Goodness Growth Holdings, Inc. (PNK:GDNSF) Q2 2023 Earnings Call Transcript

Goodness Growth Holdings, Inc. (PNK:GDNSF) Q2 2023 Earnings Call Transcript August 14, 2023

Goodness Growth Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.06 EPS, expectations were $-0.05.

Operator: Good afternoon. My name is Ama, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Goodness Growth Holdings’ Second Quarter 2023 Results Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Sam Gibbons, Investor Relations, you may begin your conference.

Sam Gibbons: Thank you, Ama, and thanks to everyone for joining us. With me on today’s call are our Interim Chief Executive Officer, Josh Rosen; our Chief Financial Officer, John Heller; and our President, Amber Shimpa. Today’s conference call is being webcast live from the Investor Relations section of our Web site. Dial-in and webcast details for the call have also been provided in today’s earnings release, which is also available on our Web site. Before we get started, we’d like to remind everyone that today’s conference call may contain forward-looking statements within the meaning of US and Canadian securities laws. These statements are based on management’s current expectations and involve risks and uncertainties that could differ materially from actual events and those described in such forward-looking statements.

For more information on forward-looking statements, please refer to cautionary note regarding forward-looking statements in today’s earnings release. Now I’ll hand the call over to Josh.

Josh Rosen: All right. Thanks Sam. And thanks everyone for joining us this afternoon. I’ll begin today with some discussion of the progress we’re making executing our strategy for the year, then Amber will run through some business updates and key performance indicators before we pass the call to John for review of the financials. Please turn to Slide 3 of today’s presentation, which is available in the quarterly results and Events and Presentation sections of our investor relations Web site. We first highlighted our CREAM & Fire operating strategy for this year during our year end conference call on March. And with our second quarter results, we felt it would be helpful to provide a mid-year progress report on how the components of this strategy are trending.

As we’ve discussed, 2023 is an important year of transformation for the company. We’re focused on simplifying our business, improving the efficiency of our operations to drive cash flow and support longer term profit growth and managing our balance sheet to give us additional flexibility as we maneuver through some exceptionally challenging circumstances that were created by Verano’s wrongful termination of our arrangement agreement in October of last year. Our CREAM & Fire priorities boil down to; one, making decisions that drive cash flow generation and profit growth with an eye on winning at the local level as our markets get more competitive; and two, growing and selling Fire cannabis products, because we firmly believe that we need to have passion for the quality and value that we’re providing customers in order to thrive longer term.

These must become core tenets of our organization in order for us to be successful and we’ve been pleased with the pace of progress we’re making in transforming the company in line with this vision for our future. In the first quarter, we began to restructure the organization by reducing costs and enabling our various state markets to act point independently. This decentralized approach to the leadership of our various state markets with a design to improve the speed and quality of decision making on the ground at our facilities and after two quarters, we can see this is helping us drive stronger operating and financial performance. We’ve also infused the organization with more passion for producing and selling Fire cannabis products through some collaborations with external third parties who have helped us rightsize our product assortment and pricing, prioritize the efficiency of production and the quality of our manufactured goods and improve the quality of our flower.

Our partnership with Grown Rogue has been especially helpful and Amber will provide some additional discussion of this relationship momentarily. Finally, we have made progress to simplify our business to the divestiture of our New Mexico operations, which we deemed immaterial from a disclosure standpoint but was completed during the second. Additionally, in this afternoon’s earnings release, we shared that we are now under an LOI to divested New York business. Last quarter, we disclosed that we’d entered a formalized sale process for New York, which required some accounting adjustments to assets and liabilities, which John will detail in the discussion [again] today. These accounting changes reflect that much of the value assigned to our [New York] business relates to our currently under construction Bluebird facility, which we leased from Innovative Industrial Properties as a result of a sale leaseback transaction.

We’re optimistic we’ll have definitive documents within the next 30 days at which point we could begin the license transfer application process. It’s important to note that Verano’s wrongful termination of our merger agreement last October left us in a particularly tough spot in New York, most notably with respect to our large construction project that was to provide indoor flower to the market. This project was midstream at the time. We operated in good faith within the scope of our definitive agreements, which gave Verano consent rights for the significant project and in practical form enabled them to provide meaningful input to adjusting the scope, approach and financing of this project. Upon the wrongful termination, we were left with a more expensive project with additional contractor engagements and ended up being a closed window for incremental financing from our landlord.

