Gold Flora Corporation (PNK:GRAM) Q2 2024 Earnings Call Transcript

Gold Flora Corporation (PNK:GRAM) Q2 2024 Earnings Call Transcript August 14, 2024

Pablo Zuanic – Zuanic & Associates:

Operator: Good afternoon, everyone. Welcome to Gold Flora Corporation’s Second Quarter 2024 Conference Call for the Three-month period ended June 30, 2024. Listeners are reminded that certain matters discussed in today’s conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties relating to Gold Flora’s future financial or business performance. Any such forward-looking information is based on certain assumptions and subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information, including the risk factors detailed in Gold Flora’s continuous disclosure filings that can be accessed via the U.S. Securities and Exchange Commission website at www.sec.gov or SEDAR at www.sedar.com.

Forward-looking information provided in this call speaks only as of the date of this call and is based on the plan, belief, estimate, projection, expectation, opinions, and assumptions of management as of today’s date. There can be no assurance that forward-looking information will prove to be accurate and you should not place undue reliance on forward-looking information. Gold Flora undertakes no obligation to update such forward-looking information, whether as a result of new information, future events, or otherwise except as expressly required by applicable law. In addition, during the course of this conference call, there may be references to certain non-GAAP financial measures, including references to adjusted EBITDA and adjusted gross profit, which do not have any standard meaning under GAAP and therefore may not be comparable to similar measures presented by other companies.

For more information about both forward-looking information and non-GAAP financial measures, including a reconciliation of adjusted EBITDA to the most directly comparable GAAP measure, please refer to the company’s annual report on Form 10-K, including management’s discussion and analysis, available on the SEC’s website and SEDAR. I would like to remind everyone that this call is being recorded today, Wednesday, August 14, 2024. I will now hand the call over to Ms. Laurie Holcomb, Chief Executive Officer of Gold Flora. Please go ahead, Ms. Holcomb.

Laurie Holcomb : Thank you, Operator, and thank you to everyone joining us today. During today’s call, I will provide a high-level overview of our recent successes and strategic goals. Then I will turn the call over to Marshall Minor, our Chief Financial Officer, who will review our second quarter 2024 financial results in further detail, following which we’ll open the call to questions. Through the first half of 2024, we have demonstrated the competitive advantages that our vertically integrated operations provide. As we grow and optimize our cultivation capacity, enhance our brand positioning, and continue to drive towards profitability across each of our operating segments, all while successfully navigating and leading the California cannabis market.

Profitable growth and sustainable cash flow remain our core objectives. Our Q2 2024 revenue declined slightly to $31.6 million from $32.2 million in Q1. As is typical in our industry, the second quarter reflects a normal seasonal slowdown versus a generally robust first quarter. Q2 gross profit was $7.2 million, representing 23% gross margin, compared with $10 million or 31%, respectively for Q1. Adjusted gross profit improved by 4 percent to $18.2 million, or a 57% adjusted gross margin, compared with $17.4 million or 54% respectively, in Q1 of 2024. An important contribution to adjusted gross margin improvement was a planned increase in our CPG segment. We remain focused on scaling our operations and growing profitably by optimizing production of our existing infrastructure and fully leveraging the benefit of our vertical integration by increasing the portion of cultivated product that moves through our CPG pipeline.

Complementing this, we’ve reached a significant milestone with our first party brands now representing over 30% of our total retail revenue. Subsequent to quarter end, we have continued to see this metric hold steady. This reflects the strength of our brands in that they can replace well-known third-party brands in our stores without jeopardizing revenue. This dynamic is now being demonstrated as our brands are gaining shelf space at third-party dispensaries. One of our brands in particular that is generating strong momentum with consumers is Gramlin, which was launched in March of this year. It is currently the fifth fastest growing brand per BDSA retail sales tracking data and is a rising star in our brand portfolio. Building on our initial flower line launch, we have further expanded Gramlin to include all-in-one vapes and infused pre-rolls and, most recently, one-gram all-in-one live rosin vapes.

