Planet 13 Holdings Inc

CNSX:PLTH

Earnings Call Transcript 2022-Q4

[Operator]

Good evening, ladies and gentlemen, and welcome to today’s Planet 13 Fourth 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 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' fourth quarter 2022 financial results were released today. The press release, the company’s quarterly report 10-K, including the MD&A and financial statements are available on the SEC’s 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 and does not assume any liability for disclosure related to any company 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 to the most directly comparable GAAP measures, please refer to today’s press release posted on our website. Planet 13’s financial statements are presented in US dollars and the results discussed during this call are in US dollars unless otherwise indicated.

On the call today, we have Larry Scheffler, Co-Chairman and Co-CEO; Bob Groesbeck, Co-Chairman and Co-CEO; Dennis Logan, CFO.

I’ll now pass the call over to Larry Scheffler, Co-Chairman and Co-CEO of Planet 13 Holdings.

[Larry Scheffler, Co-CEO]

Good afternoon everyone and thank you for participating in our fourth quarter and full year call.

I'll be discussing our performance in Nevada and California, Dennis will discuss our financial performance, and Bob will provide an update on our growth initiatives and plan for 2023 later on the call.

2022 was a challenging year. Across the economy, consumers dealt with dual pressures of high inflation and rising interest rates that took money out of their pockets.

We've seen the impact of this on the other cannabis companies that have already reported as well as many companies that are focused on consumer, discretionary spending.

Turning to the impact on our individual states. In Nevada, the trends we've all seen -- we've seen all year have started to stabilize with pricing compression slowing and Nevada state-wide sales relatively flat from Q3 to Q4. We've also seen some of the more marginal dispensaries start to go out of business in Q4, reducing the risk for future competition and pricing pressure. We're optimistic that this is a sustaining change in the trend line.

Despite all of the new competition over the last couple of quarters, we've been able to maintain our share in Nevada sales at 8.5% for the quarter and 9% for the full year, in line with our long-term goals of between 8% and 10%.

We expect this to continue to have some fluctuations quarter-to-quarter from Q2 and Q3 being traditionally stronger due to higher tourist traffic, but fully intend to continue to set this benchmark on our retail operations in the state.

In Q4, in Nevada, we generated $14 million from the SuperStore, $2 million from curbside and delivery, $2 million from Medizin, $2 million from other Nevada wholesale -- from Nevada wholesale and other. Total Nevada revenue was $20 million compared to $20.5 million in Q3.

For the full year, we generated $80.6 million from Nevada retail companies compared to $107.5 million in 2021. This decrease was caused by the material weakening of the consumer and over 20% decline in equivalent per gram cannabis prices, as well as reduction in the number of California tourists in Las Vegas.

On the wholesale side, we took advantage of the new doors opening in the state over the course of the year and our incredible product portfolio to grow wholesale by 26% year-over-year. This strength continues with December and January being our two highest months ever and [Indiscernible] performing very well on a per day basis.

I'll call out specifically the increased sales of our Medizin Flower brand, which has seen strong growth and see the completion of our cultivation expansion in September of 2022. Through the fourth quarter and 2022, we continued to enhance our portfolio and bring top cannabis brands and products to consumers.

Per BSA, we grew Medizin to the number two flower brand in Q4, HaHa to the number five cannabis brand, Dreamland Chocolates to the number one chocolate brand, and TRENDI to the number three concentrate and number four vape brand in the state. This is an impressive performance for our house of brands and a testimony to our cultivation production and sales staff.

Looking ahead, in Nevada, we're optimistic that the trend we saw in the fourth quarter with the normalization on pricing as a sign of the bottom of the market and so far through Q1 2023, that appears to be the case with pricing and sales stabilizing. The obvious caveat is that is -- that's what happens with a wider macroenvironment.

We've seen pressure in consumer wallets resulting in consumers trading down to lower cost options or shopping in bulk to receive more discounts. If inflation, interest rates in the economy continue to take money out of consumers' pockets, it could lead to further sales pressure.

Turning to California. In Q4, we generated $4.9 million of revenue, which is a slight reduction as a result of typical seasonality, but a massive increase of 88% over the same period in 2021, mainly driven by the expansion of wholesale in California from our acquisition some Next Green Wave. The same thing can be seen looking at the full year. Through 2021, we generated $18.1 million compared to $5 million in 2021.