When combined with a fairly limited medical market and patient base that burns cash and our inability to fund the anticipated adult use activation fees, divesting New York became our only viable option. Without getting into the specifics, given this transaction is not yet beyond the LOI stage, I do want to provide that we don’t expect to receive material proceeds from this transaction with the majority of any proceeds going to our senior secured lender. While this is not a direct boost to our cash position, it’s an incredibly important milestone for controlling our own destiny and our march toward producing meaningful cash flow. I’m wearing my industry hat, it’s also exciting to see a new independent operator as the counterpart is ready to capitalize on the opportunities this industry presents with a strong product led vision and aligned capital.

Should this progress as we hope and we get it across the finish line, which is not a given in the cannabis space, I believe our New York teammates should be in good hands and in many respects, it appears our counterparties’ timing couldn’t be better with the likely activation of the adult use sales later this year. We can’t say much else on this for now but we are looking forward to sharing details regarding our future profitability expectations once we are more calibrated to the timing and this process is complete. Collectively, we believe that these updates and information shared on Slides 3 and 4 demonstrate that we are gaining meaningful traction executing our plan for the year, especially given the recent dawn of adult use sales in Maryland on July 1st.

We also have the legalization of cannabis in Minnesota coming with adult use sales expected to commence in the first quarter of 2025 to look forward to. While these positive developments are encouraging signs of progress, we are still working to generate meaningful cash flow and improve our credit profile. There’s a growing sense of optimism within our organization supported by the execution on the ground in our Minnesota and Maryland operations, which points to a bright independent future as we work through the final stages of restructuring our business. As we discussed on last quarter’s conference call, we gained additional financial flexibility to execute our plan for the year by amending our credit facility and closing on a convertible loan, which provides us with incremental monthly support while we remain in ongoing litigation with Verano.

Make no mistake, though, we were put in extremely compromising position by Verano. Our share prices suffered tremendously and we’ve been forced to fund our go forward effort as an independent organization with dilutive and expensive capital. We are seeking substantial damages from Verano as a result of their wrongful termination and we’re optimistic we will have more to share on this process shortly. As I’ve stated in the past, I view our claim against Verano as a very important strategic asset and it’s one of the reasons I was willing to step into this role. That concludes my prepared remarks, and I’ll now pass the call over to Amber, for some additional business updates and review of our second quarter performance indicators.

Amber Shimpa: Thanks, Josh, and thanks everyone for joining us. I’ll start on Slide 5 for today’s presentation where we provide an update with our Q2 core market key performance indicators. As a reminder, we began tracking these metrics in conjunction with our fourth quarter results call in March and they represent some of the most relevant metrics that are recently formed Weed Hustle Office are using to evaluate our progress as we move forward. As I’ve referenced previously, our Weed Hustle Office is comprised of internal leaders in our state markets, as well as some additional external support and can collectively be thought of as our version of a COO within our new decentralized structure. We’ve been very impressed by the response of all our team members as we’ve been executing the CREAM & Fire strategy so far this year.

I have personally been on the ground visiting our facilities in Maryland and all eight of our Green Goods dispensaries in Minnesota to spend time with our team as we augment and enhance our mindset from a medical and accessibility focus to a more complete product driven and customer centric focus. Based on what we’ve seen in other markets, the ability to provide products that compete with the quality and pricing of the illicit market helps migrate the industry toward the regulated market. We have made great progress so far this year to improve the productivity of our facilities as well as the quality being produced, which is allowing us to lower prices with higher quality products that our dispensary teammates can then share with the customer and who doesn’t like better products at lower prices.

Please note that we did make a change to our methodology for our calculation of total harvested biomass quarter and are now excluding trim byproduct from the calculation and our bucking processes, because we currently have considerable excess trim and oil on hand at Minnesota, New York. With that said, to keep the comparisons consistent, we adjusted the second quarter’s data shown on this slide to add back an estimated amount of trim in order to present Q2 results on an apples-to-apple basis. As you can see, the trajectory of total harvest yields and percentage of A Flower over the course of last year remains favorable. Our goal is to drive more sell-through of higher quality products at better value for customers and our results to date on these important operational KPIs serve as strong indicators that we are positioned to have continued success achieving these objectives.

