Beginning with our direct-to-consumer business, during the quarter, we served over 67,000 customers, a 15% increase quarter over quarter, and processed over 188,000 transactions, a 14% increase quarter over quarter. Our new mobile app continues to show strong results and currently customers shopping on our mobile app have a conversion rate three times higher than when shopping on our website. Our loyalty program now has 30,000 members, a 30% increase quarter over quarter. Loyalty members have an 11% higher in-channel AOV compared to non-loyalty customers. We also continue to see strong momentum in our brand and product portfolio. We launched several new product offerings in Q3, including number eight, the first light strain for Monogram, and a live resin line for Fun Uncle Cruisers. Fun Uncle Cruisers' one gram vape line continues to grow, and according to BDSA, in September, the product line had all five of the line SKUs ranking within the top 40 in the state, with the Berry Gelato SKU ranking number two. As a perspective, BDSA tracked over 4,700 vape SKUs sold in the month of September in California. On the flower side, we continue to see strength in our Alien OG strain, which was recently ranked by Headset as the fifth best-selling strain in California for the week preceding November 12th. In addition to expanding traditional consumption products of flower and vape, we have enhanced our non-inhalable product lines as well. In August, we launched Well by Kaleva, a wellness brand and product offering. This new line offers lotions and tinctures in three categories, well-balanced, well-rested, and well-relieved, allowing consumers to pick the products that best cater to their needs. As we've consistently seen in the data, consumers are often choosing cannabis products for reasons that include relaxation, sleep quality, and pain management. This line of products is designed with those consumers in mind. In October, we launched Deli Dimes gummy line. This 100% full spectrum oil, 10 milligram product line builds on the progress of our Deli Nichols line, which has been a top selling gummy brand in our direct-to-consumer channel since its launch in May 2020. As of October, the gummy category has been one of the fastest growing categories in California, and we are excited for consumers to experience these fun and exciting new products. With our growing direct-to-consumer retail and delivery footprint, our strong branded product offerings, and our solid balance sheet, we believe 2022 will present significant growth opportunities to us as we execute on our vision of building great products, providing ubiquitous access, and offering great value and service to our customers. We look forward to updating you and sharing our progress in the months ahead. I'd now like to turn the line over to the operator to commence the Q&A session. Operator?
spk00: Thank you, sir, and thank you all. If you'd like to ask the questions, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your agreement. Again, press star 1 to ask the questions. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will take our first questions from Eric Des Rorys from Craig Helm Capitals. Your line is open. Please go ahead.
spk08: Thanks for taking my question. I was wondering if you could kind of break out the revenue, the DTC revenue between retail and delivery and just kind of walk us through what gross margins you guys are seeing within each of those. Thanks.
spk07: Yeah, Eric, this is Dennis. I appreciate you asking the question. At this time, we have not broken out the revenue breakout within D2C of retail and online, online consisting of really pickup and delivery. So I think I'd go back to we broke out D2C revenue and wholesale revenue at the breakout at this time. And furthermore, in terms of just gross margins, I think you'll continue to see a transition of our overall revenue mix into a D2C revenue channel. And again, that includes the higher margin channel of retail pickup and delivery, but also to note the extension of those first party products into that channel. So both those two different initiatives are really key growth drivers for us, both from revenue growth, but also expansion and margins as well.
spk08: And can you help us understand, maybe without separating physical and online, Can you help us understand the gross margin profile of those D2C revenues and maybe where you're expecting them to get in the coming quarters?
spk07: Well, I think there's a number of different key initiatives within gross margins. Certainly, when you look at some of the first-party products, there's two things to look at. One is the products that we see within Fun Uncle Cruisers and Deli Dimes, for instance. Both of those products are some of our highest margin products that we've had. So we'll continue to focus on scalable products that are non-inhalable products. With that said, we're also making continued cultivation improvements within our indoor facility specifically. So over time, though we've seen price compression in greenhouse and outdoor flowers specifically, we have seen indoor flower pricing increase. hold more constant. So I think you'll see over time a focus on improving our gross margins within indoor flower products as well.
spk08: And is that indoor flower mix? Those comments and the prepared remarks, is that based on the indoor flower that you guys are growing? Or is that what you guys are able to source? And could you maybe remind us of your capacity for each?
spk03: Thanks. Yeah, so two things.
spk07: In terms of the indoor flower capabilities, certainly we're focusing on our indoor flower cultivation that we have under canopy within our San Jose facility. And then two, we haven't broken out in terms of just the gross margin profile on that, but I'd also leave to Mike to provide a perspective on indoor and some of the source flower as well.
spk05: Sure. Thanks, Dennis. So, Eric, as we think about the indoor, we've got about 27,000 square feet of canopy that we can grow in. And we are looking at, you know, capital expenditures that will in a magnitude of, you know, $5 million or so. That would allow us to significantly increase the yields that we're getting out of that area, and that would obviously dramatically increase the margins. I know that we're not answering specifically your question, but we've chosen not to provide direct guidance at this point in time, especially now that we have a new CEO that's joined the company. He's coming in, understanding the business, and then going to be working with us to develop a strategy for the future to really accelerate our move towards D2C and margin expansion. And so at that point, I think we'll be in a much better position to get into deeper, more granular details.
spk04: This is Troy. We have incredible upside in terms of opportunity to improve our yield to cover most of the demand that we have for high-quality products within our portfolio. We are vetting other partners to lean on, as we build and expand our distribution beyond just our ecosystem. So there'll be a combination of partners as well as our in-house growth. And we'll lean heavily though on our in-house growth to produce the high quality products that people will come to respect and from all of our offerings in the marketplace. As the team has alluded to, obviously if it's going in-house, The margin structure is more advantageous for us. And so that's why we're looking at making investments to improve our yield to that end.
