Scott Fortune: I appreciate. Congrats again. I’ll jump in the queue.
Operator: Thank you, Scott. Our next question is from Frederico Gomes from ATB Capital Markets. Your line is now open. Please go ahead.
Frederico Gomes: Hi. Good morning and congratulations on a great quarter. Thank you for taking my questions. Just on capital allocation, I guess, now that you have reached the free cash flow target, how are you looking at that use of cash that you’re going to build? You mentioned plenty of M&A opportunities ahead. So does that mean that you plan to do those using cash instead of shares as you have done in the past? And then I guess just what sort of cash, cash in your balance sheet, are you looking to build and you would be comfortable with? Thank you.
Raj Grover: Hi, Fred. Thank you for that question. So Fred, let me tell you this. I’m very happy with our cash position where it’s sitting today. But am I absolutely thrilled about it. I’ve said it previously that we — a company our size that is generating $0.5 billion in annual run rate sales, should have close to $50 million sitting in the bank and we’re not there today. And although, we are very fortunate to have a bank line and connect for supporting us through that credit facility, which is extreme rarity in Canadian cannabis. I don’t know if any other operator or many other retail operators that have secured such a line. It’s not easy to get additional financing. And it’s also restrictive in a way of — due to financial covenants that we have to maintain minimum cash balances with the bank.
In this case, we’re sitting at around $9.5 million, $10 million that we cannot touch. So we’re really only left with $10 million to $15 million. We had so many opportunities ahead of us, and we want to remain disciplined. We had an ATM facility opened for the last 25 months. And we only used 25% of that facility just to really manage dilutive capital versus non-dilutive. So when some of these M&A opportunities present, we are going to have to act and mostly stock. I am not sitting on a war chest today, although the intention is, as our equity prices grow and become stronger, yes, we want to act upon raising more capital because we’ve proven we are successful operators. We know we have the best model in the country. Now all we need is a little bit of additional cash where we could start doing these things more comfortably.
But because we’ve been responsible in the past, we want to do exactly that thread. And like I said, we have some restricted covenants because of the situation in the cannabis industry, where banks are keeping it tight currently, and we have to — we cannot touch $9.5 million to $10 million. Although that also gives us security because that money is just sitting in the bank. We don’t have access to too much capital. So we may have to use shares going forward, but we are only going to touch opportunities that are going to yield tremendous value for our shareholders. We’re not looking to just dilute our shareholders for anything that comes our way. As I mentioned, the fine flower opportunity happened. And we don’t always want to be the highest bidder on the table, right?
Whether we would have raised additional cash to facilitate that or pay it out in all stock. We know what we can get at this time, and we’ve been very, very responsible with that. So going forward, it may be a little bit of a hybrid for both, but we’re going to be very selective even when we’re issuing stock, we’re going to be selective on the best opportunities only.
Sergio Patino: And let me just add just one point here on the capital allocation. The main priority that we have right now, one of the key components is in addressing the debt, which is the debenture we’re looking at amending the payment terms as priority one before we start allocating cash to different alternatives. And the second one is extending the maturity of the notes payable to at about $50 million. So those are key components that we want to resolve here within the next 90 days or so before the end of the year.
Frederico Gomes: Thank you. That’s great color. And then just my second question, just on margins. So when you look at the brick-and-mortar retail margins, I guess, another impressive quarter, you have been expanding that at a pace of 1% every quarter, I guess, for the past four or five quarters. So do you think this trend is going to continue? What are system levers that you’re pulling to drive those increases? How much of it is maybe just increases in prices and how much of it is just related to some of your other measures in terms of white label products and the ELITE program. So just curious what you’re doing to drive that increase? And I know that you mentioned 26%, 27% gross margin. That’s a good outlook. But just thinking about that brick-and-mortar retail expansion, maybe that’s a little bit too conservative. So thanks for any color there. Thanks.
Raj Grover: Sure, Fred. So Fred, we’re not going to be aggressively expanding. Like, we’ve expanded 1% a quarter over the last six quarters now. in our brick-and-mortar stores. And we’ve lost a little bit on the e-commerce side just to keep our e-commerce business relevant for when the switch – when we flick the switch again and we’re back to e-commerce growth, we’re just making sure that we can balance both at this time. But our members are really enjoying our concept. As you can see, we grew by another 6% in our membership base from 1,040,000 to 1.1 million Cabana Club members now. So we don’t want to overly be aggressive on margin expansion. We will be actually slowing down a little bit and stabilizing our margins a little bit.
So we can continue to gain market share because what we’ve learned from our model, the more tighter we remain on the market, we see a lot of the noise and a lot of the smaller operators starting to get out of the race, simply because they cannot compete. So if we sit on a horse and start expanding our margins, then we’re not that competitive with everybody else. So we want to kind of remain stable. We had a lot — we have a lot of levers that we can pull, such as ELITE sign-ups, which is also contributing towards the margin. We have white label offerings that are also contributing towards the margin. And then we’re also increasing product prices. and we can always do that, and we are going to generate more exclusive ELITE inventory, which will also have House branded products, which will give us another margin expansion opportunity.
But we have other levers to pull through when it comes to margin growth, like Sergio mentioned, when fast tender licensing becomes a reality, and we can start licensing in the U.S., we don’t really need to push brick-and-mortar margins very aggressively. We can always go do that. We’re also looking at our e-commerce margins right now, which we’ve held very, very tightly. We’re going to slightly expand them as well. So we’ve got a lot of different levers we can pull and not only just keep pushing product prices up in our ecosystem. But as operators fail or cannot make it or don’t renew their leases here in Canada, suddenly, we’re the only game in town, you can bet on it that margins are going to continue to go up.
Frederico Gomes: Thank you very much for the color.
Operator: Thank you, Fred. Our next question is from Andrew Semple from Echelon Wealth Partners. Your line is now open. Please go ahead.
Andrew Semple: Hi, there. Congrats on the strong beats and High Tide’s first quarter of positive free cash flow. You mentioned that with achieving positive free cash flow, you’d review the pace of, I guess, organic growth in store developments. We recently saw three stores open in Ontario over the last 1.5 months. So it appears to be a pretty good sign that you’re, again, maybe perhaps accelerating your investments into stores. Could you maybe talk about your outlook for new store openings for the balance of this fiscal year and going into next year?
Raj Grover: Hi, Andrew. Thank you for your questions. So yes, the balance of this year, again, we only have 3.5 months, four months left now. And Andrew building permits is sometimes our biggest challenges like we’ve had the Mississauga leases for quite some time now, but we’re waiting on building permits. We have six very attractive locations that we are waiting to build there, and that is a high priority for us. But I don’t even think we’re going to be able to get to all six this year. We maybe get two to three in Mississauga in Ontario and another two to three, one in BC for sure, that we are working on, and I’m super excited to share that location with everybody and maybe one or two additional ones in Ontario. So overall, we think we can do four to six locations by the end of this year.