Our CPG pipeline plays an important role in our growth plans as it provides reliable, captive, and independent sales channels while also helping optimize manufacturing and cultivation through not only our growing demand but helping to eliminate typical volatility. We can plan better, price better, and compete better, and make more money. As discussed previously, our rosin category development has the potential to play a significant role in the growth of our consumer goods division while also allowing us to optimize cultivation and manufacturing operations. Over the first half of 2024, we implemented the resources for in-house live rosin production as we expanded our production and manufacturing capabilities. We are thrilled to introduce this all-in-one vape as our first rosin offering produced with 100% indoor grown hash rosin oil made possible by our skilled vertical infrastructure and ability to harvest fresh frozen indoor material to produce a premium rosin product at scale.

We launched Gramlin rosin vapes across our Gold Flora Retail Network on July 10th and now, as of August, have expanded this offering into the wholesale market, beginning with selected strategic third-party retailers. We plan to further expand our rosin production capacity and product offerings over the coming quarters, which will increase our ability to generate high margin revenue. Gramlin was born out of our team’s ability to identify and act on opportunities we see in the market, specifically high-volume consumers who don’t want to sacrifice quality and flavor for price. With our scale and infrastructure, we can deliver the premium indoor grown flower consumers are looking for at an attractive price point few others could match. Gramlin products are now available in all 16 Gold Flora owned retail locations and at more than 250 third-party retailers across the state distributed by our stately distribution team.

Our cultivation and extraction team are continuously innovating and exploring new terpene profiles so consumers can expect regular introductions of exciting new strains all produced in-house. Gramlin is a testament to our ability to respond rapidly to consumer demands and successfully bring new products to market, and we are thrilled with the customer response we’ve experienced since launch. To support Gramlin and keep up with demand we are seeing across our product portfolio, we’ve entered into agreements with Innovative Industrial Properties to lease an additional 53,000 square feet of cultivation canopy at two facilities. These facilities are located near our Desert Hot Springs campus and will expand our cultivation footprint to 160,000 square feet of canopy and add approximately 25,000 pounds of annual flower production.

These are turnkey facilities that will be delivered, ready to operate, and will enable us to meet the growing and significant demand for our products. The associated leases will commence upon the receipt of all necessary state and local licenses, which we anticipate will occur during the first half of 2025. In addition to expanding our cultivation footprint, we continue to focus on optimizing our current footprint by refining our cultivation techniques to improving yields and flower quality while also expanding our own use of our proprietary strains to capture greater margins. As a result of these efforts, we have increased our flower harvest by approximately 14% compared to Q1 2024 and are currently harvesting an average of over 2,900 pounds per month.

As highlighted during last quarter’s conference call, we anticipate seeing the full impact of these improvements in the second half of this year. These efforts underscore our commitment to profitable growth and market leadership as we continue to introduce disruptive brands and products made exclusively from the high-quality unique strains that we grow ourselves at our premier indoor cultivation facilities. This ability and the resources in which we have invested to be able to accomplish this at scale are unique in the market and allow us to offer products at attractive prices for consumers while capturing margins throughout leveraging the economies of scale. We expect to see the benefit of our expanded enhanced cultivation capacity in the second half of the year and anticipate this future growth will have a positive impact on the bottom line to help achieve our goal of sustainable cash flow.

Now I’d like to turn the call over to Marshall who will discuss the financial results of the quarter. Thank you. Marshall?

Marshall Minor : Thank you, Laurie, and good afternoon, everyone. As a reminder, the results I will be going over today can be found in our financial statements and MD&A contained in our quarterly report on Form 10-Q. All figures are in U.S. dollars. It should be noted that we are a U.S. registrant with the SEC and such our financial statements are prepared on a U.S. GAAP basis. Revenue for the second quarter of 2024 was $31.6 million compared to $32.2 million in Q1 of 2024. Revenue for Q2 was comprised of $26.2 million of retail revenue and $5.5 million of wholesale revenue. The small sequential decrease in revenue was primarily a result of the slower seasonality of the second quarter compared to the first quarter. Gross profit in Q2 2024 was $7.2 million or 23% gross margin compared to $10 million or 31% in Q1 2024.