We view this approach as the key to long term success here, balancing efficiency, quality and providing value to delight customers. Our inventory turns on a consolidated reported basis improved sequentially as compared to Q1, largely driven by improved efficiency in New York during the quarter. As we discussed on last quarter’s conference call, we anticipated inventory build in Maryland ahead of the adult use launch, which contributed to lower as reported inventory turns in Q2 as compared to the second quarter of last year. I’d also add that the significantly improved productivity in Minnesota resulted in an unfavorable inventory turns comparison in Minnesota given that we continue to selling into Minnesota’s limited access medical market. So in other words, there’s no immediate sell through for meaningfully more flower production in this vertical market, but we do view our improvements as important indicators of future performance and we are getting better at managing our product allocations.

Photo by terre-di-cannabis on Unsplash

Inventory turn data has some natural variability attached to production timing but improving our working capital performance will be a critical component in improved cash flow performance in the future. We do expect to see improvement in this metric over time, especially once adult use sales begin in Minnesota in 2025 and we have a few plans in the works for more immediate improvement. Please turn to Slide 6. During the second quarter, we were pleased to announce our partnership with Grown Rogue International and are glad to provide some information about this relationship with today’s presentation. Grown Rogue has established itself as a market leader in flower production in Oregon and Michigan, which are two of the country’s most competitive adult-use markets.

We are very excited to bring Grown Rogue’s expertise in balancing cost efficiency and flower quality to our patients and customers in Minnesota and Maryland. Even more so, as our productivity improves and to sound like a broken record here because it’s so important, we’re most excited to be bringing higher quality products to customers at price points that are more competitive with the illicit market. We’re serious about delighting our patients and customers. Although we formally announced this partnership in May, groundwork on this collaboration had been underway since Q1 and Grown Rogue’s team’s on the ground at our facilities in Maryland and Minnesota. So far this year and especially in Q2, as noted through the KPI data on the previous slide, their efforts have helped us drive improvements in flower production and percentages of A Flower at our facilities.

It’s also important to know that this is structured to be a longer term collaboration. While we’re seeing improvements, we also have ongoing challenges and there’s a lot of room for continuous improvement through this collaboration. The Grown Rogue team has also been a great addition to our focus on product driven culture and their CEO, Obie Strickler, is part of our Weed Hustle Office. Moving on to some state specific market updates on Slide 7. Our home market of Minnesota remains our most important market and we were proud to celebrate our 8th anniversary of serving patients on July 1. Our sales in Minnesota continued to grow following the commencement of flower and edible sales in 2022. We’ve also been encouraged by productivity levels in Minnesota during the recent summer months.

Summer is our most challenging season given temperatures and humidity in our greenhouse environment in Minnesota. But so far, we continue to see productivity improvements over this time last year. Cannabis was legalized in Minnesota effective August 1st but adult use sales are not expected to commence until the first quarter of 2025. Adult use regulations will permit us to increase our cultivation capacity and maintain our existing eight Green Goods dispensaries. We’re also pleased with recent changes to the state’s medical program, which eliminated enrollment costs for medical patients as compared to the $200 in fees that have been in place since the program was implemented. New patients are also now able to conduct their provider consultations virtually rather than in person.

We believe these changes have contributed to increased patient enrollments in Minnesota’s medical program, which should help us drive continued growth into adult sales begin in Q1 of ’25. In New York, as Josh mentioned, we are now under an LOI to divest our New York business and look forward to providing investor updates of this process when available. We anticipate to balance our need to control cash burn with a need to prepare for adult use implementation. This has been a challenging market considering our liquidity position. In Maryland, we have been pleased with the revenue performance of our two Green Goods dispensaries since the beginning of adult use sales on July 1st. And we are continuing to see solid sales and profitability trends in this market in early August.

