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Edited Transcript of GGB earnings conference call or presentation 26-Feb-20 10:00pm GMT

Q2 2020 Green Growth Brands Inc Earnings Call

Toronto Mar 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Green Growth Brands Inc earnings conference call or presentation Wednesday, February 26, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian P. Logan

Green Growth Brands Inc. - CFO

* Peter Z. Horvath

Green Growth Brands Inc. - CEO & Director

* Randy Whitaker

Green Growth Brands Inc. - COO

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Presentation

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Operator [1]

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Good evening. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Green Growth Brands Q2 Fiscal 2020 Earnings Conference Call. (Operator Instructions) On the call today are Chief Executive Officer, Peter Horvath; Chief Operating Officer, Randy Whitaker; and Chief Financial Officer, Brian Logan.

Today's discussion may include forward-looking statements based on management assumptions. Actual results could differ materially from those anticipated. Please refer to the earnings release in our SEDAR filings for risk factors, which may impact forward-looking statements made on this call. Throughout the discussion, we will refer to non-IFRS measures that do not have any standardized meaning prescribed by IFRS, such as gross margins before fair value adjustments and adjusted EBITDA, which are defined in the MD&A issued today.

Please note, all financial information is provided in the U.S. dollars, unless otherwise indicated.

During the call, we will refer to -- we will reference the segment information, which can be located in our earnings announcement.

Peter, you may now begin the call.

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Peter Z. Horvath, Green Growth Brands Inc. - CEO & Director [2]

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Thank you. Good evening, and welcome to our second quarter 2020 earnings call. In our press release issued Monday evening, we detailed the steps that we're taking towards improving our balance sheet, cash flow and ability to realize our pipeline for our MSO growth in 3 key states.

Three's detailed the following: debt restructuring, allowing certain debts, though, to be pushed out with new interest and conversion rates; an equity raise for $30 million that will fuel growth for our MSO segment. The first $10 million has already been committed to -- by our seed investors, who remain steadfast in their commitment to the business. The first tranche of $10 million will be available upon closing of the CBD transaction. We believe this $30 million will satisfy the capital infusion required to bring our MSO platform online.

The other points that we announced were the formation of a special committee of the Board of Directors related to the sale of the CBD business, a definitive agreement with the BRN Group, BRN, in partnership with Authentic Brands Group to purchase the CBD business. The agreement is subject to a 30-day go-shop period. AltaCorp has provided a fairness opinion and has been retained to conduct the go-shop process. It's anticipated that we will have a 20% interest in the go-forward CBD business, and we are excited to continue to participate in the upside potential of that business.

We also had G&A reduction conducted on February 21 that will save approximately $4 million a year in salary and fringe benefits, and that is taking effect immediately.

We believe that these efforts position us to maximize our MSO strategy, where we'll bring our retail and operations experience to consumers and patients and up to 47 dispensaries in 3 key states, a very significant business.

Let's now turn our focus to the second quarter results. Total revenue for the quarter was $21.1 million, a 66% sequential growth rate to last quarter and a 571% growth rate to last year. We created compelling experiences and product assortments that drove loyalty without price promotion and saw this reflected in our product margins.

Adjusted EBITDA loss of $13.4 million was a 12% improvement to last quarter. Much of the investment we made this quarter was in our CBD segment as we completed our CBD shop rollout to 195 malls and started in earnest to market our brands to consumers. We guided to over $10 million in sales for the quarter for the CBD segment, and we're pleased to announce that we exceeded that expectation, achieving $11 million in CBD sales during the quarter, a 113% sequential increase. In fact, if we had the ability to chase some of the product, we could have delivered probably another 10% on top of that, which was very encouraging.

While we're currently in the process of selling the CBD business, we're extremely proud of how we grew this business from a mere idea to products that have reached over 300,000 consumers in just 9 short months.

We're proud of our team, which includes nearly 1,000 guys in the field as well as our home office associates, all of whom developed and launched the most comprehensive topical CBD assortment in the world, an assortment with quality that is resonating with consumers, garnering an average rating of 4.5 out of 5 points, with 75% of our consumer responses at a 5 out of 5.

We're proud of the customer testimonials that we've each witnessed firsthand. It's been fun and exciting especially those explosive revenue days that we experienced in the holiday 2019 selling period. So here are a few highlights for the CBD business from the quarter.

We leaned into the opportunity to capture the attention of hundreds of millions of holiday shoppers across 195 of the top malls in the United States. This is something that we're very familiar with, with the businesses that we've worked at. It's something that's probably new to the CBD segment. The idea that it's a holiday gift-giving item, which we proved absolutely.

