Stem Hldgs Inc

Greetings and welcome to STEM Holdings Fiscal Third Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during today's conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Walter Pinto, Managing Director of KCSA Strategic Communications. Thank you, sir. You may begin.

Thank you, operator. Good morning, everyone. This morning's remarks will be given by Mr. Adam Burke, CEO of Driven by STEM. Following our prepared remarks, we'll host a brief question and answer session. The company's 410Q for the period ended June 30th, 2021 was filed with the U.S. Securities and Exchange Commission yesterday, August 16th, 2021. Today's call will refer to various non-GAAP financial measures. Today's discussion will include actual historical information as well as forward-looking statements that are based on assumptions which are subject to risks and uncertainties that could cause actual results to differ materially from those in these forward-looking statements. Management can give no assurance that any forward-looking statements will prove to be correct. Forward-looking statements discussed on this call are relevant as of the date of this call. August 17th, 2021, and the company undertakes no obligation to update or revise any of these statements except as required by applicable law. Management refers you to the cautionary statements and risk factors included in the company's MD&A by which any forward-looking statements made are qualified in their entirety. All information is in U.S. dollars unless otherwise specified. Now let's turn the call over to Adam. Adam, please go ahead. Thank you, Valter.

Good morning to everyone on the call and thank you for joining us as we deliver our financial results for the fiscal third quarter into June 30th, 2021. I hope that you all have had the opportunity to review our earnings release as we are eager to share our results and the operational progress we made during this quarter. Now let's dive into some of the details. During the fiscal third quarter, STEM holdings generated historically high revenue that was two times above our fiscal third quarter 2020 revenue. The strong revenue results reaffirmed the strategic and financial benefits of our focus on organic growth, coupled with the acquisition in late 2020 of Driven Deliveries, which was the only publicly traded cannabis e-commerce and delivery as a service platform in California. Our fiscal third quarter 2021 gross revenue was $12.4 million, an increase of $6.3 million, or 104% from $6.1 million in the same quarter of 2020. Our gross margin of 14% includes a reclassification of expenses from SG&A to COGS for our recent acquired driven cannabis delivery business. Without this, our gross margin would have improved 7.6% to 41.8% for the quarter. As I'll discuss in a few minutes, our retail and direct-to-consumer delivery operations continues to outperform our expected expectations. Our team executed 57,603 transactions during the quarter, driven by a 15.3% increase in Oregon and producing a 19% increase in revenue on improved transaction value. Similarly, we executed 78,000 455 deliveries during the quarter in California, and nearly 1,000 in Oregon as we test drove Buddy in anticipation of our official launch in the greater metro Portland area this past week. Due to full vertically integrated operations, we have the advantage of participating in every aspect of the cannabis supply chain. This integration strengthens the foundation of our long-term growth strategy and reduces regulatory risk as the industry continues to evolve in the U.S. and globally. This structure will enable us to build value for our shareholders and support our rapid growth. As previously outlined, we have a clear roadmap to build the largest publicly traded cannabis farm-to-home e-commerce and delivery company with multiple strategic opportunities ahead of us. This roadmap that we're building contains five paths to profitability. The first path is further expansion of our proprietary buddy delivery as a service platform into new states and multiple markets. The second path is to create strategic partnerships for delivery with leaders in the cannabis space in new markets to expand our footprint. We plan to achieve this utilizing our own licenses or by entering states with joint ventures. The third path is focused on continued growth of our current retail dispensaries, as well as Buddy and Ganja Runner in California and Oregon. The fourth path is the progression of our own branded product sales and distribution. And lastly, the fifth path is strategic M&A that is accretive in value and provides synergies to our operations in current and future markets that are consistent with our vision. As we drive our current business model and explore new opportunities, we are also monitoring and preparing for the future landscape of cannabis. As the industry continues to evolve in the US on a state-by-state basis, we are positioning accordingly. Notably, the recent proposed Cannabis Administration and Opportunity Act, introduced by Senator Majority Leader Chuck Schumer, along with Senators Ron Wyden and Cory Booker, contemplates interstate commerce for which we are already well positioned. Both small and large cannabis operators are evaluating their current operations and focused on geographically strategic production facilities that can service a national footprint in the event that this bill passes. These operators can effectively be viewed as our potential partners for our delivery as a service platform as we are ahead of the curve in the rapidly growing delivery sub markets. In fact, we are already working with some of these potential partners in some of our current markets. For the past six months, Driven by STEM has strategically onboarded specific brands