Gold Flora Corporation (PNK:GRAM) Q3 2024 Earnings Call Transcript

Gold Flora Corporation (PNK:GRAM) Q3 2024 Earnings Call Transcript November 14, 2024

Operator: Good afternoon, everyone. Welcome to Gold Flora Corporation’s Third Quarter 2024 Conference Call for the three-month period ended September 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 risk and uncertainties relating to Gold Flora’s future financial or business performance. Any such forward-looking information is based on certain assumptions and is subject to risk and uncertainties that could cause actual results to differ materially from historical results or results anticipated with 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 today’s date and is based on the plan, beliefs, estimates, 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 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 measures, please refer to the company’s annual report on Form 10-K, including Management Discussion and Analysis available in the SEC’s website and SEDAR. I would like to remind everyone that this call is being recorded today, Thursday, November 14, 2024. I will now hand over the call to Ms. Laurie Holcomb, Chief Executive Officer for 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 in strategic gold. Then I will turn the call over to Marshall Minor, our Chief Financial Officer, who will review our third quarter 2024 financial results in further detail, following which we’ll open the call to questions. Throughout the quarter, we began to see the positive impact of our optimized cultivation and a successful launch of our Gramlin brand. As we anticipated, our strategic initiatives have delivered real progress in the second half of the year, with sequential improvements in revenue, gross profit, adjusted gross profit and adjusted EBITDA. Our Q3 2024 revenue increased to $32.6 million from $31.6 million in Q2.

Q3 gross profit increased 86% to $13.5 million, a 41% gross margin, compared with $7.2 million of gross profit and 23% gross margin in Q2. Adjusted gross profit improved by 16% to $21.1 million, a 65% adjusted gross margin, compared with $18.2 million adjusted gross profit and a 57% adjusted gross margin in Q2. Importantly, we returned to positive adjusted EBITDA in Q3 with $2.8 million of adjusted EBITDA versus a loss of $2 million in Q2. While the first half of the year was impacted by the capital and operating investments that we made to bring our new flower rooms online, cultivation expenditures have stabilized. We are now completing regular weekly harvest schedules and have more products available for sale. Our focus remains on enhancing our operations to drive profitability by improving the efficiency of our existing infrastructure and fully capitalizing on our vertical integration.

Specifically, we achieved the highest value and consolidated margins by increasing the portion of our cultivated products that are funneled through our CPG pipeline. Our completed cultivation investments have generated a 20% improvement in flower harvest yields compared to Q1 of this year, an important gain for both revenue and costs as every additional gram that we grow lowers our overall cost per pound. The company is realizing economies of scale as we grow to full utilization of our installed capital base. On top of increasing our cultivation yields, we’ve also built out our dedicated rosin production facilities, effectively tripling our production capacity for live rosin products. This significant capability makes us one of the top rosin producers in California.

With rosin production now operating at high capacity utilization, we have driven down our cost of production per unit, allowing us to capture more margin while also providing customers with a superior product at an attractive and competitive price point. We launched our first live rosin, a 1-gram, all-in-one vape during the third quarter, and subsequent to quarter end, we’ve rolled out additional innovative products with positive market reception, including an innovative dual-chamber live rosin vape offering a unique customer experience. Market distinctive Gramlin rosin products are truly homegrown. We produce the hash rosin oil from our own premium indoor flower, which we fresh freeze immediately after harvest and convert into premium live rosin all at the same facility.

Through the end of the year and into 2025, we plan to broaden our family of Gramlin branded products further. Following the successful launch of its initial flower line in first quarter and vapes and pre-rolls in the second quarter, Gramlin has demonstrated incredible success amid a contracting marketplace. While other brands are losing market share amid challenging conditions, Gramlin has experienced remarkable momentum. Since its launch, both the brand and its product categories have consistently gained traction, steadily improving market position and showing impressive growth. Currently, Gramlin is the 10th largest selling California brand and the number one fastest growing cannabis brand according to Headset Sales Tracking Data. Gramlin is currently available at all of our 16 retail stores and at over 350 third-party retailers.

Thanks to our scale and infrastructure, we’re able to offer its premium indoor grown products at a price point that few competitors can match, meeting the demand for quality, consistency and safety while maintaining strong value. Our vertical integration makes this all possible and to support this growth further and also the expansion of Gramlin. As we have previously shared, we have 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 20,000 — 25,000 pounds of new annual flower production.

