Lftd Partners Inc

Welcome to Lifted Partners' Earnings Conference Call to discuss the first quarter of 2023. This call is being recorded. At this time, all participants are in a listen-only mode. If you have joined via the webcast and would like to ask a question during this presentation, please click on the Ask Question button on the left side of your screen, type in your question, and hit Submit. Teleconference participants, please hit Star 1 on your telephone keypad to ask a question. I'll now hand the conference over to Jerry Jacobs, the Chairman and CEO of Lifted Partners, Inc. Please go ahead.

Good morning, and welcome to Lifted Partners' earnings conference call to discuss the first quarter of 2023. Our earnings press release and financial statements for the first quarter of 2023 have been filed with the SEC, and links to both can be found on our website, www.lftdpartners.com. On today's call, we will share some comments on our quarterly performance, and we will answer some questions at the end of the call. A replay of this call will be available for an extended period of time, accessible through the investor section of our website. Here's the safe harbor notice. Some of the statements that we will make today regarding our business operations and financial performance, including words such as may, might, would, should, could, potentially, hope, believe, expect, project, and similar verbiage are forward-looking statements that involve a number of risks and uncertainties that could cause actual results to differ materially. So, listeners should not place undue reliance upon such statements. For more information, please refer to the risk factors discussed in our most recent Form 10-K filed with the SEC. We undertake no obligation to update these forward-looking statements. Our Q1 2023 consolidated net revenues were over $12.4 million. Lifted Partners reported a loss of $141,000 during the first quarter of 2023. This loss was caused by a one-time non-cash employee compensation charge of $2.1 million resulting from the terms and conditions of our acquisition of our wholly owned subsidiary, Lifted, made three years ago. As a result of this charge, instead of reporting positive net income of 1.4 million during the first quarter of 2023, Lifted Partners reported a net loss of $141,000. And instead of reporting basic positive basic earnings per share of 10 cents, we reported a basic loss per share of 1 cent. When Lifted Partners acquired LiftedMaid on February 24, 2020 in a merger, Bill Benos, In addition to the merger consideration that we paid to lifted maids then owner Nick Warner lifted partners committed to issue an aggregate of 645,000 shares of unregistered common stock of lifted partners. Bill Benos, Is certain employees who are designated by Nick provided that those employees satisfied certain contingencies. These contingencies included a requirement that those employees were continuously employed by lifted made or lifted partners during the first three years following the merger. We greatly appreciated next willingness to structure the acquisition of lifted in this fashion, as it created positive goodwill among employees and provided a significant financial disincentive for employees to leave their employment at lifted and lifted partners post merger. On February 24, 2023, this three-year listing contingency for the deferred contingent stock was satisfied, and under GAAP accounting rules, a one-time non-cash employee compensation charge of $2.1 million was recognized by listed partners. Regarding the Oculus deal, we pursue vertical integration when we see good opportunities. We decided to bring gummy manufacturing in-house starting with a first machine that started operations toward the end of last year and continuing this year with a larger second machine as Nick will discuss later. We also saw an opportunity to bring high quality, low cost hemp flower products manufacturing in-house. We spent a great deal of time and effort during the first quarter of 2023 exploring, negotiating and structuring a potential acquisition of the hemp flower products business of Oculus CRS LLC, which is located in Aztec, New Mexico. Since 2020, Oculus has been a valuable supplier of high-quality, award-winning packaged flower products such as joints and blunts to Lifted and other top brands in the country. Our efforts came to a successful conclusion when Lifted purchased nearly all the assets of Oculus on April 28th. The purchase assets include a substantial amount of equipment cash on hand raw materials inventory and accounts receivable. As well as a contract to purchase a machine that will allow lifted to automate and hopefully expand a significant portion of the hemp flower products business, the only asset of oculus that was not included in the purchase assets. was Oculus' rights as the plaintiff in a pending lawsuit filed by Oculus against a particular customer for an alleged breach of contract. The $368,000 purchase price was allocated and applied solely to pay off all the liabilities of Oculus, including the remaining $209,000 that was owed by Oculus on the machine purchase contract. We expect that machine to be delivered today. Simultaneously with this purchase of assets we acquired via a merger, Oculus CHS Management Corp, whose assets consisted solely of multi-year employment agreements with Oculus' owners and managers, Chase and Hagen Sanchez, who are now working under those contracts as executives have lifted. We're delighted to have Chase and Hagen as new partners with us. They are smart and aggressive, and they are very talented at sourcing hemp flower and manufacturing hemp flower products that we believe have the highest quality and lowest cost in the industry. The merger consideration is to be paid in two installments. The first installment paid at the merger closing was 100 unregistered shares of Lifted Partners common stock. The second installment of the