and products that are not only in high demand by our connoisseur cannabis consumers, but may also become national partners. In addition to retail delivery partnerships, our Brand Buddy widget is an online ordering tool enabling seamless integration for current and future brand partners to have consumer delivery. Essentially, this service allows branded product companies to install a tool on their web browser, social media, and auxiliary digital platforms, enabling a seamless and direct connection to consumers engaging in personalized home deliveries of cannabis products that we are facilitating. To build a strong balance sheet in order to achieve our vision, we continue to focus on our four-point execution plan described in previous calls and presentations. Our first point is the execution of expanding our domestic footprint. We are currently operating in California, Massachusetts, Nevada, and Oregon, and will launch operations in Michigan in the fall, followed by our new state of Georgia. We are also expanding by way of our wholesale business, with our products now sold in over 240 dispensaries, outside of our own, decreasing by over 23 new locations just in the last quarter. As we now get set, Driven by STEM is executing our go-forward strategy for home delivery with our Buddy proprietary platform. We made further progress in our expansion plan as we recently announced the official launch of the ShopBuddy.com e-commerce platform in Oregon. This represented our first contiguous expansion stage for our delivery service and a major catalyst. Our Buddy platform is anchored by our STEMS local TJ's on Powell dispensary in Portland. This location is recognized for the largest selection of curated products available for delivery in the market, including flour, pre-roll, concentrates, and edibles, as well as non-cannabis gear. After a soft launch and several months of work to ensure a complete build-out of our market-specific front end and an API to connect our ERPN metrics, ShopBuddy.com is now live with over 100 brands and 825 SKUs for delivery in greater Metro Portland to be soon followed by the rest of the state beginning in October with Metro Eugene. This will be supported by an exciting new marketing campaign capturing consumer behavior, seeking cannabis delivery at home. We also continue to grow Buddy in California, with two-thirds of our customers in the desirable age range of 21 to 39, which is a heavy user demographic, which has indicated increases in average size of orders. Customer attention or stickiness, which I like to say, is critical to our strategy as we continue to build our technology capabilities in this area. We continue to operate a well-performing Foothills Health and Wellness dispensary in Northern California region of El Dorado. This dispensary is currently medical use only with limited competition in the area, and we expect to receive our recreational license in the coming months. In addition, we are exploring opportunities in the Rockies and looking to expand our current footprint in alignment with the opportunities that will be identified in constantly evolving cannabis industries. Among the strategic opportunities under consideration to enhance our footprint, including brick-and-mortar dispensaries, that can also act as new hubs for home delivery. We can also expand our core competencies through M&A in several areas, including extraction technology, as well as integrated disruptive brands that we can pipeline across our full footprint. And this is just the beginning. Point two focuses on cost reduction. As we continue to expand and scale our operations, We will drive cost savings through synergies that eliminate duplication and increase performance. In addition, we plan to reduce SG&A through consolidation of back office and other functions that can be handled by our management team to further improve efficiencies in the coming months. Point three is our commitment to operational excellence and productivity. We have implemented a new MRP and IT solution to improve inventory, as well as financial controls to drive cash conversions. We seek to increase automation, assortment efficiency, and to reduce product costs through value engineering while not compromising on product quality. We have already applied this process in our acquisition of the Buddy delivery platform. Buddy also offers localized cannabis products prepacked and carried by our own drivers in lockboxes to our highest performing communities. As a leading cannabis technology company this quarter, we implemented a new algorithm to completely maximize and optimize the assortment and value of the cannabis products that are stored in each vehicle. This has reduced order processing time with increased accuracy, eliminating the potential for human error of overpacking the coolers while also enhancing customer satisfaction. This is indicative of the initiative that we have underway to drive our top-line growth and our bottom-line profitability with cutting-edge know-how. As we assess and integrate new acquisitions, we will continue to identify opportunities for margin improvement with quality assurance while supporting our culture of diversity, inclusion, and teamwork. Point four is perhaps the most crucial. Customer acquisition, loyalty, and retention. We continue to acquire new customers at all points in our distribution chain with high retention by exceeding their expectations. This is critical given the unprecedented of long-lasting behavioral changes driven by COVID and other environmental changes and challenges on the West Coast of the US. Despite the increased mobility of the California population this past summer, our buddy platform acquired over 3,800 new customers this quarter, demonstrating that our customer-centric focus is