These are operational turnkey facilities that will be delivered to us ready for use, allowing for us to meet the increasing demand for our products quickly. The leases for these facilities will begin when we obtain all required state and local licenses, which we expect to happen in 2025. As we move into 2025, our focus remains on further optimizing our cost base to increase our profitability. By strategically refining our operations and realizing the full benefits of our expanded rosin capacity, we are positioning ourselves to grow our cultivation profitability, increase margins and evolve towards sustainable cash generation. By leveraging this scale to maximize production, we will strengthen operating performance and drive increased EBITDA and cash flow.

In the quarter, we announced that we’d entered into an agreement with JJ Astor for a $13.15 million loan facility and completed an initial draw of $7.51 million, as well as the second $2 million draw last week. Given the backdrop of the difficult capital raising environment in which the cannabis sector currently operates, we were proud to complete this capital infusion to help us continue to grow our CPG brand presence and market position, further enhancing profitability. As we increase the revenue generated from our cultivation footprint, Gramlin has been a key driver of our growth. As we plan to capitalize on that momentum with additional product launches, profitable growth to deliver sustainable cash flow remains our core objective and we are confident that our efforts will position us for long-term success.

With everything we have accomplished to-date, we are well-equipped to meet the growing demands of the market while achieving a top leadership position in California as a vertically scaled operator. Now, I would 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 that we’ll be going over today can be found in our financial statements and MD&A contained in our quarterly report on Form 10-Q and all figures discussed today are in U.S. dollars. It should be noted that are — that we are a U.S. registrant with the SEC, and as such, our financial statements are prepared on a U.S. GAAP basis. Revenue for the third quarter of 2024 was $32.6 million, a 3% increase, compared to $31.6 million in Q2. Revenue in Q3 was comprised of $24.4 million of retail revenue and $8.2 million of wholesale revenue. The improvement in revenue was primarily a result of increases in wholesale revenue due to increased sales to third-party dispensaries driven by the launch of the Gramlin brand during Q2.

As Laurie mentioned earlier, Gramlin is currently ranked as a top 10 brand in overall retail sales in California, according to Headset. Remarkable growth for a brand launched in late Q1. Gross profit in Q3 2024 was $13.5 million, representing 41% gross margin, compared to $7.2 million or 23% in Q2. Adjusted gross profit for the third quarter, which excludes operating expenses related to U.S. Tax Code 280E and depreciation and amortization adjustments was $21.1 million or 65% adjusted gross margin, compared to $18.2 million or 57% for Q2, respectively. Q3 net loss was $18.9 million, compared to a net loss of $24 million in Q2. Adjusted EBITDA for Q3 was approximately $2.8 million, compared to an adjusted EBITDA loss of $2 million in Q2. Both gross profit margin and adjusted EBITDA have been positively impacted this quarter to the increase of the first-party brand sales, primarily from our Gramlin brand, as well as achieving cost reductions and efficiencies in cultivation.

We ended the quarter with cash and cash equivalents of $10.2 million as of September 30, 2024. With that, I would like to turn the call back over to Laurie.

Laurie Holcomb: Thank you, Marshall. With our premium indoor cultivation, fully integrated operations, collection of 16 geographically strategic dispensaries and strong market share growth, we are increasingly distinguishing ourselves from our peer group in the California market. Our strategic focus on building a fully-equipped platform while maintaining high-quality standards has enabled us to capitalize on recent market opportunities. With full control over our entire value chain, we are maximizing every dollar margin. Our success is driven by sustainable long-term growth, supported by premium cultivation, impactful brands, economies of scale and we’re only just getting started. With that, I would like to open the call to questions. Operator, please go ahead.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from Jesse Redmond of Water Tower Research. Your line is already open.

Jesse Redmond: Hi, Laurie. Hi, Marshall. Congratulations on the positive adjusted EBITDA. I’m curious if you expect this to continue, and specifically, are there any seasonal factors we should think about moving forward that could impact us in future quarters?

Marshall Minor: We do continue to — we do believe that we will continue to see positive growth in adjusted EBITDA. From a seasonality perspective, we don’t see much compared to kind of other competitors in the industry. From our standpoint, you may see some softness at the end of the year, just natural from a retail perspective, but not much.

Jesse Redmond: Any specific trends you’re seeing, Marshall, on the flower site price in California?

Marshall Minor: For us, for indoor flower, we’ve actually seen an increased pricing and demand for our indoor products over the last few months.

Jesse Redmond: Okay. Great. The second question is, it would be great to see you generating positive cash flow. Do you see any catalysts that could get you back to breakeven or better cash flow over the next couple of quarters?

Marshall Minor: We’ll continue to see — we expect to continue to see increased growth in revenue from the CPG growth of Gramlin, additional sales channels, as well as additional product offerings within the Gramlin brand, as well as we did initiate some additional cost cutting measures in Q4. We did do an approximate 10% reduction in payroll. So we are still monitoring other operational efficiencies, but we’ll increase cash flow from both revenue growth from CPG, as well as additional cost savings initiatives.