merger consideration will be paid to the Sanchez Brothers after the first anniversary of the merger closing, 20% in the form of cash, and 80% in the form of unregistered shares of Lifted Partners common stock valued at $5 per share and will be equal to five times what Nick Warrender in consultation with our president and CFO Jake Jacobs determines is the incremental annual pre-tax cash flow being generated for Lifted as a result of the deal subject to a minimum of $1 million and a maximum of $6 million. This is an attractive deal for lifted partners, because we expect to pay a reasonable multiple of incremental pre tax cash flow being generated by the deal. With 80% of the merger consideration in the form of lifted partners stock valued at a price $5 per share that, in our view, is better than in our view better reflects its long term value than our current stock price on OTC QB. At the same time, we believe that this is a fair deal for our new partners, the Sanchez Brothers, as it allows them an opportunity to realize significant value from the growth of the hemp flower products business as part of LIFTED over the next 12 months, including potential growth resulting from the purchase of the new machine that should allow LIFTED to automate a significant portion of the manufacturing of hemp flower products, which in the past has been done by hand. Regarding regulatory developments, during the first quarter of 2023, the regulatory landscape has continued to evolve. Various state legislatures have considered prohibitions of or tighter regulations of certain hemp-derived, cannabinoid-infused products, psychoactive products, and kratom. However, we are seeing success lobbying and implementing business and consumer-friendly regulations in key states such as Florida, Tennessee, and Alabama. We continue to expend management time and effort and legal and lobbying fees in regard to regulation affecting our industry, and Lifted's website is updated on a regular basis to reflect developments on a state-by-state basis. Our company supports regulations that require all industry participants to professionally test ingredients and finish products to label finished products so that ingredients are clearly and accurately stated, and to package and sell finished products in ways that aren't intended to entice sales to minors. Regarding our level of working capital, we are devoting a significant portion of our cash flow to support our ongoing efforts on behalf of our herb and silly shroom brands and our exciting new product collaborations with Cali Sweets and Diamond Supply Company. In addition, NIC and Lifted have some additional initiatives in the pipeline, including initiatives relating to cannabinoid-infused products, tobacco products, and nicotine products that, if they proceed forward, will also require capital to purchase raw materials and packaging and to build up inventory. We have also agreed to purchase Lifted's headquarters building in Kenosha for $1.375 million no later than the end of 2023. Paul Cecala, As Jake will discuss later we don't currently have any debt and we do possess significant cash on hand inventory and accounts receivable. Paul Cecala, Our current mentality is that, if necessary, we will just continue to navigate our growth initiatives and the building purchase strictly using internally generated cash flow. Paul Cecala, However, we would like to raise some capital, if it can be raised on attractive terms. At this point in time with our stock price where it is and with the profoundly negative investor sentiment for equity securities that is present in the cannabis industry, in light of the mammoth losses that have been experienced by most of the publicly traded companies in the cannabis industry, we are not inclined to try to raise capital by selling equity. However, we are potentially interested in raising some capital in the form of debt. At this point in time, we are having discussions with a commercial bank about a potential secured borrowing, a portion in the form of a term loan, and a portion in the form of a revolving credit facility. We cannot say at this point whether or not such borrowing can be finalized at an interest rate and on other terms and conditions that we would view as attractive. Regarding litigation, Our industry is somewhat chaotic and includes many unreliable players. And consequently, we have been forced to file lawsuits or maybe forced to file lawsuits to protect our financial interests in several situations. Most recently, one of our competitors has gone to market with a particular product packaging that violates Lifted's rights, including Lifted's pending application for a patent on such packaging. Lifted's attorneys have sent this competitor a cease and desist letter, but it may be necessary to institute litigation if the matter is not resolved properly. Lifted is currently involved in three pending lawsuits as the plaintiff and in one pending lawsuit as the defendant. Lifted's other pending lawsuits are described in our SEC filings. While we generally expect acceptable resolutions of these disputes via judgments and or settlements, which should increase our earnings per share in future periods, these lawsuits have required us and are continuing to require us to expend substantial management time, effort, and legal fees. And finally, regarding potential acquisitions, we are in preliminary discussions regarding some potential acquisitions within the hemp-derived cannabinoid-infused products industry. I'm not in a position to say at this point in time whether any of these potential acquisitions will proceed forward, but I can say that each of them is of sufficient size that if they do proceed forward, audits will be required. At this point in time, I'll turn the presentation over to Nick Warrender, our Vice Chairman and Chief Operations Officer, and the founder and CEO of our wholly-owned subsidiary, Lifted Made. Thank you, Jerry.