Since the beginning of this year, we have made significant improvements in the quality and depth of our product offerings in Maryland and we believe we have a strong opportunity to grow market share with our manufactured products. We were also pleased to recently reach consulting, licensing and wholesale agreements with two additional dispensaries in Maryland. These agreements are intended to enable us to continue growing our wholesale channel and provide opportunities for stronger cash flow generation. Upon regulatory approval, the owner plans to rebrand these stores under the Green Goods name and customers are already able to shop through our Green Goods Web site. Importantly, we also secured an option to acquire these stores when regulations allow.

I’ll now hand the call over to John for a more detailed review of the financials.

John Heller: Thank you, Amber, and thanks to everyone for joining us this afternoon. I’ll provide a high level summary of key financial metrics from the second quarter and then review our balance sheet and liquidity position in more detail. Please turn to Slide 8. Our second quarter results reflected overall revenue growth in our core markets, both sequentially and as compared to second quarter of last year. Total GAAP revenue of $20.2 million in the second quarter declined approximately 4.2% compared to the second quarter of last year. However, excluding discontinued operations in Arizona and New Mexico, total revenue grew approximately 10.6% year-over-year. Gross margin performance contracted year-over-year from 49.2% of sales in the second quarter of last year to 46.2% of sales.

The variance compared to the prior year reflects some margin compression in each of our markets, partially offset by a higher mix of revenue in Minnesota and the divestiture of our former operations in Arizona, which was completed last year in the second quarter. SG&A expenses as a percent of sales continued improving year-over-year in the second quarter, declining to 39.9% of sales from 40.9% of sales. On a year-to-date basis, the improvement in SG&A has been much more meaningful with an improvement of more than 10 percentage points from 48.7% of sales to 38.7% of sales. We’ve reduced costs across the business and continued to implement stricter cost controls and believe will show continued progress driving improved SG&A as a percentage of sales in the back half of this year.

Slide 9 contains our usual summary of revenue performance in our core markets. We continue to see overall revenue growth in our core markets on both a sequential and year-over-year basis, and expect these trends to continue following the recent launch of adult use sales in Maryland and the new consulting, licensing and wholesale agreement Amber mentioned with two additional dispensaries in the Maryland market. For a complete review of state-by-state revenue performance, including non-core markets and discontinued operations, please refer to our Form 10-Q, which will be filed with the SEC later today. Slides 10 and 11 provide summaries of our balance sheet and debt outstanding as of June 30th. We ended the quarter with total current assets of $126.4 million, including cash on hand of $11.3 million.

Total current liabilities at the end of the quarter were $157 million, which as a reminder from our conference call last quarter now includes $75 million of lease liabilities held for sale related to our business in New York. As we discussed last quarter, we have the opportunity to extend the maturity date on our credit facility loan to January of 2026 through the achievement of some performance based milestones. These milestones are based on fixed charge ratios so they are effectively tied to our ability to generate profits and cash flow consistent with being a better credit. These milestones are not easy performance hurdles for us to achieve. But we’ve been encouraged by our recent progress in driving improved operations and financial performance and are pleased with the potential for stronger cash flow generation resulting from positive regulatory developments in Maryland and Minnesota.

On Slide 12, we’ve provided a summary of our share capitalization as of June 30 adjusted to reflect the required future issuance of warrants related to our agreement with Grown Rogue, which included an exchange of warrants and the subordinate voting shares we have agreed to issue to lenders in connection with the recent amendment to our credit [facility]. The company now has 143,126,330 fully diluted equity shares issued and outstanding on an as-converted treasury method basis and 223,608,947 shares outstanding on an as-converted fully diluted basis. That concludes my prepared remarks. I’ll now hand the call back to Josh for any additional or closing comments.

Josh Rosen: Thanks, John. I’m excited as we see our CREAM & Fire initiatives gaining traction, made possible, thanks to the continued hard work and dedication of all of our team members. Our Maryland team in particular has done an excellent job preparing us for the launch of adult use sales. And as we’ve discussed today, we’re very encouraged by the early revenue performance we’re seeing in this market. We’re optimistic about our position in Maryland, but I know from experience, we need to stay extremely focused with our local teams and market in order to grow market share and be successful longer term. Anecdotally, we’ve been growing faster than the market appears to be growing out of the gate, but that’s no promise of long term success.