spk08: Okay, great. And then just last one from me here. Can you remind us where you are now with that D2C footprint? I know with Coastal, you have some sort of master service agreements there. Can you just remind us again how those kind of flow through the income statement, how they're different from you know, fully owned stores. And then just a comment as we look into 22, what you guys are seeing from, you know, an M&A pipeline and, you know, what we can expect from an increased D2C footprint. Thanks.
spk04: Yeah, why don't I handle the footprint piece and, Mike, I'll kick it to you for the financial aspect. What's exciting about the closing of the coastal transaction is that now we can reach 80% of the California cannabis marketplace through a direct-to-consumer, whether that's one of our 11 dispensaries that they can visit or delivery to home through our delivery service. That's an important objective, as you are well aware, Craig, We have stated publicly that we want it to be at 75% coverage by the end of the calendar year, so we're ahead of pace there. Our objective is to get to 90% coverage by the end of 2022. The team's done a great job of identifying what we've determined as tier one and tier two locales that we need to make an investment in in order to round out that objective to get to 90% coverage by the end of the calendar year. We have very strict objectives when it comes to making investments in this area. The location is obviously one of them. The infrastructure that's currently there. So we like to take over a property that we can invest less in infrastructure and more in growth. And those things we've identified and have a playbook in place to execute against that objective. So on track, actually ahead of track right now. So we like that. But on track to deliver against that 2020 stated objective.
spk05: Yeah, thanks, Troy. And For the financials, when they roll up, it'll roll up just as if they're 100% owned by us. That's basically how these MSAs are set up. Because effectively, we own them. We're just waiting for regulatory approval for licenses. And so therefore, we're going to be making decisions and running the businesses.
spk04: And one last point, Greg, is that our balance sheet. It's still strong and allows us to execute against that strategic objective of additional expansion if we find the right opportunity to do so. So well positioned and we've got the financial support to execute against the plan.
spk03: Thanks.
spk00: We will move to our next question from Bobby from . Your line is open. Please go ahead.
spk06: Hi. Yeah, good afternoon. So, you know, probably my first question is just looking at the pricing dynamic in California. I'm curious what you guys have seen for bulk wholesale and just general pricing as we've, you know, moved beyond Q3 so far.
spk07: Yeah, I appreciate the question. This is Dennis. So I think as noted previously, we've seen a pretty big, you know, decrease in wholesale bulk flour and wholesale oil, and specifically on the flour part, you know, really greenhouse and outdoor. And I think that's why we are really focusing on the D2C business and really focusing on, I think, some of the the indoor cultivation as well. And while we can't forecast what the pricing will be for that wholesale bulk flower or bulk oil, at least for the foreseeable future, what we see as of today, we still see potential softness within that bulk flower market. So it really goes to show in terms of the shift that we have, you know, from the wholesale bulk business into our D2C business, why that's a strategic priority for us.
spk06: Okay, great. And then in terms of the cash operating expenses, you had some improvement there. I'm curious, you know, where that came from. What kind of measures you guys are taking there to improve that?
spk05: Yeah, most of the improvements were around our sales and marketing expenses on a quarter of a quarter. And last quarter, we actually had a severance, a large severance that we had to pay out for that. So those were what primarily was the change was there's a couple million dollar large severance that was paid out or accrued anyway to be paid out and some improvements in the marketing expenses.
spk06: Okay, and then just last one from me. On the M&A outlook, you guys have $200 million. It seems like the transactions are happening a little bit more slowly than I would have expected this year. I'm curious what kind of impediments you're coming up against or what the kind of state of play is right now, how dynamic that M&A market is. Do you see, like, some acceleration in the ability to announce some transactions here going forward?
spk02: Yeah, Bobby, this is Steve. You know, we continue to do diligence. I think as Troy was covering on the last set of questions, we have an extremely high criteria around what fits for us, whether that's around the raw materials perspective, on a product form factor perspective, and very specifically in a direct-to-consumer perspective. That pipeline is robust. We continue to cull our way through it. We are seeing that there continues to be a softening or weakening within the California market, which obviously is providing more opportunities for us to evaluate, but it will continue to be selective. Our goal is not to get X number of transactions done in a month or a quarter. It's really to make sure that we're executing against our strategy. As we've always held, it's got to be a good price, something that we can operationalize, and something that's long-term accretive to our shareholders. And we'll continue along that mindset for everything we do within California. We'll also be selectively looking at potentially other markets here as well as we go into 2022. Makes sense.
spk06: And are you still barbell kind of a focus there where you're looking at production as well as distribution, or are you more focused on retail distribution?
spk02: Our number one focus is on direct-to-consumer. It has been and will continue to be. That's our most profitable channel. It's also really within the California market. It's a microcosm of really where there's a need for the consumer base, and we can help solve that need. As you know, the per capita dispensaries are on par with Florida, about a tenth of what you see in Colorado. And we know that will change over the coming two and three years. But really, given the delivery platform we have and the online presence that we have, Being able to solve that on a broad basis for the California consumer is really a core focus of what we're looking towards, both as we round out the remainder of 2021 and roll into 2022. Obviously, that's supported by a lot of the digital assets and the app that we've put together and really believe that over time, that's really what's going to help drive consumer loyalty across the state. And so that really will always be our primary focus.
spk03: Okay, great. Thanks.
spk01: At this time, I would like to turn the conference back to Mr. Thatcher for any additional or closing remarks.
spk04: Well, I'd like to thank you for joining us on today's call. I want to thank the management team for the hard work of the last quarter, and importantly, for charting a very bright future with the closing of the acquisitions that are covered in the call today. Looking forward to a safe Thanksgiving break for your families and ours as well. And we look forward to talking to you in the new year. Thanks for your time.
spk01: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
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