And thank you everybody for coming on this morning. LIFTED has been organically growing very rapidly since we went public by merging with LIFTED partners. Despite the pandemic and despite the numerous regulatory challenges that have put on our way, we generated $5.3 million in sales in 2020, $31.6 million in sales in 2021, and achieved $57.4 million in sales in 2022. Our employee headcount has grown from less than 10 employees to about 200 today. Our ops have grown from 3,500 square feet in Zion, Illinois, to a total of 42,000 square feet, five locations in Kenosha, one in Chicago, Illinois, and one location in Aztec, New Mexico. Our profitability on a GAAP-based EPS basis during 10 of the past 11 quarters is something that few other publicly traded companies in the cannabis industry have come close to achieving. And we would have had 11 straight profitable quarters except for that contingent deferred stock consideration for certain employees that we've committed to three years ago, which essentially came out of the total number of shares that otherwise would have come to me in the acquisition of Lifted and which vested in February 2023 and triggered a one-time non-cash charge of $2.1 million. We have a robust new product pipeline during Q1, 2023, this quarter and this quarter, we've rolled out many new products. We're extremely delighted that our three milliliter vape device has been a huge success. And in April was chosen as the best vape and the prestigious high times hemp cup people's choice competition. We also placed second in the high times hemp cup in the flower category. Our first product SKUs pursuant to the collaboration between Herb Brand and Cali Sweets began shipping in mid-April. These SKUs have become an instant success and currently are some of our fastest selling products. I do want to give credit to Flo Mirsky, the owner of Cali Sweets, who has worked hand in hand with us and our team to launch these exciting new products. And I expect more success in the future and more products for the Herb and Cali Sweets collab. On April 23rd, 2023, we entered into an exciting new collaboration with Nick Turchet of Diamond Supply Co., under which Lifted will manufacture and both companies will distribute and sell new Diamond brand cannabinoid infused vapes and gummies. For the last 25 years, Nick Turchet and Diamond have created an active lifestyle streetwear brand that combines clothing, skateboarding, music, and a special vibe. that is immensely appealing and inclusive. We have already designed the initial launch SKUs that we plan to use for this collaboration, and we hope to begin selling and shipping products late this quarter. I expect great success for these new Diamond branded products, and we are extremely proud to partner with Diamond on this collaboration and more in the future. Our Magic Amanita mushroom products have also been well received by our distributors and consumers. and we plan to launch more products in this category and to continue to explore alternative products in our distribution channels. We're also working hard on certain herb-branded tobacco and nicotine products and hope to have more to announce on those fronts here in the future. We're very excited about all these initiatives, and we understand the need to remain nimble and pivot quickly to stay in front of trends and always changing consumer preferences. In this arms race, our company's greatest strength is its well-known high-quality and extremely popular ERV brand. Consequently, we are now increasing our focus on direct-to-store and direct-to-consumer sales channels, as we do believe those sales channels often exhibit a higher brand loyalty and margin. As Jerry mentioned, we do have two major vertical integration projects that I'd like to run you through. We brought on our first gummy manufacturing machine last fall and it has been a huge success for us. We have substantially reduced our per unit cost per gummy and now control our own destiny relative to ingredients, production schedules, and throughput. Nevertheless, we've still not been able to produce enough gummies with this one machine. We decided to purchase a significantly larger second gummy manufacturing machine that was delivered to Kenosha and has been put into operations during the past two weeks. With these two gummy machines, we are now capable of producing about 30 million gummies per month. And for the first time, we're also capable of fulfilling all of our internal production needs. In addition to those needs, we've recently begun manufacturing for third-party purchasers, which is already underway. Our goal is to obtain over time the necessary CGMP certifications and approvals that would allow us to begin manufacturing gummies that do not contain any THC or cannabinoids that can be sold in the general health and wellness industries. We've recently hired a consultant and a compliance officer who are responsible for leading this effort. We're very excited about the potential opportunities for us. The second leg of our vertical integration play, our recent acquisition of the Oculus hemp flower products business is a major inflection point for us. Hemp flower products, including our blunts, joints, and prepackaged flower are important and profitable profitable business for Lifted. Chase and Hagen Sanchez have built a business sourcing hemp flower and manufacturing consistently high quality hemp flower products at unit prices that we believe make them as low cost or the lowest cost as anyone in the industry. And with new automation, we expect that we should be able to produce more hemp products faster at a lower cost, creating new cashflow and profits. At this point, I'll turn the presentation over to Jake Jacobs, our president and CFO.