Jesse Redmond: Great. Thank you very much.

Laurie Holcomb: Thank you, Jesse.

Operator: Your next question comes from Matt Bottomley of Canaccord Genuity. Please go ahead.

Matt Bottomley: Yeah. Good evening, everyone. Thanks for the questions. I just wanted to stay on that theme with respect to some of the pricing trends that we’ve been seeing in the market. I’m just curious, I know that other MSOs or I should say multi-state operators that predominantly don’t have exposure to California are seeing much more of erosion in certain markets where the supply dynamic is a lot more volatile. So I’m just curious where that is in your local regions in the state and if you think that there’s sort of a steady — more of a steady state now that you’re seeing in terms of overall price.

Laurie Holcomb: Yeah. Hi, Matt. So I would say this, it’s really competitive at the retail side. So in consumer packaged goods, we’ve seen the retail side prices come down with promotions and such. And the average basket size is down a little bit, but the number of units that people buying has increased. So that tells me that consumers are trying to get a little bit more for their money given the economy and inflation. So instead of buying maybe five — a pack of five pre-rolls, they may buy an individual pre-roll. So we’re monitoring that closely. When you look at the full wholesale, which Marshall was referring to, I believe the reason, if you look at today, back five years ago, there were approximately 18,000 cultivation licenses in California between annual and provisional.

Today, both those combined, there’s about 4,500. If you just look at the annual and that provisional, it’s probably 3,500. So we’ve had a decrease of over 75% of cultivation licensors in California since inception and I think we’re starting to see not just a bottom for both wholesale for indoor, but stabilization and some price increases.

Matt Bottomley: Perfect. I’ve got it. And then the other question I had is just more on within your own same — within your own store economics, in your retail locations, does the introduction of Gramlin at all have any impact on your store margins? Like, are you — I guess, another way of putting it, are you selling more of your vertical mix in the last six months compared to before?

Marshall Minor: Yeah. We are, our first party exposure within our store has — in our — within our 16 retail sources has increased tremendously. I think at the beginning of the year, we were probably 20% Q2, we were mid-30s. We’re kind of creeping up to that kind of 40% level. So we are seeing more of our products within the stores and that’s because they’re just the suite of products. It’s bakes, flowers, pre-rolls, live rosin and we’ll launch some edibles as well. So we were kind of up and down the suite compared to the beginning of the year, we didn’t have as many SKUs to offer our customers.

Matt Bottomley: Perfect. And just last one for me, maybe a question that no one really knows the answers to, but just on the back of the election, I know you talked about banking and obviously access to capital in this space has been challenged for everybody. Do you have a view just obviously, politics aside, but just the aligned potential Senate and House here and some of the appointees we’ve seen with respect to their stances on banking reform? Is this something that means anything to you at this point or any commentary on that? Just because it’s a question obviously as analysts we get every day now?

Laurie Holcomb: Yeah. So I would say this, we don’t bet on college sports and we don’t bet on politicians. So every time we think they’re going to do something, they do something else. But I will say over the last two days, we will see where this goes, but been pleasantly surprised by the appointment of HHS today and by the appointment of the Attorney General and by pleasantly surprised both of those individuals have voted in favor of rescheduling cannabis and getting a very strong, safer banking policy in place. And I think this is going to be the first time that we’re going into an administration where the Attorney General is confirmed is supportive of cannabis rescheduling and a strong, safer banking policy. And I think on the HHS side with that meeting being moved, a push there down to the DEA to get something across the finish line, I think just the consensus was that was up in the air.

So if he gets confirmed as well, I think it’s all positive news and could potentially be nice till when joining 2025.

Matt Bottomley: Okay. Thanks, Laurie. Thanks, Marshall.

Laurie Holcomb: Yeah. Thank you.

Operator: Your next question comes from Aaron Grey of Alliance Global Partners. Your line is already open.

Aaron Grey: Hi. Good evening. Thanks for the questions, Laurie and Marshall. So the first one for me, just talking about the wholesale trends, nice growth in the quarter there. Could you speak to the sequence of that growth, maybe on a monthly basis? Did you see a growth each month? And then if you could also just talk a little bit about the repurchase rates you’re seeing from some of the third-party retailers. I imagine there’s some that are new to Gramlin as that brand’s been ramping up. So could you speak more towards the sequence of the growth and the repurchase rates that you’re seeing in the early days from third-party retailers? Thank you.