Looking forward to California, our operations continue to mature and gain momentum. We are also continuing to expand distribution to our wholesale portfolio. We obviously don't expect to replicate the success we've had in Nevada and become a top five selling product in every category in California. But we're confident and have seen our products at good velocity and are welcome addition to a third-party shelves.

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 today's call are US dollars, unless stated specifically otherwise.

In Q4, we generated $24.8 million in revenue compared to $25.6 million in Q3, that's a 3% decline quarter-over-quarter. As Larry discussed, the significant declines in pricing started to bottom in Q4, while unit sales volume has trended above that of Q3, enabling the company to offset some of the increased pricing pressure on operating costs that we have experienced during the quarter and during the year ended December 31st, 2022. Q4 has historically been our slowest quarter and the shift in the pricing environment during the quarter was welcome to market developments.

Looking at 2023, we expect revenue to be relatively flat for the first half of the year with growth towards the back end of the year, driven by new asset coming online and continued growth from our wholesale operations in both Nevada and California.

In Q4 2022, gross margin increased sequentially to 43% from 41.2% in Q3 2022. The increase was driven by gains in efficiency and yields at our cultivation facilities, along with an increase in the shelf space and sell-through rate of our house brands at our own dispensaries.

Over the course of 2023, we expect continued incremental improvement in gross profit, especially in California. 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 in both California and Nevada.

Gross margins at our retail continued to be in the high 50% range in Las Vegas and the low 50% range in California. We continue to target a long-term 50% or higher gross margin for all of our retail operations and we expect gains from vertical integration to offset some of the pricing pressures at the retail level.

Sales and marketing expense for the quarter was $1 million, up from $938,000 in Q3 and down substantially from the $1.8 million in Q4 2021, for the full year, $3.5 million compared to $6 million in 2021.

We continue to focus our marketing activities on areas that are direct sales drivers such as events and activities and celebrity appearances where we can readily measure the incremental sales generated in the return on investment from this targeted spending.

The company spent $12.5 million on G&A expenses in the quarter, down significantly from the $15,7 million in Q4 of 2021. Across the organization, we are doing a good job of controlling our costs and improving our efficiency.

For the full year, G&A was $49.3 m compared to $59.9 million in 2021. The improvements in sales and marketing and G&A are clear signs of our focus on cost control and cash flow.

This continues to be a priority for us in 2023, becoming a leaner, more efficient company that can propel future growth and most importantly, generate sustainable cash flow despite the unfair -- what we consider unfair 280E tax treatment.

During the quarter, we also took a $32.7 million impairment charge related to our cultivation assets in California. As we've seen across the industry, the change in valuations and the decrease in wholesale pricing in the California market led us to a revaluation of the assets on our and several of our competitors' balance sheets leading to this impairment charge. This impairment charge reduces the carrying value of the goodwill on our balance sheet to zero, but does not impact our cash flow or business fundamentals.

In 2023, we generated $3.8 million in positive operating cash flow, while remaining current on our tax -- on our taxes payable balance. We've done this while supporting the build out of Florida and Illinois, which are both still pre-revenue. It's a testament to our individual state-level profitability in Nevada and working towards that in California. As we increase the scale of our operations and generate more revenue, we expect to improve operating leverage and cash flow.

As of December 31st, 2022, the company had a cash balance of $52 million and no debt. In 2022, we spent approximately $14.1 million on CapEx between our Nevada cultivation facility expansion, which was completed during Q4 and the build out of our Florida operations.

As we've discussed, our priorities as we look ahead to 2023 are to build scale and increase profitability and operating cash flow. We are focused on the continued build out of Florida, as well as focusing on our Illinois dispensary, and looking for other profitable standalone opportunities that will increase prior to team scale.

We will be opportunistic in managing the CapEx requirements 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, generating cash -- positive cash flow, and being debt-free gives us flexibility to weather the current storm that other cannabis operators do not have such luxury doing.

And with that, I'll turn it over to Bob.

[Robert Groesbeck, Co-CEO]

Thank you, Dennis and good afternoon everyone. Throughout 2022, we took steps to add scale to the business. We've gone from essentially a single-state operator to a vertically-integrated multi-state operator with a lot of growth ahead.

Looking at our various growth projects. In Illinois, for instance, we're making significant progress. In February of this year, we purchased the dispensary location and started renovations. We also purchased the remaining 51% ownership in February, making the Illinois dispensary now 100% owned by Planet 13.