Thank you, Nick. From a financial standpoint, we had another fine quarter during Q1 2023. Although, as Jerry mentioned, our profitability was masked due to the one-time non-cash employee compensation charge of $2.1 million. That was attributable to the expensing of the value of 645,000 shares of deferred contingent common stock that was committed to simultaneously with the closing of our acquisition of Lifted in February 2020, and that's vested on the three-year anniversary of that merger. My comments will compare Q1 2023 to Q1 2022, except when I state otherwise. During the three months ended March 31st, 2023, net sales decreased to 12.5%. compared to $18 million. Reasons for the decrease in net sales include, but are not limited to, greater competition in the marketplace, certain distributors creating their own brands, and certain other competing brands paying distributors and wholesalers for valuable shelf space. In addition, comments from regulatory agencies and law enforcement sometimes trigger confusion or fear among distributors, retailers, and consumers, which can result in decreased sales or returns or exchanges of our products. Our total cost of goods sold was $6.8 million, down 33%. Written-off inventory, which is accounted for within cost of goods sold, sold $131,000 for the quarter, which consisted of raw goods, packaging, and some finished goods. Operating expenses were $5.7 million of 51%. The primary driver for this was the deferred contingent stock expense of $2.1 million and payroll and independent contractor expenses of $1.8 billion. Operating loss was $104,000 compared to an operating profit of $4.1 million. The one-time non-cash charge related to the expensing of the vested deferred contingent stocks stemming from our acquisition of Lyfted in February 2020 swung our company from net income for the quarter of $1.4 million to a net loss of $141,000, compared to net income of $2.9 million for the first quarter of 2022. But for this charge, our company would have reported a Q1 2023 basic and fully diluted EPS of $0.10 and $0.09, respectively. Basic and diluted weighted average shares outstanding were both 14,246,745. At March 31, 2023, we had total outstanding options and warrants of 3,612,198. with a weighted average exercise price of $3.85, which, if all were exercised, would generate proceeds of $13.8 million, ignoring any cashless exercise features. Of the options and warrants outstanding as of March 31, 2023, 3,587,198 of these options and warrants are vested and exercisable, with a weighted average exercise price of $3.84. In regards to our March 31st, 2023 balance sheet compared to our December 31st, 2022 balance sheet, cash on hand decreased 2% to $3.4 million, down from $3.5 million. Inventory increased 26% to $7.5 million, up from $6 million. Current assets increased 8% to $14.9 million, up from $13.8 million. The current ratio increased 17% to 2.61 from 2.23. Working capital increased 20% to $9.2 million, up from $7.6 million. And there was no outstanding debt as of March 31, 2023. Thank you. We will now answer some of the questions that have been submitted to us.

If you would like to ask a question and are connected via teleconference, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Webcast participants please click on the ask question box on the left side of your screen, type in your question, and hit submit. So looking at the questions, the first question, I noticed that your website, www.liftedmade.com, now redirects to www.herb.shop. Is Lifted now branding yourselves as Herb, Or are you branding yourselves as Lifted or Herb, depending on the audience involved, or how should I look at it? Nick, would you like to answer that question?

Yeah, it'd be a pleasure. So Lifted Made has been known as a high-quality goods manufacturer since 2015. However, over the last four years, Herb has become one of the leading brands in the CPG industry. hemp-derived space in the United States. We felt it necessary to rebrand particularly our direct-to-consumer website under our CPG brand being Herb just to create more access points for the brand as many consumers see us as Herb.

Okay, thank you. The second question, are you going to use the Oculus brand in the future? I will answer that. No, we did not purchase the Oculus name or the brand. All of the hemp flower products will be branded as herb products. Oculus is going to be dissolved no later than when its pending lawsuit against that particular customer for breach of contract is resolved. Okay, so we've got a third question here. The Cali Suites and Diamond supply deals are attractive in that you've been able to launch new brands without having to pay millions of dollars to even do business with those companies. What demographics do Cali Suites and Diamond appeal to, and what other demographics would be appealing to you? Nick, do you want to answer that?

Sure thing. So a big part of our goal between these collaborations as well as the ERR brand is to be able to cast a wider net in regards to demographics. We believe between the three brands, we're increasing our demographics between the ages of 21 up to 50. Cali Sweets, I would say, is a younger demographic brand, while Diamond really seems to be navigate and be more considered by millennial groups. And Herb is also very wide net that, you know, our largest, our oldest client is 96 years old. So, you know, the goal with these brands is to be able to work multiple brands through the same distribution and retail outlets, but give diversity in the demographics we're going after.

Okay, thank you. There's another question. Do you expect to take any further deferred employee compensation expense from the listed acquisition? And is there any employee compensation expense from the Oculus acquisition? Jake, do you want to respond to that?

Yeah. Okay, so there's no further deferred employee compensation from the lifted acquisition that was expensed 100% in Q1 2023. And the Oculus deal listed is going to be paying a total of $50,000 in employee bonuses to former employees of Oculus who are now working for lifted. And that $50,000 will be expensed during Q2 2023.

So I don't see any more questions. This concludes today's conference. Thank you for attending, and you may disconnect at this time.