Planet 13 Holdings Inc

CNSX:PLTH

Earnings Call Transcript 2023-Q1

[Operator]

Greetings, and welcome to today's Planet 13 First Quarter 2023 Conference Call. At this time, all participants have been placed on a listen-only mode and we will be conducting a question-and-answer session with the covering analyst after the presentation. It is now my pleasure to turn the floor over to your host, Mark Kuindersma, Head of Investor Relations. Mark, the floor is yours.

[Mark Kuindersma, IR, LodeRock Advisors Inc.]

Thank you. Good afternoon, everyone, and thanks for joining us today. Planet 13 Holdings first quarter 2023 financial results were released today. The press release, the company's quarterly report 10-Q, including MD&A and financial statements are available on the SEC website, EDGAR and SEDAR, 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 developments, 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 SEDAR. 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. Planet 13 disclaims any intention or obligation to update or revise such information except as required by applicable law, does not assume any liability for disclosure related to any comment mentioned herein.

In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliation to the most directly comparable GAAP measures, please refer to today's press release posted on our website. Planet 13’s financial statements are present US dollars and the results discussed during the call or in U.S. dollars unless otherwise indicated.

On the call today, we have Larry Scheffler, Co-Chairman and Co-CEO and Dennis Logan, CFO. I'll now pass the call over to Larry Scheffler of Planet 13 Holdings.

[Larry Scheffler, Co-Chairman & Co-CEO]

Good afternoon, everyone. And thank you for participating in our first quarter call. We'll keep the call brief since it wasn't that long ago that we last did this. On our Q4 call, we identified that we're starting to see price stabilize in Nevada. Those early signs that carried on throughout the quarter and they are continuing into Q2. After both the quarters with sequential declines, we saw sales increase at the SuperStore. This has almost all been driven by pricing dynamics as the number of tickets have been relatively consistent or growing throughout that time, even with new dispensaries opening.

We're optimistic that Q4 marks a low point for pricing and we've reached the supply and demand equilibrium. We expect demand to continue to grow at a steady pace and supply to be either flat or declined based on the tough funding requirements and some smaller subscale competitors growing liabilities and tax bills. In Q1, in Nevada, we generated $14.3 million in revenue from the SuperStore, $1.7 million from curbside and delivery and $1.9 million from Medizin. Once again, we've been able to maintain our share of Nevada retail sales above 8% for the quarter. This is in line with our long term goals.

In addition to the $17.9 million in retail sales, we generated $2.3 million from Nevada wholesale and others. Total Nevada revenue was $20.2 million in Q1 2023 compared to $20 million in Q4 2024. The largest area of growth in Nevada quarter-over-quarter is once again our wholesale business, which grew 13% sequentially. Our cultivation and wholesale teams continue to execute at a high level. We're consistently creating new products, getting them into shelves across the state and delighting both local and tourist customers.

Through the first quarter, our brand kept the prominent position in Nevada. Per BSA, Medizin was the number five flower brand in Q1, HaHa moved up to the number three candy brand, and Dreamland was the number one chocolate brand and Trendi the number five brand in the state. The statistics that count for products sold at our stores, around third party shelves, demonstrating the immense brand building value of the SuperStore. It is the reason why partner brands and celebrities like Mike Tyson, Lil’ Kim and STIIIZY continue to launch their products in Nevada with us.

Looking ahead in Nevada, we expect to see our incremental growth as pricing remains consistent. And demand in unit volume continues to grow. We also expect traditional seasonality this year with Q2 and Q3 being stronger than Q1 and Q4. The one caution is that there is still significant risk in economy with consumers clearly struggling with an increased cost of living and uncertainty about how the continued rise in interest rates will impact consumers over the remainder of the year.

Turning to California. In Q1, we generated $4.7 million in revenue compared to $4.9 million in Q4 2022. This breaks down to $2.1 million from retail $2.6 million from wholesale compared to $2.4 million from retail and $2.5 million from wholesale in Q4 2022. Looking ahead, we believe this is a good base in California. We will see incremental improvement on our wholesale business.