Adjusted gross profit for the second quarter which excludes operating expenses related to U.S. Tax Code 280E and depreciation and amortization adjustment was $18.2 million or 57% adjusted gross margin compared to $17.4 million or 54% for Q1 respectively. Q2 net loss was $24 million compared to a net loss of $13.7 million in Q1 2024. Adjusted EBITDA loss for Q2 was approximately $2 million compared to adjusted EBITDA loss of $1.8 million in Q1 of 2024. Adjusted EBITDA continues to be impacted by the upfront costs incurred in bringing our new flower rooms online. These expenses are expected to be to stabilize as the new rooms are now on a normal weekly harvest cycle and the cost to operate is spread across a broader inventory for COGS base. We ended the quarter with cash and equivalents of $10.7 million as of June 30, 2024.

With that, I would like to turn the call back over to Laurie.

Laurie Holcomb : Thank you, Marshall. Our platform sets us apart in California due to its unique fully integrated operations and strategic advantages. By starting with our top tier indoor cultivation, we can swiftly capitalize on market opportunities while still maintaining full control over our manufacturing and distribution processes which is further strengthened by our established retail presence and limited license, high value locations, and our impactful brands. We’ve developed our comprehensive vertical integrated platform over many years and it is the key to our success. It ensures we maintain our discipline, focus on building sustainable, profitable revenue streams rather than chasing bulk sales. This deliberate strategy positions us as a leading force in California and with our expertise, integrated operations, and strong infrastructure, we are well equipped to enhance our leadership role and achieve positive cash flow moving forward.

With that, I would like to open the call to questions. Operator, please go ahead.

Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question will be coming from Jesse Redmond.

Jesse Redmond: Hi, Laurie. Hi, Marshall. I’ve been following the headset data and seeing the strong growth of Gramlin. Can you talk a bit more about the traction that you’re getting there with the brand both in Gold Flora own stores, and distributing to other stores?

Laurie Holcomb : Yeah. Hi, Jesse. Thanks for the question. So, I believe in last quarter, we talked about our first-party brand sales. In our 16 retail stores at that point, we were doing about 20% first-party sales in our own stores. Today, finishing Q2, we were at 30%. Today, we’re tracking closer to 34%. So, happy about the adoption of Gramlin in our first-party stores. But we’ve also had real success in third-party dispensaries. So, a few statistics from headset. We’re the number 29 brand overall, six months into market. We are the number 16 big brand, three months into market. We’re the number eight all-in-one brand, three months into market. And as of today, we are available in 300 dispensaries outside of our own dispensary network. So, it is one of the fastest-growing brands in California. And we are thrilled with the adoption — the consumer adoption, and the products that we’re putting out.

Jesse Redmond: Great. And I had a question also on the expense side. It looks like just eyeballing it that SG&A might have increased about 10% sequentially. You talked about this being in part due to bringing on the new flower rooms in Desert Hot Springs. Can you talk a little bit about where you are in this SG&A process and how we should think about modeling that in the second half of the year?

Marshall Minor : Yeah. Thanks, Jesse. From an expense standpoint, yeah. Part of the expenses were just ramping up additional labor since there’s obviously some additional operating costs with having those flower rooms now online. A lot of those costs are just now being kind of worked through the flower as we’re kind of bringing that flower down, packaging, et cetera. I think we’ll start seeing kind of a decrease from a percentage basis going forward. Like I said, a lot of this is kind of the ramp up from last year into the first half of this year. So, we’re getting more efficient with these costs. And going forward, yeah, I think that some of these costs should decrease.

Jesse Redmond: Great. Thanks very much.

Laurie Holcomb : Thanks, Jesse.

Operator: Next question in line will be coming from [indiscernible].

Unidentified Analyst: Hi there. Good afternoon. Thank you for the question. So, the first question I have is regarding just EBITDA loss for the quarter. Looking ahead, what are you guys expecting in terms of the movement in this margin going forward, given that you guys have recently entered into new leases to increase the cultivation footprint? Will this activity kind of cause a further drag on your operating expenses? Just trying to think about how we should think about just EBITDA going forward for the rest of the year. Thank you.

