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spk06: Good evening, ladies and gentlemen, and welcome to today's Planet 13 third quarter 2022 conference call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mark Kindersma, Head of Investor Relations.
spk03: Mark, the floor is yours. Thank you. Good afternoon, everyone, and thanks for joining us today. Planet 13 Holdings' third quarter 2022 financial results were released today. The press release, the company's quarterly report, 10Q, including the MD&A and financial statements, are available on the SEC's website, EDGAR, and CDAR, as well as on our website, planet13holdings.com. Before I pass the call over to management, we'd like to remind listeners that a portion of today's discussion include forward-looking statements. There can be no assurances that such information will prove to be accurate. or that management's expectations or estimates of future development, circumstances, or results will materialize. As a result of these risks and uncertainties, the results or events predicted in these forward-looking statements may differ materially from actual results or events. Risk factors that could affect results are detailed in the company's public filings that are made available with the United States Securities and Exchange Commission and on CDAR. We encourage listeners to read those statements in conjunction with today's call. The forward-looking statements in this conference call are made as of the date of this call. Plan 13 disclaims any intention or obligation to update or revise such information, except as required by applicable law, and does not assume any liability for disclosure relating to any county mentioned herein. In addition, we will refer to both GAAP and non-GAAP financial measures for information regarding our non-GAAP financial measures and reconciliations with the most directly comparable GAAP measures. Please refer to today's press release posted on our website. Plan 13 financial statements are presented in U.S. dollars. The results discussed during this call are in U.S. dollars unless otherwise indicated. On the call today, we have Larry Scheffler, co-chairman and co-CEO, Bob Grostek, co-chairman and co-CEO, and Dennis Logan, CFO. I will now pass the call over to Larry Scheffler, co-chairman and co-CEO of Plan 13.
spk00: Good afternoon, everyone, and thanks for participating in our third quarter call. As most of you know, I missed the last quarter call. I was stuck on an airplane. I'm Sorry I missed it. Appreciate everybody that missed me, and I'm back for this quarter. I'm going to discuss the performances now in Nevada and California, and then Bob provide an update on our growth initiatives later on the call. As we talked about last quarter in June and July, we saw material weakening of the cannabis consumer as they dealt with increased inflation and higher gas prices. During the quarter, there was an approximately 9% drop in the number of vehicles from California, according to the Las Vegas Convention and Visitors Authority. These are customers that usually overrepresent as cannabis consumers and clearly show how consumers are adapting to the macro conditions. In Q3 in Nevada, we generated $14.9 million from the Superstore, $2 million from curbside and delivery, $2.1 million from medicine dispensary, and $2 million from wholesales. and a total revenue in Nevada of $21 million. The lower sequential superstore revenue was directly related to lower statewide sales. Looking at the latest Nevada statewide sales data, the state is on track for a 5% quarter-over-quarter decline and a 20% year-over-year decline. This has been driven by lower tourists spending on cannabis and increasingly strained local consumer. This quarter, we also saw an acceleration in more cannabis-specific pricing pressure across Nevada. Cannabis prices were down 24 percent year-over-year as more dispensaries lowered prices to try and compete for the limited sales. This was coupled with an increase in the supply of flour in Nevada and also had an impact on the price of flour. Despite the incredibly aggressive pricing by our competitors, an 18 percent increase year-over-year in number of dispensaries We're able to maintain our share of the market at 9%. There are a couple of keys to our success. First, we implemented unique promotions and discounts, utilizing our robust consumer database to be very targeted and maximize gross profit dollars compared to blanket discounting and price cutting. We continue fine-tuning our assortment to match consumer needs and avoid stale inventory. In addition to these initiatives, we continue to deliver the single best consumer experience in Nevada. Like retail, our Nevada wholesale was impacted by pricing pressure and lower sales industry worldwide. Having said that, our brands continue to show strength from a market share and ranking perspective. Looking at our various brands, HaHa was the number five edible brand. Trendy was the number four bait brand. And medicine was, which is our flower brand, grew to number three, highest selling brand flower in September. As we look into the future, we don't see any signs of a significant shift in the macro environment. These are predictions of a recession in 2023. And we agree, based on what we're seeing with the consumer on the ground, this will continue to pressure Las Vegas tourist traffic and local consumers, which have a high correlation with economic conditions. We're also entering into a seasonably slower period of the year from November through February. Turning to California, we generated revenue of $5.1 million, up 15% sequentially. We saw growth 70% sequentially at our Orange County location. We continue to see sales growth quarter after quarter as we institute the practices we've perfected in Nevada, from customer service to product assortment, including our own brands, to marketing and promotion tactics. On the cultivation and production side, the vertical integration in Nevada and our owned brands are part of what's driving incremental traffic to the store. The next Green Wave team, which is our grow facility, continue to improve themselves as expert growers, and we're pleased with the acquisition and the positive synergies it has created for our California operations. On the wholesale side, we generated 2.5 million. Now, this was down from Q2 due to almost doubling the amount of product we allocated to our own shelves in California. We are prioritizing our own shelves as a differentiator in the market and utilizing the extra retail margin to run single-item promotions that can draw in new net customers. Looking ahead in California, we continue to expect incremental gains. California, while incredibly challenging, is not seeing the same price compression sequentially as some other markets are currently. Having said that, it is clear that we're entering into a challenging period for consumers, and we will continue to be very prudent and conservative with our forecasts and our expenses. Overall, our companies performed well during these very challenging macro conditions. Despite an 18% increase in the number of dispensaries in Nevada, From 86 in Q2021 to 107 today, we've maintained market share on both retail and wholesale. We take comfort in knowing that we've been there before and weathered other economic storms. As long as we stay focused and maintain our commitment to outperforming the market, we will reap the benefits as federal legalization changes and the economy improves. With that, I'll pass it on to Dennis to discuss our financials.