We distorted our assortment for holiday by focusing on gifting. We found that as the season progressed that our margins got stronger. We tested price promotion because that's typically what happens in the fourth -- in the calendar fourth quarter of the year in malls. And we discovered there was no, virtually no customer response to price promotion. They wanted the product at any price. Our best products, we had products that would sell through 35% unit sell-through in a week at some of the highest prices that we had in the kiosks. So we learned a lot, and there's definitely a there, there.

We invested in a comprehensive marketing strategy to drive awareness during the key time. During the period, Google Analytics showed -- results showed that the term Seventh Sense was the #1 CBD brand -- the #1 search for CBD brand, and our search results were up 4,600%. So this resulted in about $11 million in sales from hundreds of thousands of customers at a high-60s product margin. And since the second quarter, over 26% of the customers have placed a product reorder.

Our biggest day -- the biggest single day was December 21, where we did over $425,000 in 1 day. That's bigger -- that was bigger than our entire October. Of our 195 shops during that period, standouts included Las Vegas South Premium Outlets, Westfarms Mall and Hartford. I was there on Thanksgiving, it was amazing. South Shore Plaza and Braintree, Massachusetts, Mall of America in the Twin Cities and Oakbrook Center in Chicago. Online, 26% of the customers, who made a purchase with us have returned for repeat purchase.

The top CBD products, and I've already mentioned one of these earlier, the Hyperstrength Cream, Strawberry Gummies and a Sleep Roll-On. All of these top sellers were sold at full price with 0 price resistance.

We think our 3 channels of shops, e-commerce and wholesale are completely synergistic. We've heard from wholesale inquiries that, basically said, what they liked was the fact they could see our product in malls and that we are able to lead them to the sequence of the formulations, which formulations would be best and what the selling was as you walk down that sequence. It's incredible intelligence. And we know that shops drive customer acquisition and contribute the stickiest customers. E-commerce fosters constant contact, loyalty and reorders, and these channels completely help generate wholesale interest as well.

During the second quarter and, subsequently, we've received several wholesale inquiries from new partners, including purchase orders from existing partners for over $2.3 million.

Our overachievement in Q2 left us out of stock and chasing inventory in many of our top products. So while we're proud of the CBD business we created, it's important to reiterate that our core business has always been the multi-state cannabis business. And with the turn in the capital markets that we've all experienced in this segment over the last year, we need all of our resources: cognitive, physical and financial poised to realize the potential that we currently possess in 3 key states across up to 47 dispensaries.

Turning to the MSO segment. We continue to apply merchant dispense to already highly successful dispensaries. Our merchants, they pattern the competition weekly, we understand what's happening in the marketplace, and they've proven that you don't need to get into a price promotion game to have loyal customers and drive traffic. And that showed in the results.

We met our guidance with sales of $10.1 million, a sequential increase of 33% to last quarter. Average sales per foot continue to be at the high end of the industry at over $15,000. Green Wednesday, the Wednesday before U.S. Thanksgiving, was the second largest day of the year with $134,000 in sales between the 2 dispensaries, second only to 4/20, as you might expect.

Our focus at our established dispensaries is to drive margin through creating clear and compelling assortment, newness, in-stock and targeted promotions. In other words, having the products our patients and customers want at the right price.

Our retail operations in Nevada achieved flat top line to last year but had a 10% increase in gross margin dollars in the same period last year. So the thought that we drove more loyal customers with higher margins is really a testament to the assortment strategy that we've been developing in these 2 dispensaries. Examples of how this worked. We took the legacy brand that came with The Source of 8 Fold, and we took it from 10% of the vape business to 30% by introducing 8 Fold gifting for the holiday, lifestyle-oriented products.

We introduced CAMP, a premium uniquely positioned product, which has achieved commercial and critical success, with awards by High Times and Jack Herer, thanks to collaboration between our merchant and production teams.

During the quarter, some of our top products were CAMP's Solventless Rosin, Animal Face, CAMP Flower, 8 Fold, 12 J's of Christmas, yes, you heard that right, and 8 Fold spray tinctures, which are excellent, by the way.

Over the last 5 quarters, we've learned an incredible amount about what patients and consumers want out of their dispensary experience and feel well positioned to operate successful dispensaries in other markets. The revenue and product margin results in both our CBD and MSO segments were strong this quarter, but we feel confident that if we had access to more capital during the period, we would have been able to drive even stronger sales and margin. We believe the recapitalization effort, the G&A savings and the sale of the CBD business will drive our MSO business to reach its full potential. So that's really what we're doing. I think you have a sense of why we made these changes.

Now Randy Whitaker will touch on the operational state of the business.

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Randy Whitaker, Green Growth Brands Inc. - COO [3]

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Thank you, Peter. Good evening, everyone. As Peter mentioned, I'm going to hit on a couple of the operational highlights and actions we took for the quarter. I'll start with the CBD segment of the business.