Turning to the remainder of 2023 and beyond, we outline like these three key deliverables we want to achieve this year to be successful. Number one, maintain and build the core. This will continue to generate north of 8% of Nevada's retail sales. Grow wholesale revenue in Nevada and California and generally improve the quality of our stand alone operations in both states. Number two, increased sale -- excuse me, increased scale. Significantly, we want to finish and open our Illinois dispensary this year and start to demonstrate why we think this might be the best dispensary in our portfolio after the Las Vegas SuperStore. We're also focused on progressing the build out of our Florida cultivation to set us up for success in 2024 and continue to evaluate the one appropriate pursue accretive M&A. And three, improve profitability and cash flow and preserve capital. This will be particularly accomplished as we get more scale and able to spread our corporate costs out over a higher revenue base. The other key piece is the continued streamlining of operations and efficiency improvements. If we can execute those three goals, 2023 will be a successful year for Planet 13.

Taking to look at how we are doing so far, the core of our operations remains strong. We are predominant player in Nevada, maintaining again market year north of 8%. Nevada wholesale revenue was up 13% with a number of wholesale accounts up 3%, meaning, each account to becoming more productive. Our cultivation expansion is improving yield and potency, now that we've got a couple of harvests through and fine-tuned our operation. Overall, the core of our business remains strong, giving us a solid base to grow on.

We are leveraging that base to add scale in more markets to improve our financials and ensure we are long term industry winner in Illinois [indiscernible] makes a significant progress, we purchased a dispensary location and started renovations, now also purchased the remaining 51% of the Illinois dispensary. It's now a 100% owned by Planet 13. Overall, we have paid less than $10 million for this dispensary, which will project less than 1 times of sale if we assume the average revenue for a dispensary in Illinois. And given the quality of our location, we expect to be well above that average.

We are thrilled about the potential of this dispensary and thinking it might ultimately be the second, again, best location in our portfolio. It is in a prime shopping area adjacent to a massive casino project, guaranteeing a steady flow of customers. Although the store has a smaller footprint, we will have lower operating cost expense than in SuperStore, it will still provide the distinctive customer experience that Planet 13 has renowned for. We are aiming to launch the dispensary later this year.

In Florida, progress has been slower than we would like on our build out, and some of the opportunities we thought we had to speed up -- we thought we had to speed up our time to market fell through. We're continuing to explore all options to be cultivation online by the end of the year in a cost effective way. In addition, through potential M&A in Florida to speed up time to market, we're exploring other accretive M&A opportunities with an eye on scale, profitability and overall attractiveness. Ultimately none of the deals we explored in the quarter met our criteria after going through our extensive due diligence process. The deals available in the market continue to get more attractive, but due diligence is critical and crucial. We will remain disciplined to ensure every deal is in the interest of shareholders. This pursuit of growth and scale hindered our profitability in the quarter, but operationally excluding fees associated with M&A, we would have been cash flow positive again.

Even including the onetime M&A costs, while excluding the reduction in share based compensation, including SG&A, we've lowered our general and administrative expenses by 10.5% in the last year, demonstrating our commitment to finding efficiencies and lowering our fixed costs. Overall, we're off to a solid start on our goals for 2023. The core remains strong and outside of Florida, we are making rapid progress on our growth initiatives and improving profitability.

Before I pass the call on to Dennis, I'd like to take a minute to recognize Mike Harman, our Board Member and Audit Chair will pass away in April. Mike was at Planet13 since we went public in 2018. He helped us with important projects like our conversion to U.S. GAAP and SEC registration. He was a valuable source of advice and has steady presence on the board. Joining the board, as the new audit chair is Lee Fraser. Lee has over 20 years of experience at publicly traded companies and private businesses overseeing financial reporting, large scale construction projects and real estate portfolios. He has done this for world famous companies like Warner Brothers and Fox Corporation. As I look at our goals for 2023 and our ongoing expansion projects, couldn't think of a better board member or want to have more relevant experience across the lean on.