spk04: Thank you, Larry. Before I begin, I'd just like to remind everyone that all numbers on today's call are stated in U.S. dollars unless specifically stated otherwise. We've seen the macro economy worsen sequentially in Q3, along with more specific cannabis pricing pressure. The company generated $25.6 million in revenue in Q3 2022, compared to $28.4 million in Q2 2022, a 9.9 decline quarter over quarter. The major driver of the decline, as Larry mentioned, was a significant pricing pressure we saw in Nevada with prices down 24% year over year. In our California operations, revenue was up 6.4% year over year, excluding our push into wholesale. And if we include our wholesale revenue in that, it's up by 111%. Looking at Q4 2022, We know that it is seasonally slower this time of year. Having said that, we are seeing more stability in pricing, not a reversal, but no longer the same downward trend that we experienced in Q3. In Q3 2022, gross margin decreased to 41.2%, down from 49.4% from Q2 2022. The decrease in gross margin was due to wholesale revenue making up a larger share of our overall revenue, coupled with pricing compression, as mentioned earlier. Gross margins at our retail operations continue to be in the high 50s in Las Vegas and in the low 50s in California. We continue to target 50% or higher gross margins at our retail operations, and we expect gains from vertical integration and automation to offset some of the pricing pressure at the retail level. We expect gross margins from our wholesale business to continue to be substantially below the retail business, especially in California. Sales and marketing expense for the quarter was $938,000. up from $803,000 in Q2 2022, but was almost half of the $1.9 million it was in Q3 2021. We continue to try to be very targeted with our sales and marketing spend, focusing only on activities with a measurable ROI. The company spent $9.3 million on G&A expenses in the quarter, excluding share-based compensation, down from $9.9 million in Q2 of 2022 to and $13.2 million in Q3 of 2021. We are making strides in improving the revenue generated per employee with overall sales and wages about half of what they were a year ago. With the current operating environment, macroeconomy, and pricing pressure across the entire cannabis industry, we will continue to focus on improving our efficiency, maximizing profitability, and are prioritizing controlling costs and maintaining positive cash flows. The company generated positive operating cash flow of $2.3 million through the first nine months, while staying current on our tax payment obligations. As of September 30, 2022, the company had a cash balance of $50.9 million and no debt. Since the start of the year, we've spent approximately $14.6 million in capex between our Nevada cultivation facility expansion and our Florida operations. As we've discussed, our priorities are to continue build out of Florida as well as focusing on our Illinois growth opportunity. We will be opportunistic in managing the CapEx requirement for these initiatives and continue to seek alternatives that reduce CapEx in order to conserve our cash position. We believe having a strong cash position and being debt-free gives us much more flexibility than most other cannabis companies. It allows us to capitalize on opportunities and have a clean share structure when legalization is enabled and larger institutions enter the space. And with that, I'll turn it over to Bob.