We’re continuing to focus on executing what’s within our control amidst the challenging current landscape. We’re pleased with our progress to-date this year in simplifying our portfolio of assets and positioning the business for stronger cash flow generation with our operations in Maryland and Minnesota. We believe that we have an attractive stand-alone platform for growth and the foundation to be a long term winner as our industry emerges. Our current situation still requires us to play defense first, but as we gain momentum, we hope to selectively become more offense oriented, the recent expanded reach with Maryland Retail being a small example. Our litigation with Verano and the divestiture of our New York business remain extremely important events for us and we expect to have additional updates on both processes in the coming months.

We will look forward to providing investors with more visibility into our future profitability and expectations once we have clear visibility on the timing and economic impact of our divestiture in New York in particular. With that, I think we’re ready for Q&A.

See also 10 Beaten Down Stocks Billionaires Are Loading Up On and 30 Oldest universities in the World.

Q&A Session

Operator: [Operator Instructions] Your first question today comes from the line of Eric Des Lauriers with Craig-Hallum.

Eric Des Lauriers: Thanks for all the details provided today. I just have a couple of questions around Maryland and then around the Verano suit understanding that there’s limited amount you can share today. But just first on Maryland, my first question is, if you expect to be able to consolidate these revenues with the consulting agreements reached with these two new dispensaries, just if that structure allows you to potentially consolidate those revenues? That’s my first question.

Josh Rosen: Yes, simple answer, we do not expect to consolidate.

Eric Des Lauriers: And then on the rebrand there, is that a split CapEx, is there anything you can share on kind of who’s [splitting] that bill for the rebrand?

Josh Rosen: Mostly for that, I mean, we’re putting the time and energy into this, but not CapEx budget on our side. So if there’s a little bit of spending here and there, there might be some rounding air dollars, but not significant out-of-pocket expenses for us.

Eric Des Lauriers: And then just moving on to Verano again, understanding you’re kind of quite limited here. Can you just kind of help us understand what steps remain in this process? And to the extent that you can, when you maybe expect any of those steps to occur just, yes, just kind of giving us some sense of how to think about this as this unfolds in the second half?

Josh Rosen: Yes, I mean I think from a time line vantage point without getting too into the proverbial reads on this, the current status is we’re in the midst of kind of standard discovery process and working through that dynamic, coupled with that is doing work around damages calculations and some of the economic dynamics in play [Indiscernible] having some data points, I think a lot of that depends on a process that remains uncertain from a time line standpoint. And so it’s hard to give specific color, but we are optimistic based upon how things have progressed recently that there will be some more public facing information here shortly.

Operator: [Operator Instructions] Your next question comes from the line of Chris Yetter with Dumont Global.

Chris Yetter: Josh and team, thanks for updating everyone with all the transparency you’ve been giving recently. So I want to talk about cash flow in the states that you’re selling. In New Mexico, what was the cash flow run rate at the time of the sale? And then for New York, the same question, what’s the cash burn look like right now?

Josh Rosen: Yes, without getting too precise. In New Mexico, toward the tail end, particularly as the market started to get competitive, it went from marginally cash flow neutral, marginally positive, sometimes negative, kind of bounced around cash flow neutral after tax, in particular, to marginally cash flow negative by the time that we sold the assets. And so there’s actually, as we look forward, it was a net cash gain on the disposal for us. New York, quite a bit more substantial and moves the needle from a material standpoint for us, pretty close just from an operations standpoint to running right around $1 million a month. A decent amount of variability in that number month-to-month but kind of when you average things out, it’s not far from moving $1 million a month.

Chris Yetter: So I should think about $1 million a month from the business plus the cost of the lease. Is that right?

Josh Rosen: That includes the cost of lease. And part of that — so basically, we’ve tried to be prudent in preserving the value of the New York operations for potential acquirers while we manage this cash flow burden. So frankly, as we sit here on kind of what should be the precipice of being able to participate in the adult use market and having a viable business there, the timing is real disappointing, but we’ve had to activate that lease given the time line of the Bluebird project. So that $1 million does include the burden, if you will.

Chris Yetter: And if you still own the New York when December rolls around, do you think you will pay the price and open it up for adult use during the potential transition?