With that, I'll pass it over to Dennis to discuss our financials.

[Dennis Logan, CFO]

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.

In Q1 2023, we generated $24.9 million in revenue. This compared to $24.8 million in Q4 2022, essentially flat sequentially and down 3% year-over-year. Overall, wholesale growth offset a slight decline in sales at the retail level in California. This is consistent with what we talked about on our Q4 2022 call where we expected revenue to be relatively flat for the first half of the year with growth towards the end of the year driven by the opening of our Illinois dispensary.

In Q1 2023, gross margin increased sequentially to 43.7% up from 43% in Q4 2022. The sequential increase was a result of higher utilization rates at our cultivation facility and we think there's still some room for incremental improvement, especially with price compression slowing. Having said that, we don't expect gross profit to reach north of 50% again because of the dilutive impact on margins from our growing wholesale operations. Gross margins at our retail operations continue to be in the high 50% range in Las Vegas and in the low 50s in California. We continue to target 50% or higher gross margins for our retail operations and we expect gains from vertical integration to offset some of the pricing pressure at the retail level.

Sales and marketing expense for the quarter was $1.3 million up from $1 million in Q4 2022. We ramped up our marketing spend ahead of the traditionally busier tourist season to capture a higher share of total sales. That includes activities like more [indiscernible] advertising, celebrity partnerships and direct drive referrals. Excluding share based compensation expense, the company spent $10.2 million on SG&A expense in the quarter, down from $11.4 million in Q1 2022, a 10.5% decrease from Q1 2022. During the quarter, we spent approximately $1 million on fees and expenses incurred on potential M&A opportunities that did not materialize during the quarter. We do not expect that this level of spend should be repeated in future quarters. However, we will continue to explore accretive M&A and other paths for value creation for our shareholders.

These onetime fees and expenses significantly impacted our profitability and cash flow in the quarter. Excluding these onetime items operating cash flow before changes in working capital would have essentially been breakeven. We expect lower onetime costs in future quarters better operating cash flow. As an organization, we recognize that this is the metric cannabis companies are being judged on and that aligns with our long term internal rubric. As of March 31, 2023, the company had a cash balance of $42.7 million and no debt. During the quarter, we used $5.2 million in operating cash flow, $1 million of that was used for the onetime fees and expenses as discussed previously. Another $3.9 million in cash was used for work capital as we increased some inventory ahead of the 420 day and paid down some outstanding liability.

We used $4.5 million in investing cash flow, approximately $0.9 million to buy the remaining 51% of Planet 13 in Illinois, and spent $2.5 million to buy the building for our Illinois dispensary and begin construction. We plan to enter into a sale leaseback on this building when it is finished to continue with our asset light approach. We also spent $1.1 million approximately on facility upgrades in the Las Vegas SuperStore.

As Larry indicated earlier, our priorities as we look ahead to 2023 are to build scale and increase profitability and operating cash flow. Everything we're doing is aimed at building the strongest Planet 13 possible without the need for any additional outside capital.

With that, I want to thank everyone for participating on the call. I’ll now ask the operator to open the line for questions. Thank you.

[Operator]

Thank you. At this time, we will be conducting a question-and-answer session with the covering analysts. [Operator Instructions] The first question is from Doug Cooper with Beacon Securities. Please proceed.

[Doug Cooper, Beacon Securities]

Good afternoon, everybody. Just sort of quick one off the top -- just on the press release, it says Q1 2023 adjusted EBITDA loss of $680,000. And then if I scroll down the actual, I think it's a $680,000 positive EBITDA. I just want to make sure I'm got everything right here.