We are very excited about the prospects for this dispensary. Its location in Waukegan and a prominent shopping center and beside a large casino project, will ensure built-in customer foot traffic.

The store is similar to our neighborhood style stores with a smaller footprint and lower operating expense, yet still offering the unique customer experience that Planet 13 is known for. We are targeting and opening for later this year.

We've also begun discussions with many different producers in the state to ensure we get competitive pricing and diverse inventory selection. We don't see any issues in that regard with not being vertically integrated. With so many MSOs in the state, there's a lot of competition and we believe we can ensure a steady supply at attractive prices.

Turning to Nevada, we are provisionally approved for consumption allowance on December 5th. We are working closely with the regulators to craft our plan and are exploring all options including working with partners to lower the CapEx and operating costs involved with the lounge.

This is a new and exciting frontier the cannabis industry and alongside our various stakeholders, we are working to figure out the best path forward that exceeds everyone's expectations and delivers the highest return on investment for Planet 13.

In Florida, we purchased our cultivation campus in July. We've been building out a focused hyper-efficient cultivation facility, aimed at growing high quality flower that is cost competitive.

Concurrent with building out the facility, we've been exploring opportunities to take on leases from other companies as a way to speed our time-to-market increase our long-term supply of edibles, vapes, and other manufactured products.

We signed leases for four dispensary so far, all of them in good locations, with easy access, good parking, and very reasonable lease rates. We expect all of these dispensaries to have strong four-wall economics once they are up and running and very low fixed costs. We expect all six of our initial dispensaries to be ready when our cultivation is online, and we're able to fully stock shelf.

Let's look back at 2022 for just a moment and I'll address the three goals that we set at the beginning of the year and where we ended up. Our first goal, of course, was to maintain the 8% to 12% of Nevada retail sales and continue to grow wholesale share in the state, while executing on accretive and diversified revenue opportunities.

Looking at the year as a whole, we have maintained a 9% share in the Nevada retail market and our wholesale revenue has continued to expand at 25% for the full year. We completed our belt cultivation expansion as indicated previously and have made progress on several opportunities to increase utilization of the SuperStore, include getting a consumption allowance approved and opened and other third-party shop-in-shop concepts.

Unfortunately, we've seen an industry-wide slowdown in sales and reduction in average unit price, which has limited to revenue in Nevada. But under the circumstances, all-in-all, we performed well throughout 2022.

We are optimistic that this pricing pressure has stabilized and that we can grow revenue in Nevada in 2023 and continue to maintain that 8% to 12% margin state-wide from our two dispensaries.

With respect to the second goal we've set for ourselves, we were looking to improve profitability through increased sales and operating leverage at our expense in California, increased vertical integration, and enter into profitable wholesale operations.

Throughout 2022, we saw progress on all fronts. We successfully entered into the California wholesale operations and generated $3.1 million in Q4 alone. Our revenue on the retail side in California increased $9.8 million in 2022 compared to $5 million in 2021. We believe we can continue to grow those numbers in 2023.

Over the course of the year, we've also drove margin expansion in California through better utilization rates at our wholesale facility, increased vertical integration at the OC store, and more efficient staffing.

Our third target at the start of the year was making progress on operations in Florida to drive growth and to open our doors in Florida in 2023. On this front, progress has been slower than we would have liked. We've attempted to speed-up the path to market in a cost-efficient way, including taking over lease cultivation facilities, while building our premium-focused cultivation operation.

We could continue with our plan to build out a cultivation facility that will be competitive long-term from an efficiency and quality perspective, but have had some of our lease opportunities fall through at the last minute.

Overall, despite the difficulties facing the cannabis industry throughout the United States, we've been effective in our goal to meet the objectives that we set. We have generated meaningful expansion of sales on our own brands and have made progress towards the expansion of Planet 13 in both Florida and Illinois.

2023 will be important here in the development of Planet 13. We'll take a major step towards being a scaled multistate operator with revenue generating retail in four states and a full vertical operation in three of those states. We are also seeing more and more opportunities to add assets to the portfolio from practically nothing that are synergistic with our current footprint.

As we look at 2023, the goal is clear, to serve capital, improve profitability, and increase scale and operating strength to ensure that Planet 13 is one of the companies that makes it through the challenging period, increase the outside benefits available, and long-term for the cannabis industry's best companies.