Josh Rosen: It depends on a few variables. We’ve been doing work in New York for a long time. We would love to have the opportunity. The variables in play currently, there’s a limited fee to turn on wholesale alone that might be something that might be quite a bit easier for us. I think as folks pay attention, there’s a $5 million activation fee as currently contemplated. There is some ongoing litigation on this topic but a $5 million activation fee for the first retail store to be opened, that’s a dual store between medical and adult use, that’s the bigger price tag for us obviously. I’d be very surprised if that was achievable for us. But the expectation, the hope is that we’re unfortunately not able to get — we’re not the group activating. I think I’d also open this up to Amber to see if she have any additional context on New York that she wants to add.

Amber Shimpa: Well, I guess another reason that we’re disappointed that we’re not the ones that we’ll be able to capitalize on it is that we believe we’re one of the few remaining unique licensed operators in New York. And I guess, what do I mean by unique is that New York is arguably one of the most competitive and merit based application and licensing processes back in 2015. The state determined, we were one of the top five operators to stand up and serve the medical market, something we were and still are incredibly proud of here. And over the past eight years, our team has been good stewards of the medical program. We feel good partners to communities we serve in the state. So again, to have our eight year commitment to New York patients be adversely impacted, we feel after being identified as one of the top five to participate and to have this track record and early recognition and support not translate to our participation in adult use market timely, it’s just really disappointing to our team and has obviously had a negative impact on our business.

Chris Yetter: I appreciate that. I live in New York, and it’s really sad to see that there’s so few stores per capita when many, many other states got it right. Let me ask you on continuing the theme of cash flow about the litigation with Verano. What is the impact on your cash flow for pursuing the cost of litigation, for instance, in 2023 or in 2024?

Josh Rosen: I mean what I would say and I think it’s hard to predict with specificity because there are situations in which the — I call them kind of discovery and legal proceeding process can get quite a bit more intensive. But just to give some perspective, we’re about — in very round numbers, we’re about $150,000 all in. Given my past experience with litigation, that’s actually incredibly efficient. And I think what we’ve seen thus far is that this process that is being run in British Columbia is a relatively efficient process compared to at least my experience with US litigation and costs. And so we don’t believe — while it’s a real amount of money, we don’t think that the litigation itself is all that much of a burden from an ongoing spending standpoint.

Chris Yetter: You said yourself that cash is tight and you had to do some capital raises that you wouldn’t have wanted to do if the deal hadn’t broken apart. How do you think about whether it’s worth it to spend this money or the upside on the spending or the risk of winning versus losing litigation?

Josh Rosen: It’s probably not prudent to get into the sausage making of the litigation, similar to Eric’s question. But the core of our case here is relatively straightforward. If I were in Verano’s shoes, I’d feel compelled to protect myself by articulating the purported legal reasons for terminating the agreement. This is likely the economically rational thing for them to do, right? That said, most folks that I’ve asked about this and the specific situation suggest the same reasons for their termination as we believe with confidence, and these reasons also are probably relatively economically rational on their side. But it’s our strong belief that these reasons are not allowable reasons to terminate the merger. And so I highlighted during the prepared remarks that this litigation is the key asset of the company, mostly because of how I personally think about financial damages.

For those that don’t want my background or don’t recall my background, I was an investment analyst for the first decade plus of my career. And this includes spending significant time studying and working alongside some valuation gurus, including Michael Mauboussin at Credit Suisse. Looking at this situation as an example, one can get to some large numbers quickly by simply calculating the NPV of the corporate overhead savings alone. And that’s not getting into the nuance and how vulnerable we were left in New York after acting in good faith to prepare for the combined efforts. It’s just our general inability to get financing at terms close to what Verano achieves. These are real harms and while the math can get complex, the underlying factors are really fairly straightforward and supportable.

I understand it’s difficult for investors to give us credit, given the overall uncertainty of the time line and what’s by definition an uncertain outcome. But we see this as a highly important internal priority to maximize the probability in the magnitude of the successful outcome that we’re after.

Chris Yetter: Thanks for that, and thank you for your time. I’m really encouraged with the last few conference calls of a different tone than the ones nine months ago, and that partnership with Grown Rogue looks pretty auspicious.

Josh Rosen: Appreciate it, Chris. We are working hard.

Operator: [Operator Instructions] There are no further questions at this time. And this concludes today’s conference call. Thank you for attending. You may now disconnect.