spk02: Thank you, Dennis, and good afternoon, everyone. I'll dive right into our growth initiatives in Florida. We continue to make progress on our cultivation build-out. There were building delays at the start of the quarter related to permits, delays associated with backlog in construction services availability, and of course, supply chain issues, some of which were directly related to the recent hurricane. While these delays are disappointing, I'm pleased to report that we've had no material damage to our facilities due to the hurricane. We are also opportunistic and looking at methods to reduce the upfront CapEx requirements and the time to market. Moving over to Nevada, we've submitted our lounge application and we think there's a strong likelihood that we'll secure a license. We've got a straightforward conversion of our restaurant into an incredibly high-end, unique consumption lounge which is as close to the Las Vegas Strip as possible. The capex required for this project would be relatively minor, but we will keep you updated on the licensing process and conversion as we move forward. In Illinois, we submitted our location to the state and municipal regulators and are awaiting their respective approvals. Our proposed location is Fountain Square, Waukegan, which is close to the Wisconsin border and just off the highway between Milwaukee and Chicago. It is a large shopping center, home to multiple big box retailers, restaurants, hotels, and a recently announced casino project. The plan for the store would be smaller than either the Las Vegas or Orange County super stores, but will still be experiential and up to the Planet 13 standards for which our customers come accustomed to. As a reminder, we've agreed to an option with Frank Cowan, our social equity partner, to purchase the remaining 51% ownership in our Illinois dispensary at our discretion. So I'd like to take just a moment to look back at the three goals that we set at the start of the year and where our performance stands thus far. Our first goal, of course, was to maintain that 8% to 12% of Nevada retail sales and continue to grow wholesale share in the state while executing on accretive and diversified revenue opportunities such as the cannabis lounge. In Q3, we are still holding approximately 9% share based on the available data that we've seen. Our wholesale brands held a brew share, and we're making good progress towards a first-of-its-kind cannabis consumption lounge. Unfortunately, we've seen a substantial industry-wide slowdown in Nevada. While this is unquestionably disappointing, we can only control what we control, and that is how we compete and perform relative to the market. And number two, California. Our goal, of course, was to improve profitability through increased sales and operating leverage at our dispensary, increase vertical integration, and enter into profitable wholesale operations. In Q3, we saw another quarter of sequential growth. And thirdly, with respect to Florida, our objective was to continue to drive growth in order to allow us to open in 2023. The progress on our construction, as I indicated earlier, was a bit slower than desired during the quarter to permit timing and delays from the hurricane. However, we have multiple opportunities to substantially speed up our time to market and reduce upfront capex. We will hopefully be in a better position to update the market on those opportunities very soon. We are executing on our goals and controlling what we can control. A year from now, we plan to have more than doubled our dispensary count and the number of states we have operations in. As a company, we recognize in the macro and the capital markets environment we are operating in and the risks that they currently pose. The greatest risk we see today is cannabis companies unable to fund themselves and being forced to take expensive capital prior to regulatory change that will act as a tremendous tailwind for growth, margins, and cash flow. Because of that, we remain focused on balancing the need to set ourselves up for the long term through various growth initiatives, maintaining our share, and margins today and conserving capital to be able to capitalize on regulatory change and a large payoff that will come with uplisting and the removal of 288. And with that, I'd like to again thank everybody for participating today. And now I'd ask the operator to open the lines for questions.
spk06: Certainly. Ladies and gentlemen, the floor is now open for questions. If you would like to join the queue to ask a question at this time, you may press star 1 on your telephone keypad. Should you wish to remove yourself from queue, you may press star two. We do ask if listening on speakerphone this evening that you pick up your handset while asking your question to provide optimal sound quality. Once again, ladies and gentlemen, you may press star one at this time to enter the queue to ask a question. Please hold a moment while we poll for questions. And the first question is coming from Greg Gibbous from Northern Securities. Greg, your line is live. Please go ahead.
spk05: Great. Good afternoon, Larry, Bob, and Dennis. Thanks for taking the questions. Hi, Greg. Hi, Greg. You know, regarding, I guess, the weakness in Nevada, you know, I know you kind of predicted it and everything. I wonder if you could just comment on differences and, you know, pressures on pricing versus maybe lower unit sales, those impact on sales.
spk04: Sure. It really is more a pricing pressure than it is on a unit basis, although our customer count is down somewhat, you know, kind of quarter over quarter. We are seeing that average ticket come down. You know, it's in the 85-90 range right now, whereas a year ago it was 125-130. So it's more of a pricing pressure versus a volume game and a reduced number of actual customers making purchases. So it's a combination of both.
spk05: Yep, makes sense. Great. And then in terms of, I guess, your outlook maybe on supply across the state of Nevada, you know, I know you saw it kind of rise a lot this quarter or recently. I'm wondering if you could just comment on the outlook there, and do you expect maybe additional pressures on pricing as a result of that?