And with that, I'd like to thank everybody for participating today and I'd ask the operator now to open the lines for questions. Thank you.

[Operator]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]

First question is coming from Bobby Burleson from Canaccord. Please proceed.

[Bobby Burleson, Canaccord]

Hey, thanks for taking my questions. So, I guess this is for either Bob or Larry or both. It looks like some of the tourists data so far this year has gotten better versus last year, at least with the stuff I've seen. And there's also talk about a younger demographic and more international stuff like that. Is that something that you're seeing at the SuperStore? How does that kind of play into your position vis-à-vis the tourist component of your demand?

[Robert Groesbeck, Co-CEO]

Yes. Hi, Bobby, it's Bob. Yes, look, we're really excited. We're seeing traffic upticks. We're seeing convention upticks. That's all positive news. And the type of events that are coming are really exciting. We think we'll complement our facility.

For instance, we've got this weekend, the Sweet 16 and the Final 8 [ph] College Basketball Tournament here in town. We've got one of the largest concerts of the year here at Allegiant Friday Night. And through the balance of the year now we've got F1 coming in, which we think is going to be huge draw later in the year. And with things such as the Super Bowl coming in, and festival season is just starting with EDC and the other large outdoor events like Life is Beautiful.

So, we see a really strong summer and we're excited. The thing that's a bit concerning, of course, is addressed -- is where does the economy go from a macro perspective where as we see the Fed just raised interest rates again yesterday. This all has an impact on the customer and their wallets and their ability to pay.

So, we're going to watch that closely. And as Dennis said, we're going to continue to operate as efficiently as we can. But from a traffic standpoint, we're very encouraged. We think Vegas is on the upswing there.

[Bobby Burleson, Canaccord]

Great. And then it sounds like some other operators are struggling in the state and just wondering how you plan on capitalizing on that? Clearly, you can pick up some share, are there more aggressive things you can do in terms of acquisitions? Or what are your thoughts on this extension of that that seems to get in the way?

[Robert Groesbeck, Co-CEO]

Sure. We're continuing to watch that, Larry, and I feel inquiries and multiple inquiries every week. We've got a lot of stores that are struggling. We think that's going to create some opportunities for us here in the near-term.

Again, it's a function of those operators coming to the realization where the market really stands. And so we stay in touch with them and we're optimistic we'll pick up some solid assets here as a result.

[Larry Scheffler, Co-CEO]

This is Larry. I'll add that the other big benefit for us, even if we want to pick up the assets is getting rid of some of the competition that we'll pick up the customers that are left. We divide between the ones that survive this downturn of dispensaries labelling us.

[Bobby Burleson, Canaccord]

Sure. Well, great. Thanks Bob. Thanks Larry. I'll jump back into the queue.

[Robert Groesbeck, Co-CEO]

Appreciate it, Bobby. Good talking to you.

[Operator]

[Operator Instructions]

The next question is coming from Doug Cooper with Beacon Securities. Please proceed.

[Doug Cooper, Beacon Securities]

Hey, good afternoon, guys. Just let's start on the balance sheet just so I'm clear. So, $53 million I think was Dennis as of December 31st.

[Dennis Logan, CFO]

Correct.

[Doug Cooper, Beacon Securities]

What is the CapEx budget? And just remind me, how much do you have to pay in February to take out the minority interest in the Illinois? And then what is the CapEx expected remaining in Florida and Illinois? Or I guess I'm looking for kind of, pro forma cash number?

[Dennis Logan, CFO]

So, 50 -- kind of $53 million on the balance sheet. If you look at the subsequent to the year end, we spent $2.1 million -- $2.2 million purchasing the land for the Waukegan dispensary. We will likely spend another $2.5 million on the build out of that dispensary. So, we'll be with a $5 million asset there and then we'll do a sale leaseback on that to get some of that cash back. So, I look at that as a temporary out.

And then we had to pay, Frank, $866,000 in cash to buy out the 51% of that license that we didn't own. So, that gives you a summary of where we are in Illinois in terms of the build out there.

I think we have, call it, $3 million to $5 million that we may spend on the SuperStore, expanding the Grand Hallway, and building a gray shelf for another lease opportunity in that space.

And then also, as Bob mentioned, working with regulators on the lounge. We don't intend to spend very much on the lounge and we will take advantage of some of our leasing space into that conversion.