pivotal to our continued success. It is expected that as many companies in our geographically delayed reopening once again and vaccination and testing mandates expand, we will continue to have millions of employees working virtually, creating new incremental opportunities for home delivery opportunities. specifically in California. Service excellence is critical to our growth and expansion as this situation continues to evolve. I'd like to share a few key performance indicators for the quarter, which has been supported to this strategy. Operationally, this past quarter, our average delivery time was 59 minutes, reaching 92% of California's population two minutes faster than the prior quarter. In addition, we increased our monthly retention rate in the state of California to 72.5%, which was a 6.1% increase from calendar Q3 2020. As mentioned, Buddy added 3,850 new customers in fiscal Q3, which was an 11.5% increase from the previous quarter, and at an equal average order rate of $66. Our acquisition cost per customer in the same period was $17.02. This was a decrease of 9% from the previous quarter. We achieved this through focused marketing, particularly with Weedmaps, which is our primary marketing platform in California, where we have optimized over 450 pins to drive response. Our Weedmaps partnership for consumer engagement yielded 6,964 orders for the quarter. This was a 24% increase from the previous quarter. Weedmaps is a technology company servicing the cannabis industry with whom Buddy has partnered since its inception to drive relationships and sales in the cannabis community. Additionally, The WeMaps app has just been approved for in-app purchases of cannabis products, enhancing the value of our partnership as we will be able to explore additional opportunities to further consolidate the market. During the quarter, we also added a proper high to our digital mix, which has a proprietary app that reviews thousands of products and connects consumers with the best distribution outlets available. This is a new relationship for our company, and we are excited about the future prospects. We have also partnered with and taken a 5% minority stake interest in HiThere, a cannabis social networking platform. We'll be writing an API into their app so HiThere members can purchase cannabis through our delivery network in both California and Oregon. We will integrate our order platforms with our partner apps. and their members will be able to swipe and purchase cannabis at their fingertips, and we will be doing the delivery. Additionally, we expect our ads will drive traffic directly to Buddy for ordering. Further, we are excited to plan for the launch of our own exciting new Buddy shoppable cannabis application that will be available through the Apple App Store once approved as expected. Apple has long prohibited full e-commerce cannabis functionality through the App Store, forcing consumers to complete transactions through their own websites. Apple recently changed its policies, thus enabling cannabis companies to create experiences that reflect the way people currently shop. The Buddy app will facilitate our national indoor market-by-market expansion of deliveries. The Buddy app will provide a seamless process, allowing our customers to move through the initial registration step to the final home delivery option in the most efficient way possible. Customers will also be able to track their orders throughout all stages of the order placement process. We will use our expertise to build trial and loyalty quickly, rolling out in California first. Phase two of our Buddy integration encompasses our plan to expand beyond our internal capabilities to key external partners. As a cannabis technology company, our Buddy and Ganja Runner e-commerce platforms will partner with leading cannabis companies in new markets, while our experience management team will integrate and streamline our operations for our creative margins. We are currently looking at opportunities on the East Coast, where we are planning on implementing this model by the end of the year. As previously announced, our first Michigan dispensary will open in Kalamazoo, Michigan in the fall, enabling us to offer delivery service to this high potential market valued over $3 billion. In addition, Driven by STEM was recently notified that we are one of the six applicants to be awarded a cannabis license out of the 69 applicants in the state of Georgia. Georgia is an extremely attractive cannabis market with one of the fastest growing populations in the U.S., now with over 11 million people. The 60-plus population of aging baby boomers is growing very rapidly, indicating the potential for a robust medical cannabis program. There are 17 qualifying conditions for patients and five allowable product form factors. Those form factors will include oil, tinctures, transdermal, capsules, and lotions. We are already manufacturing these types of leading products in these segments in other states, particularly Oregon, where our TJ's Gardens brand has long offered five THC and CBD tinctures while also supporting the Forest Initiative, supplying safe and prescribed tinctures to suffering adult children. It is worth noting that Georgia's framework is very similar to Florida's, which is by far one of the most favorable markets in the U.S. in which to hold the lights. Our Class II license will have a limit of 50,000 square feet of cultivation canopy, allowing us to build dispensaries as one of our core competencies in addition to the potential for home delivery. We are projected to build our facility near the campus of Central State Hospital in Milledgeville, which is the state's largest treatment for treating mental illness and developmental disabilities. Overall, we are excited