Overall, we're proud of the platform we built in just 9 months. We started the quarter with 139 shops and ended with 195 shops across 34 states. We would be remiss to gloss over the extraordinary effort of our retail operations experts. It is no small task to design, build and install kiosks in 195 malls in 9 months to deliver a compelling product assortment that customers love, develop an end-to-end supply chain, build the requisite IT and POS platform and hire over 1,000 skilled store team members while preparing for and executing a very successful holiday shopping season.

What we've been able to accomplish in the CBD business demonstrates our competencies, and those competencies are entirely transferable to opening dispensaries go forward. Consider the kiosk rollout a dress rehearsal for our dispensary rollout because it's the same team that will lead the construction and opening of our dispensary footprint.

As we announced on Monday, we believe that the sale of the CBD business positions us to focus our efforts on the MSO segment. We can fully apply our expertise to bringing our dispensary and cultivation operations online, which will enable our vision, so we can bring the best-in-class product to our patients and customers.

Turning to the MSO segment. We continue to be pleased with the performance of The Source dispensaries in Nevada, and we focused our efforts on growing margin through house brands and by creating disciplines around promotions, as Peter spoke to.

Creating innovative cannabis products and exceptional dispensary experiences has always been our focus. With the delay in opening of our additional Nevada dispensaries, we focused our intention on wholesaling some of our excess product. We had a good quarter of cannabis wholesaling, totaling $1.5 million, which was up significantly LY, but down to last quarter. We expect to and can do better in future quarters, especially in our cultivation efforts.

There is significant demand for high-quality, innovative products in the marketplace. They command premiums, which means there is upside for us when we improve our cultivation and wholesale operations. To capture this potential, we saw an opportunity to restructure our operations and add new leadership to our Nevada cultivation team. We completed this work in early January and believe we have the right team in place to elevate our cultivation and wholesale practices. We expect revenue in line with our current volume in third quarter and elevated results through the back half of the fourth quarter and into fiscal 2021.

Regarding our dispensary expansion throughout Nevada, I would like to provide an update on the injunction, we and several other license holders are subject to. While we are still prohibited from opening the 7 licenses we were awarded in December of 2018, we feel confident that we'll soon reach a positive outcome. We have partnered with other license holders in the state to aggressively pursue all paths to resolution, including appeal, litigation and settlement. When we reach resolution, we'll be able to immediately open our Reno store and move forward the other sites that we've secured.

Turning to Florida, we have 5 real estate locations secured in a 40,000 square foot growth facility up and operating with 3,000 plants in the ground. With an influx of new capital, we expect to have our first dispensary opened in the fourth quarter, slightly behind our original expectations of late spring.

In Massachusetts, we're continuing progress towards our first dispensary in Northampton. We expect to have this location open in late summer, given the complexity of the site and the 60-day inspection process that exists in Massachusetts. We continue to identify high-quality dispensary locations that have viable host community agreements as we scale in the state.

I'll now turn the call over to Brian Logan, who will share the financial update for the quarter.

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Brian P. Logan, Green Growth Brands Inc. - CFO [4]

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Thanks, Randy, and good evening, everyone. We were pleased with the progress we made this quarter. Total revenue was $21.1 million, representing an increase of 66% over the prior quarter. This included CBD revenue of $11 million, a sequentially increase of 113% and MSO revenue of $10.1 million, a sequential increase of 33%. Within the CBD business, retail revenue was $8.7 million, an increase of 190% over the prior quarter, which was primarily driven by a 58% increase in average sales per shop, and a 75% increase in average shops open.

During the quarter, we opened 56 shops, bringing the total number of shops opened to 195 across 34 states. In addition, CBD e-commerce revenue more than tripled, going from 5% of retail sales last quarter to 8% this quarter, while CBD wholesale revenue increased slightly from $2.1 million to $2.3 million.

CBD gross margin was 40%, up from 11% in the prior quarter, resulting in gross profit of $4.4 million. Realized economies of scale, higher-margin product mix and reduced raw material costs were the catalysts for this improvement.

CBD operating expense was $16.4 million, up from $11.2 million in the prior quarter but down significantly as a percent of sales. The increase in operating expense was driven predominantly by payroll and occupancy expense related to new shops. We also incurred $3 million of advertising expense tied to the holiday marketing campaign and new shop grand openings, which will be scaled back considerably in future quarters.

CBD segment operating loss was $12 million compared to $10.7 million last quarter, as higher sales and gross profit were more than offset by higher operating expense, including the impact of grand opening marketing and preopening-related expenses.