Marshall Minor: Yeah. So each month — it’s a strong month-over-month growth. So each month we are seeing pretty significant stair-step growth as each month progresses. And that’s from the standpoint of being in more doors and each month we’re offering more products. And we are seeing a very strong repurchase rate. Just give an anecdotal example. We sell to a chain of stores and they just order the vapes, and then the Gramlin vapes, and the next month they reorder the vapes and then a flower in the pre-rolls and then now they’re adding the live rosin and also the suite. So more SKUs and then more doors is what we continue to see on the retail side.

Aaron Grey: Okay. Great. Appreciate that, Marshall. And are there any type of bottlenecks we should think about maybe that would limit you from incremental growth, maybe as we’re waiting for the additional facility to come online to get the license? Are you starting to reach any level of capacity with the existing? Do you still have a lot of room to grow as you’re waiting for the license and to bring on that additional capacity which hopefully comes in 2025? Thank you.

Marshall Minor: No. The existing — yeah, we still have additional capacity in our existing facility. So we, from both from a cultivation and manufacturing perspective, we are getting more efficient. We can have some more thorough put, especially on the distillate and the live rosin side. That’s going to kind of drive some of the catalyst of the growth. And the additional cultivation facility when they come comes online, we’ll add some additional, biomass for CPG for Gramlin, both on the flower, as well as the approval side.

Aaron Grey: Okay. Great to hear. Thanks for the questions. I’ll jump back in the queue.

Laurie Holcomb: Thanks, Aaron.

Operator: Your next question comes from Pablo Zuanic of Associate. Your line is already open. Hello, Pablo. Your line is already open.

Pablo Zuanic: Yes. Thank you. Laurie, in terms of Gramlin, you have your top 10 now. What can you aspire to with that brand? I mean, some of the brands that are number one to number nine are quite well established. How much more inroads can you make there? And then related to that, if you can give more color in terms of how has it performed in flower, pre-roll versus all-in-one vapes? Thank you.

Laurie Holcomb: Yeah. Thank you, Pablo. Yeah. We’ve got a goal to be in the top five. I hate to say by the end of the year, because that means we’ve got to roll out some additional SKUs. But we would certainly, we’re number 10 right now. And if we can get in the same category as the STIIIZY’s and the Jeeter’s and the Wilds of the world, I think that’s a game changer for Gramlin being able to license the brand out nationally and potentially internationally. So that would be the goal. And in terms of flower, we started out as a flower. I think that was our number one category. As you know, and in the report that you published, all-in-one vapes are about 40% of the market. I believe we’ve got the number one and number two all-in-one vapes.

So we are seeing steady demand and pull through from consumers and the brand is just really taking off. So we expect, as you know, it’s a little bit easier to control the quality and production of vapes than it is flower, which is a live living plant. So we anticipate seeing that the live rosin and the distillate and all-in-one vape category continue to increase substantially over time.

Pablo Zuanic: Thank you. That’s good color. Look, and if I’m — when investors and analysts, we look at comps, right? And people many times benchmark you against Glass House. So sorry to ask the question, but, Glass House, they talk about Allswell and their Glass House brand. For those that are not so familiar with the California landscape, how would you compare Gramlin versus the Glass House brands? Thank you.

Laurie Holcomb: Yeah. So the way that we look at products in California, we’re a very mature market. We have three categories. We have pretty much out, if you’re looking at flower, outdoor flower, then you’ve got greenhouse flower and then you’ve got indoor flower. So Gramlin is, for the indoor flower category, it’s some of the best quality for the best price and we deliver consistency. The Allswell brand is going to be the same thing in that second tier, which is the greenhouse and that’s what they’re delivering over there. So we don’t really compete on the shelf. You’re either going to go in and buy outdoor flower, you’re going to buy greenhouse, you’re going to buy indoor. So that’s the differentiation.

Pablo Zuanic: Thank you. And for Marshall, maybe just an update on the tax refunds that you’ve talked about from, I believe that you filed for amended returns 2020 to 2022. Remind us what was amount, when do you expect to get the refund? And just confirm that for 2023 and 2024, you are filing as a normal corporation, not applying to 280E? Thank you.

Marshall Minor: That is correct. So from a 280E tax amendment perspective, we did file amended returns earlier this year. We hope to get the refunds here over the next few months, if you kind of compare what’s happened to other MSOs that have publicly announced their tax amendment. So we’re kind of falling in the same vein from a size perspective. We hope to see somewhere between $10 million to $14 million of potential refunds. And going forward, that is correct, but we’re still filing as a normal filer.

Pablo Zuanic: Got it. Thank you.

Operator: There are no further questions at this time. I would hand over the call to Laurie Holcomb for closing remarks. Please proceed.

Laurie Holcomb: Okay. I think that’s all we have. We’d like to thank everyone for the call today and thank you for joining.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation and you may now disconnect.