spk04: Well, as I think I said in the comments, we are seeing a slowdown in the price declines in Q4, hopefully moving towards stabilization. I don't think we're going to see continued pricing pressure. Most of the new supply from cultivation came online, I think, over Q2, Q3, which really drove a lot of that negative decline in price. And that seems to be stabilizing. Market seems to be able to absorb it at this current pricing level. And we're hopeful as the economy starts to improve and tourists start spending money that that demand gets picked back up.
spk05: Got it. I guess last one for me, you know, in relation to California, you mentioned your expectations, more gains there. What do you expect to maybe be the drivers there in terms of getting better gains? And I guess, why do you think maybe pricing held up better in California relative to Nevada?
spk04: It's a bit more mature market and the excess inventory of flour really came on last year, last October. was when we felt a big hit from the outdoor cultivation. I think the amount of outdoor cultivation this year is less, at least that's what we're seeing in our wholesale pricing unit in California. We do expect gains because we are only just starting to integrate our Nevada brands into that Orange County store. We have stopped delivery at the OC store and yet still saw quarter over quarter sequential growth in revenue. as we were able to run promotions into that store. And based on the preliminary data that we're seeing for Q3, we did see a 42% increase in customer traffic in the Orange County location in Q3 of 22 compared to Q3 of 21. Don't forget the store opened July 1st, 21, so that's the first real quarter over quarter comparison. And we have this year in 2022, We've seen a 22% growth in customer traffic over Q2 of 22. So we're seeing some strong demand. Some of the impediments to getting to the store are starting to clear up. The freeway construction is starting to wrap up, and we're seeing the benefits there. But more importantly, we're seeing the benefits of that vertical integration with our wholesale business where we can run, I think as Larry mentioned, we can run select promotions to help drive new customers to the store, and that's really paying off where we can run promotions on inexpensive eights and then upsell people on other products in that market. So we do see some upside there and also see some upside from moving our Nevada brands into other retail locations in California.
spk05: Got it. Thanks for the caller there, and I'll pass it on. Thanks, Greg. Thanks, Greg.
spk06: Thank you. Once again, ladies and gentlemen, if anyone would like to join the queue to ask a question at this time, you may press star 1 on your telephone keypad to enter the queue. Once again, ladies and gentlemen, that will be star 1 at this time if you would like to join the queue to ask a question. Please hold a moment again while we pull for further questions. And we have Greg Gibbous from Northern Securities with a follow-up. Please stand by. Greg, your line is live. Please go ahead.
spk05: Great, thanks. Just a couple more from me, quick ones. I guess regarding timing on the cultivation build out in Florida, and then I guess timing on the consumption lounge completion in Nevada, if you provided that.
spk02: Yeah, Greg, let me go with the lounge first. We're hopeful that Clark County will finalize their ordinance sometime toward the latter part of this year. Realistically, we're looking at Q1 before we'd actually be able to move forward on the permitting. The state has basically put their regulatory structure in place. In fact, we've submitted an application, as I indicated earlier. But you really can't do anything there until the local jurisdiction grants approvals, too. And so there is movement. I know there's a lot of pressure on them to get this done, so I'm optimistic that Q1 will We'll have some more clarity on the timing. But as I said earlier, for us, it's going to be a relatively simple build-out for us or conversion. There's really not a lot of CapEx required. So we're excited about the ability to transition the restaurant into that lounge. And so we'll update the market and update you as we get more information. But that's really what I have as of now.
spk06: In Florida?
spk02: Oh, in Florida. Yeah, so... In Florida, we've got steel on the ground. We're moving forward with our contractors. In fact, most of the week, we've been working with the civil folks. So we've got a game plan. We've basically got sign-off on the building. And we're just moving forward now to get the necessary approvals to start moving dirt. So we're hopeful by the end of this quarter, We'll be there, but as I said on the call, we're also looking at some other opportunities that I can't announce just yet, but it'll really help accelerate that schedule. But we're excited. Things are moving. You know, the hurricane was obviously troubling and concerning when Ian hit, but as I said, really no damage to either our... cultivation site or the retail locations that we have under various stages of construction. Great.
spk05: Very helpful, Bob. And yeah, great to hear that the hurricane didn't impede things too much. So thanks again, guys. You bet. Thank you, Greg.
spk06: Thank you. And there are no further questions in queue at this time. This will conclude today's conference call. Thank you for your participation. You may disconnect your phone lines at this time and have a wonderful day. Thank you once again for your participation today.
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