And then the bigger one is Florida, managing aggressively the CapEx spend there. Obviously, we have four leased locations that we haven't started paying lease rates on them yet. I think they kick-in some point in 2023.

And as Bob mentioned, we're looking at opportunities to get into that market faster than what we would otherwise be able to do if we built out on our own, but it will be a scaled building where we can manage that cash outflow. So, I would target no more than $5 million that we've spent in Florida at least in the near-term.

[Doug Cooper, Beacon Securities]

Okay. And Illinois is expected to come on revenue producing in what -- second half obviously, but closer to Q4 and then Florida, you anticipate revenue from there this year?

[Dennis Logan, CFO]

Well, you're correct on Illinois. I think it will be closer to the end of Q3 -- end of Q4, depending we're a little bit ahead of schedule in terms of our construction budget timeline.

Florida, it's really going to depend on the opportunities that we're currently working on. If they come to fruition, it could be sooner. And if they don't, then it will be likely back end of the year into 2024.

[Doug Cooper, Beacon Securities]

Okay. And the dispensary in Illinois given its location next to casino, how many square feet is it, just remind us?

[Dennis Logan, CFO]

Builds on -- build the average square footage, otherwise.

[Robert Groesbeck, Co-CEO]

Yes, we do total building about 8,000 square feet, two levels. First floor dispensary retail gross footprint about 4,000 feet.

[Doug Cooper, Beacon Securities]

Okay. So, what do you anticipate this -- there's like a $10 million opportunity I think in Illinois?

[Dennis Logan, CFO]

I would hope so. I mean that's where we're budgeting in that ballpark. I think it's a great location given it's next to a casino and it's the high traffic down from Wisconsin into Illinois, so we should pick up a bunch of traffic that is currently visiting other dispensaries and pick up all the casino traffic. So, if we can't do $10 million out of that facility, I'd be surprised.

[Larry Scheffler, Co-CEO]

Well, this is Larry, and I guess it depends. Yes, I'll say is to compare it to something, the largest grossing dispensary in the state of Illinois, is 10 miles farther south from Wisconsin border and 10 miles farther west of the Freeway. We're on the freeway across from a Super Walmart next to the casino, next to that amusement park area about 15 minutes away. So, we -- and I would anticipate more in the $20s million, not the $10s million for revenue.

[Dennis Logan, CFO]

That's why I said Larry, if we can't do $10 million, then what are we doing there, right?

[Larry Scheffler, Co-CEO]

Yes, that's exactly right.

[Doug Cooper, Beacon Securities]

Okay. And my last one, just on getting back to Bobby's question on Nevada. How many dispensaries are left now in Nevada, Bob or Larry, given that you implied with a few of maybe shutdown?

[Robert Groesbeck, Co-CEO]

Well, yes, let's say that let me qualify what was said earlier. They haven't shut down, there are some that are on life support, a number of them. The problem is, Doug, the CCB keeps granting licenses. So, we've got a number of dispensaries that continue to prop up, but they've got no market share. And like I said, their livelihood or the length of operation is very, very short, particularly the standalone. They are not as integrated operator, they're basically on fumes right now.

[Doug Cooper, Beacon Securities]

Okay. So, I guess a two-pronged thing. So, if you were -- have some opportunities, would you prefer them to be in Las Vegas itself or would you go outside to [Indiscernible] or some of the other areas of the state? What are you looking -- what are guys looking at like third -- like I know some of the publicly-traded retailers here in Canada now trade 0.2 times sales, public companies?

[Robert Groesbeck, Co-CEO]

Yes. Well, look, as far as location goes, I mean there are a couple of areas here in Clark County that would continue to be attractive for us. Northern Nevada is saturated, but there are a couple of stores up there that I think have some potential.

Obviously, you don't have the population base up there that you have here in Southern Nevada and you don't have anything close to the tourist drop. So, like I said, there are some opportunities up there and if they make sense for us and we can get them at the right price, we'll probably jump on them. But there will be no shortage of opportunities here as we go into this fall.

[Doug Cooper, Beacon Securities]

I can imagine you guys just looking at maybe build up their lease liability and when you get to realize some inventory or something like that?

[Robert Groesbeck, Co-CEO]

Yes, of course.

[Doug Cooper, Beacon Securities]

Okay. That's it for me guys. Thanks very much.

[Robert Groesbeck, Co-CEO]

Thanks Doug. Good talking to you.

[Operator]

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.