[Larry Scheffler, Co-Chairman & Co-CEO]

Let me take a look at that, Doug. Enough of it to look at it, so I'm probably was right, but give me a sec. Keep on -- keep going with your question…

[Doug Cooper, Beacon Securities]

I guess my only question is on the balance sheet, you guys talked about, obviously, preservation of capital as much as possible. Can you just talk about the remaining committed CapEx, I guess for Illinois and Florida and maybe Nevada to -- we'll call it, from an adjusted cash perspective, how much should we think you have left after those committed to CapEx requirements?

[Larry Scheffler, Co-Chairman & Co-CEO]

Yes. So we'll start with Illinois. We are budgeting another $2.5 million on the build out of that location and hope to have it open before the end of this year. I think the plan is to have it open sometime in early Q4. And so, that should take care of the CapEx [indiscernible] obviously have some working capital that we need to spend to ramp up prior to that opening, but not CapEx. The SuperStore, we have a few more upgrades we're going to have to do with that facility to facilitate some additional tenants that maybe moving in and talking about the potential for that consumption launch at some point as well as part of that. So I think we're budgeted to make sure we have $3 million for that.

[Doug Cooper, Beacon Securities]

Sorry. How much?

[Larry Scheffler, Co-Chairman & Co-CEO]

$2.5 million to $3 million for that?

[Doug Cooper, Beacon Securities]

2.5% to 3%. Okay. Yes.

[Larry Scheffler, Co-Chairman & Co-CEO]

And then Florida, we -- our target is probably $750,000 per store, retail store that we're going to open. Obviously, we have six under -- or approximately six. I can't remember if we've announced all six or not, but under lease right now that we're working on the build out of those. And then it comes down to the cultivation facility in order to feed those stores. Again, we are looking at alternatives to make sure we can get to market quicker and without spending any cash if we can on it, but it's failing that. We will have to spend I want to say near term probably between $5 million and $10 million. And if we do a full build out of the building that we have on-site there that will give us sort of I think 45,000, 50,000 square foot facility. We could be in the $15 million to $20 million in total. We hope not to spend that and my goal is not to spend that cash. But worst case scenario [indiscernible] our commitment to the MMU [indiscernible].

[Dennis Logan, CFO]

Let me -- let if I can, let me just -- let me just add on to the money spent on Phase 4 at Planet 13, Las Vegas. It is to extend the hallway down another 100 feet to the other end of the building with another grand entrance and do the gray shell for the -- we've announced at the Cannabis Museum that will start work here in a week. And in about six months, they'll be open for its 14,000 square foot two story interactive museum. Along with that, we'll have a two retail center that we'll be able to lease out in the new hallway also. So all of that will add even more traffic as the museum opens along with the retail centers and the added income of minimum about $200,000 a year just in lease space of the museum.

[Doug Cooper, Beacon Securities]

Okay. So just in a worst case scenario, if I can call it that, Dennis, between Illinois and Nevada, let's call it 5% plus the build out of the Florida plus that's 4.5% that gets me to 9.5% call it $10 million and then at the upper end of $20 million for the wholesale or for the cultivation of $20 million, that's let's call it $30 million it's kind of worst case scenario.

[Dennis Logan, CFO]

Yes, worst case scenario, Doug, for sure, I expect it to be much less than that, significantly less than that as we go forward here.

[Larry Scheffler, Co-Chairman & Co-CEO]

Yes, let me just say one other thing that is positive, but we have our site in [indiscernible] may grow listed now for just under $9 million even we sold between $8 million or $9 million and then we've got interested people looking at it right now that's just one more added thing that will go into our into our bank account. [Multiple Speakers] at the Illinois dispensary, we'll have spent $5 million on it and we'll do a sale leaseback on that. So we can recapture a bunch of that capital as well.

[Doug Cooper, Beacon Securities]

And sorry, Larry, just on-site you just referred to [indiscernible] Nevada if that's or so?

[Larry Scheffler, Co-Chairman & Co-CEO]

No, that's the one in Colinga. Colinga. Next...

[Doug Cooper, Beacon Securities]

Yes. Sorry. Where's that? Colinga?