While we were pleased with the consumer response we've seen in the CBD business and we remain confident in its future potential, cost and liquidity constraints have posed significant challenges that prevent us from building on its foundation and making the incremental investments needed to ultimately achieve profitability. Accordingly, we announced our decision to sell the CBD business. With the BRN Group providing a stalking horse offer in order to refocus our capital on the MSO business, which we believe will yield the highest long-term value for our shareholders and customers.

It's anticipated that the company will hold a 12% -- or excuse me, a 20% carried interest in the CBD business, following completion of the transaction. Any expected net proceeds from the CBD transaction will be used primarily to satisfy existing obligations and for general working capital purposes, as well as to ensure the company continues as a going concern.

Moving on to our MSO segment. Revenue for the quarter was $10.1 million, up 33% from the prior quarter. Within the MSO segment, retail revenue was $8.6 million, an increase of 49% over the prior quarter, reflecting the first full quarter sales from our second dispensary in Henderson, Nevada.

MSO wholesale revenue decreased slightly from $1.8 million to $1.5 million. On a combined basis, our current MSO footprint in Nevada, consisting of 2 dispensaries and wholesale operations, continues to generate annualized sales volume of $40 million and industry-leading sales per retail square foot at over $15,000.

MSO gross margin before fair value adjustments was 41%, up from both last year and the prior quarter, driven by promotion discipline and the higher penetration of our own brands, CAMP and 8 Fold. However, changes in fair value of biological assets resulted in a charge of $900,000, and gross margin after fair value adjustments was 33%. As Randy mentioned, we have taken steps to elevate our cultivation and wholesale practices going forward.

MSO operating expense was $3.3 million, or 33% of sales, which included approximately $800,000 of preopening expense and $400,000 of depreciation expense, primarily related to grow and dispense releases in Florida and Massachusetts.

MSO segment operating profits were approximately breakeven. This included charges of $900,000 related to changes in bio asset fair value and $1.1 million of preopening-related expenses. As we look ahead to the third quarter, we expect MSO revenue to be approximately flat compared to the second quarter as the expected opening dates of our first stores in Florida and Massachusetts have been pushed out slightly.

Moving to head office. General and administrative expense was $8.9 million, down from $11.4 million for the prior quarter, driven primarily by a reduction in legal and professional fees. Last week, we implemented a corporate reorganization as part of our cost reduction initiatives. We expect the reorganization efforts will save approximately $4 million a year in general and administrative costs.

Net loss and net loss per common share attributable to GGB was $35.9 million and $0.15, respectively, which included nonoperating charges of $11.3 million.

Excluding nonoperating charges and certain other charges, adjusted EBITDA loss for the quarter was $13.9 million, an improvement of $1.3 million over the prior quarter. Adjusting for the impact of the corporate reorganization and the potential sale of the CBD business, second quarter adjusted loss would have been reduced by approximately $9 million. Going forward, we remain committed to significantly reducing our overall operating costs.

Turning to the balance sheet. We ended the period with cash of $3.6 million and a significant working capital deficit. In addition to the announced sale of the CBD business and the corporate reorganization, we're taking action to improve our balance sheet to help position the company to achieve financial stability. As part of these initiatives, the holders of outstanding $23.7 million convertible backstop debentures have agreed to extend the maturity to 2024. In addition, the interest rate will be reduced from 8% to 5%, and accrued interest may be paid at the option of the company either in cash or through the issuance of additional debentures. In consideration of these concessions, the company agreed to reduce the conversion price.

We also announced our intention to raise up to $30 million pursuant to a non-brokered private placement of common shares in order to provide funding towards the execution of our MSO business plan. We have received a commitment to subscribe for $10 million of the proposed $30 million private placements.

In addition, we are in active discussions with our other debt holders with regard to extending maturities and/or modifying terms to better align with our business plan. We will share additional details when they become available. We believe these actions we have taken, along with those we expect to take, will provide the company with a pathway to achieve financial stability and ultimately a platform through which we can execute our MSO plan and achieve sustainable growth and profitability. That completes our opening remarks. We will now open it up to questions.

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Operator [5]

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(Operator Instructions) And at this time, we have -- let me see here. We have currently no questions registered. You may proceed.

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Peter Z. Horvath, Green Growth Brands Inc. - CEO & Director [6]

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Okay. Well, thank you for your time today. I know it's -- these are interesting times in our industry, and we've rallied with our team, with our financial supporters, and we're doing the best we can do. We've -- and I think we're very confident in our ability to fall through on the current plan. I think these are good adjustments. We're excited -- we love what we're seeing from consumers. We just need to navigate the capital markets to bring what we do best to them. So thank you very much, tonight, and you'll be hearing from us again soon.

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Operator [7]

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Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines. Have a lovely evening.