about the future of operating in this state, and are looking forward to bringing our brands to the Southeast U.S. Regarding other markets in which we operate, our operations in other contiguous states are also achieving record sales. Our facility in Las Vegas is constantly growing high-tested flour under our Travis & James brand, while sales of flour, pre-roll, and edibles grew in Q3 versus a year ago. We are now wholesaling our products to over half the dispensers in the states. We are only restrained by the size of our grow facility and commercial kitchen, where we make our award-winning canabore edibles, as well as producing groon under this license. We continue to review plans for further development and expansion of our facility and commercial kitchen. We continue to evaluate the opportunity for home delivery in this market as well. The state of Oregon remains a major area of focus and excitement for us, beyond the launch of Buddy, as we continue to strengthen our position in the state. Our five cultivation facilities have been upgraded this year. We abandoned 5,000 square feet of new canopy at our Molino Farm Light Depth Campus, as well as improved lighting and automation for efficiency, proving once more that our commitment to quality can be upheld at every facility that we have. We have planted our two revitalized light-depth greenhouses at our Applegate Farm in Southern Oregon on our 40-acre farm and have added four rooms at our state-of-the-art indoor grow in Springfield. New cultivars from our genetics and breeding program will also be introduced next quarter with this additional space. The overall market in Oregon grew 7% in dollars during this period, but our dispensaries grew at over 19%, versus a year ago as our sales and market share continue to accelerate, driven by our strong assortment and excellent bud tender staff. Our Cannavor brand achieved record sales this quarter, and our initial lineup of caramels will be soon joined by an exciting new lineup of innovative edibles for holiday and all occasions. This also includes our line of THC syrups, which will be launched by year end. The launch of the THC syrups will enable us to aggressively tackle the beverage sector in a unique form factor. And of course, the launch of Buddy will expand our direct-to-consumer sales through our dispensary environment, beginning in Portland, followed by Eugene, and then to Salem, which is the state capital. We also remain bullish on Massachusetts, and our Rebel dispensary investment is proving to be successful. with sales of $2.4 million for the quarter with 53% gross margin. We are highly data-driven and are capturing market share with a laser focus on customer shopping, ad competitors, and strong SEO. Our application for delivery is about to be filed, reflecting another expansion market for Buddy, now expected to be launched in early 2022. Our key performance indicators in Massachusetts for the quarter are include a solid growth of 16% during fiscal Q3 as we near completion of our first year of dispensary operations. 42% of sales are now from online pre-orders, which are averaging $222. This percentage continues to increase. In-store sales are 58% of revenue and are attributed to ordering averages of $155. These are some of the highest we've ever seen. Notably, the state averages $87, proving that we are well over our competition in the market. 52% of customers are repeat shoppers, returning after a positive experience despite increasing regional competition. Our brand presence in Great Barrington continues to be strong. The build-out of our cultivation facility in Northampton, Massachusetts continues to and should be completed by year end, barring any unforeseen supply chain disruptions due to COVID. By June 2022, Rebelle will launch eight cultivars and offer our own pre-packed flower, pre-rolls, tinctures, and rosin carts, thus increasing gross margin by 6% for our dispensaries. So what's next? Well, first, we are raising the bar with our management team and board of directors. We are looking to add more human capital expertise to our roster as it relates to retail, cultivation, and extraction. Second, we are investing in IT to be cutting edge in our operation and data management. This will enable us to rely on the most sophisticated IT systems enterprise-wide, databases, analytics, and technology applications. Third, We are initiating new marketing campaigns across the enterprise, particularly in new delivery regions, as previously noted. Fourth, we are investing in innovation in high-growth segments, from concentrates to edibles, with accretive margins. During this quarter, we launched our first on-trend, solventless-extracted, live-rise endavable from our best-selling Dark Star cultivar. It sold out in one week. Dabables offer great potency, greater than flour, and the segment is growing rapidly in the Oregon and West Coast markets. And solvent for extraction is the emerging technology that does not require butane or other solvents for extraction, adding to its appeal. In subsequent quarters, throughout calendar 2021 and early 2022, we will launch a line of live resin, butter, batter, shatter, and THCA crystals. We will also continue to review M&A opportunities that are accretive to our expansion goals. We look forward to a strong finishing this year and anticipate strong growth trends for the remainder of the year. We are committed to drive shareholder value through execution of our strategy, product and technological innovation, as well as our numerous productivity initiatives to improve gross margin as we prepare for the coming year and what will hopefully soon become a federally lawful industry. Thank you for joining us this morning. I would now like to turn the call over to the operator for questions.