[Larry Scheffler, Co-Chairman & Co-CEO]

That's in Colinga, California about an hour and a half southwest of Fresno.

[Doug Cooper, Beacon Securities]

And sorry, what is there?

[Larry Scheffler, Co-Chairman & Co-CEO]

There is a 35000 square foot indoor grow facility.

[Dennis Logan, CFO]

And that's our California cultivation.

[Doug Cooper, Beacon Securities]

Okay. And you're doing say leaseback on that or sorry?

[Larry Scheffler, Co-Chairman & Co-CEO]

Yes. Sale lease back.

[Doug Cooper, Beacon Securities]

Okay, got it.

[Larry Scheffler, Co-Chairman & Co-CEO]

Again, same as Chicago that we said.

[Doug Cooper, Beacon Securities]

Got it. Okay. And so the Illinois, what should we expect breakeven EBITDA level? What kind of -- how long do you think to ramp up to sort of 15% EBITDA margin? What level of sales would you need to get to that? And when could we expect that in your budget?

[Dennis Logan, CFO]

Well, we've had a lot of internal debates on what that store will do, Doug. I mean, we're closer to the Nevada -- sorry, the Wisconsin, Illinois border than any of our competitors and closer to the highway than some of the best performing stores in that state. When we initially put the plan together, we were forecasting in the $10 million to $15 million in revenue annually, we think that's a very, very conservative number likely be double or triple that to the extent they'll take us to ramp up. I think we should have that store ramped up and revving on all engines sort of by April, May of 2024, assuming we get it open in early to mid Q4. So call it three to four months to get it open and stabilized and then by that point in April, I think we're getting to the EBITDA margins you're talking about and the revenue run rate north of $15 million annually.

[Doug Cooper, Beacon Securities]

Okay. And gross margin, do you think it would be sort of similar to California, low 50% range?

A - Dennis Logan

Yes, because it is a pure retail play, there's no vertical integration there.

[Doug Cooper, Beacon Securities]

Okay. So that's it for me, except just to confirm the EBITDA in the quarter was positive $0.68 after the adjustments. Is that correct?

[Larry Scheffler, Co-Chairman & Co-CEO]

Let me come back to you, Doug. I'm going to answer your question. So give me minute.

[Doug Cooper, Beacon Securities]

Well, we just look at the press release, total revenue, 24.9% gross profit [indiscernible]

[Dennis Logan, CFO]

Yes, the press release is correct.

[Doug Cooper, Beacon Securities]

Except the headline.

[Larry Scheffler, Co-Chairman & Co-CEO]

While he's looking that up [indiscernible] I'm hoping for $15 million in Chicago. [Multiple Speakers]

[Doug Cooper, Beacon Securities]

Conservatively, we –

[Larry Scheffler, Co-Chairman & Co-CEO]

Yes, yes, not – and that's what I want to say, Dennis. I agree with you conservatively. You got to remember the number one dispensary in Illinois is seven miles farther south of us on the freeway. And seven miles away from the freeway, which is rise. And they are supposedly our inside information about $104 million last year. So that is very conservative in my mind also. I'm much more positive on how much closer we are to the Milwaukee metro area and the lack of competitiveness of other dispensaries where we decided to put ours right on the freeway at a cloverleaf.

[Doug Cooper, Beacon Securities]

And Larry, where did you say that rise of dispensary was?

[Larry Scheffler, Co-Chairman & Co-CEO]

That's seven miles further south of us in Waukegan, seven miles south of Waukegan on the freeway and seven miles west of the freeway in Mondale, owned by GTI.

[Doug Cooper, Beacon Securities]

Yes. Okay. I think that's it for me.

[Dennis Logan, CFO]

Yes. Doug, that bullet points in the press release as it disagrees with what's in the table. The table is correct.

[Doug Cooper, Beacon Securities]

Okay. Perfect. Thanks guys.

[Operator]

Okay. We have no further questions in queue. We have reached the end of the question-and-answer session. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.