Marshall Minor : Yeah. So, from the leases, the new leases shouldn’t have a material impact in the near term as the leases do not actually come into play until probably the first to second half of next year. The facilities that are coming online are kind of turnkey. There’s no kind of OpEx or kind of any upfront capital delivered. The buildings are delivered right now. From an adjusted EBITDA perspective, we are still working towards a positive trend of going to positive EBITDA, positive free cash flow by year-end. That’s our goal, and that’s what we’re working every day to achieve.

Unidentified Analyst: Great. Thank you. And just a second one from me here on the success of Gramlin Launch. Can you comment on the stickiness of the brand and how you’re thinking about capitalizing off this momentum going forward? Are you guys expecting the stickiness to continue to support the growth of the brand, or do you reckon you need additional product launches going forward to continue on this momentum? Thank you.

Laurie Holcomb : Yeah, thank you for the question. So, we believe that California brands are really going to win CPG. We leaned into Gramlin as a target core audience of 21 to 35-year-old heavy smoker. And given the economy today, it needs to be high-quality products at the right price point. And we just hit the market with the right products, the right time, and the right branding. We do anticipate potentially entering into some licensing agreements to take Gramlin and the brand out of state. We’ve not done that yet, but due to the recent success, we have been contacted about some opportunities. So, we look forward to that. And then I think the second question was additional product launches. Right now in California, between flour, vapes, and pre-rolls that accounts for close to 80% of everything on the shelf, we have all three of those.

And then we recently launched a live rosin all-in-one vape. So, between those four product categories, I think we’ve got enough product to continue our growth and execute on those products at hand.

Unidentified Analyst: Thank you so much.

Laurie Holcomb : Thank you.

Operator: [Operator Instructions] Last question in line will be coming from Pablo Zuanic.

Pablo Zuanic: Thank you. Laurie, I guess just from a strategic point of view, given all the production ramp up you have in the second half, how much pressure does that put in in terms of having to buy or open new stores? Because you’re already at 34% on brands in your retail stores, which is a great number, but I think it’s about a threshold you had talked about before. So, as you bring in more capacity, you need to open new stores. And correct me if I’m wrong, but how do you think about that and how do you balance that?

Marshall Minor : Pablo, great question. From our standpoint, we’re hovering around 30% of first-party products in our own stores. We do have another store that is in development, and there’s other stores within our own chain. The 30% is kind of an average across the stores. There are other stores that within our chain that we can increase that number with existing products. A big part of the growth with the Gramlin brand is also attacking and selling into third-party retail locations. I think we’re only into roughly 250, around 300 kind of active stores right now. We expect that to double at least over the coming months. So, that’s where a bulk of the CPG product will go. We will evaluate strategically other retail locations within California.

Pablo Zuanic: Right. And then, as you expand, remind us as you expand the wholesale side of the business, third-party stores, how are you managing accounts receivable? Or that’s all, I think if you can just give some color on that. I know it goes through your own distribution arm, but just a reminder of how you manage that.

Marshall Minor : We’re just very prudent and selective of the stores that we are selling to. There are a lot of, I would say, bad actors out in the markets. We tend to not target those. We are targeting kind of the companies that have centralized buying or have a fair number of stores under their umbrella. So, that’s still kind of an untapped market from that perspective. We don’t give very long-term. The terms that we do give are, like I said, the strategic partners out there that have multi-chains that are well-known in the industry that we have been partnership relationships with. Our AR balances and aging hasn’t significantly changed since we launched Gramlin.

Pablo Zuanic: Right. Right.

Operator: There are no further questions at this time. I’d now like to turn the call back over to Ms. Laurie Holcomb for final closing comments.

Laurie Holcomb : Thank you to everyone who joined us on the call today. We appreciate your continued support. I also wanted to express our appreciation to all of our Gold Flora members for their continued hard work and dedication. I look forward to sharing our progress over the coming months. Thank you, and have a good day.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.