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Edited Transcript of GLH.CD earnings conference call or presentation 19-Nov-20 9:15pm GMT

·22 min read

Q3 2020 Golden Leaf Holdings Ltd Earnings Call TORONTO Nov 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Golden Leaf Holdings Ltd earnings conference call or presentation Thursday, November 19, 2020 at 9:15:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jeffrey B. Yapp Golden Leaf Holdings Ltd. - President CEO & Director * John S. Varghese Golden Leaf Holdings Ltd. - Executive Chairman ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings. Welcome to the Golden Leaf Holdings' 2020 Third Quarter Earnings Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to John Varghese. You may begin. -------------------------------------------------------------------------------- John S. Varghese, Golden Leaf Holdings Ltd. - Executive Chairman [2] -------------------------------------------------------------------------------- Thanks, Wally, and thank all of you for joining us today to review Golden Leaf Holdings' performance of the third quarter of fiscal 2020. With me on the call today is Jeff Yapp, CEO. I would like to remind everyone that except for historical information, our discussion today will include forward-looking statements that are based on assumptions, which are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Management can give no assurance that any forward-looking statements will prove to be correct. Forward-looking statements discussed on this call as of the date of this call, and we undertake no obligation to update or revise any of these statements, except as required by applicable law. Management refers you to the cautionary statement and risk factors included in the company's D&A, by which any forward-looking statements made during this call are qualified in their entirety. Please note that all financial information is provided in U.S. dollars, unless otherwise specified. Jeff and I have prepared a few remarks, followed by a review of the financial results for the third quarter. And after we conclude, we will do a webinar immediately right after. Jeff and I started this journey together during the summer of 2019. In my role as Interim CEO at that time, the best thing I did was recommend to the Board that Jeff should become our next CEO and subsequently, at the Board's request, assumed to my current role. Jeff and the management team he has assembled have done a tremendous job turning around GLH. We now have a best-in-breed retail operation. Our product creation and branding are second to none. The team has solved most, if not all, operational challenges, and along the way, handled a lot of adversity like the vape ban and obviously now COVID. Remarkably, through this period, GLH has posted successive record revenue quarters, continued to take costs out of the system and, most importantly, reduced the cash burn and, in fact, produced our first positive cash flow quarter. We continue to execute the business and continue to feel we are undervalued. As announced this morning -- sorry, the end of the market close today, we adjust -- we were adjusted EBITDA positive in October. In the upcoming months, we will work on continuing to improve our balance sheet. While this call is about the third quarter, we made a significant announcement this morning that I would like to mention again. GLH has finalized an agreement with the founders of Chalice LLC to favorably restructure and further extend the USD 9.5 million earned -- deferred payments due on May 2, 2022, to the Chalice Group and its members. This obligation, related to the acquisition of certain assets and a subsidiary of Chalice back on July 7, 2017. The terms -- the prior terms were: on maturity, we had a 6% note that was comprised of $5 million cash payable; and $4.5 million payable in GLH stock at the then 30-day VWAP at the time of any share-related payment. Under the revised debt terms, we have reached an agreement to convert 50% or $2.5 million of the cash obligation that was due on May of 2022 to shares at USD 0.06 a share. While this creates further dilution of 41,666,667 shares, management is of the opinion that the debt of the company has negatively affected the current share price of the company. This represents a material -- this conversion rate at $0.06 represents a material appreciation to the share price as of close of business yesterday of $0.02. As important, these shares are going to be put into escrow and time release over 60 months starting May 2022. I mean, there's no flooding of these shares into the market, [putting -- selling fresh]. The remaining $2.5 million that was also due in May 2022 is now payable over 60 months plus a 6% interest. This provides a significant cash flow management benefit to the company, as we will not need to seek further financing to repay a balloon in May of 2022. The existing share payment of $4,527,350 remains unchanged and is due at maturity based on the then 30-day VWAP. These shares will also be released from escrow for over 60 months. The combination of the price and the shares going into escrow is a true testament of the founders of Chalice and their sense of value in Golden Leaf and the work that's been done. It is our hope also to address the debentures that are due in November 2021 in the near term to further clean up our balance sheet. I will now turn the call over to Jeff, our CEO, for a few remarks. -------------------------------------------------------------------------------- Jeffrey B. Yapp, Golden Leaf Holdings Ltd. - President CEO & Director [3] -------------------------------------------------------------------------------- Thanks, John. We had significant milestones in our third quarter ending September 30, 2020. In addition to being our first cash flow positive quarter, we have surpassed the total revenue generated in all of 2019. The increase was led by another record of Oregon revenues and heightened contribution from the company's out-of-state partnerships, primarily in California. I can now say formally, we have turned the corner. Following our record performance to date in the second quarter, we set another record in the third quarter that reflects the results, the hard work, discipline and processes established over the last 9 months coming to fruition. It's a result of the continued revenue growth, cost reductions, exceptional vendor partnerships and our operations' focus on excellence in operations. The results truly reflect an amazing team and culture we've established at the company. From our stores team to our production facilities, our grow -- GLH is singularly focused on exceeding expectations of our customers, our vendors, our partners and, importantly, our shareholders. And I hate to say this, but in a career that now spans over 40 years, I didn't think I'd be saying that and still working, I can honestly say that I've never seen a team face and overcome the challenges that this team has had to face over the last 9 months. Starting the fall of 2019, GLH faced a slew of these challenges. They included the loss -- they included the vape ban, which was about a 40% reduction in our wholesale business immediately. Something we know and saw coming was the widespread COVID global pandemic and the impact it's had on the world, the ongoing period of social unrest in Portland. And then to cap this all off was the unprecedented wildfire activity in Western Oregon that resulted in a temporary closure and evacuation of some of our facilities as well as the evacuation of a handful of staff members from their homes. We even offered storage space during those fires to our partners who were also businesses that were being threatened. And I hope this provides an even greater context for this performance that the team has been able to achieve throughout the year and now highlighted in our record third quarter performance. Not only did we respond with impressive agility, we grew and we flourished. In the face of another wave, we are posed to handle and prepare whatever comes our way. The company is facing the management of these strategies in the (inaudible) discipline to deliver operational success and profitability. In the third quarter, senior management demonstrates commitment to the business by taking significant pay cuts during the quarter to help manage the current cash position. Today, I'm proud to say we have formally turned that corner. When many vendors and retailers pulled back, we actually leaned in. We expanded our partner base, deepened our commitment to our employees and our stores with an enhanced retail culture, expanded flower by offering -- offering a bigger variety of flower as well as onboarding and exclusive training programs. We restructured the wholesale and purchasing teams with improved focus on our top vendors. We rolled out a comprehensive training program from [known] brands for all internal employees to drive more detailed product knowledge that gives vendors more of a voice in how they want their products represented by our team. We achieved further discipline with a just-in-time supply chain management process that gets products in and out of our door in 24 hours versus sitting in our warehouses. We've hired an award-winning grower for our Bald Peak as Director of Cultivation, established stronger vendor marketing partnerships and gained access to better products on better terms. The agility of our resources also improved. In preparation for the future, we focused on cross-training and strengthening the depth of each department. Moving key star leaders to central purchasing positions added a layer of real-world insight from our people with in-store experience. We expanded our digital marketing platform to include key partners, which increased the reach of our platform and financial contributions. On social media, we added market-leading brand ambassadors to highlight their own retail stores, which in turn has helped the purchasing team and vendors see the benefit from their marketing dollars. We continued to mature our marketing approach in our [digital brand] and had our eyesights set on our most aggressive promotional push to finish up this year. We've restructured our debt with the founders of Chalice Farms, demonstrating the support of our stakeholders and the vote of confidence in our current management team's success as well as paveed the way to address our debenture obligations in the coming months. GLH is focused on running the best in retail experience fueled by consistent traffic and share growth. GLH has effectively finished the turnaround from the other side of the ramp. We're growing our new offering, figuring out how to open more stores, and our partner participation and quality of our vendor relationships is amazing. We remain resilient and focused on continued growth, cost containment and optimistically await future legislative outcomes, which we hope will favor the cannabis industry. At this time, I'll turn the call back over to our Executive Chairman, John, who will review our financial results. -------------------------------------------------------------------------------- John S. Varghese, Golden Leaf Holdings Ltd. - Executive Chairman [4] -------------------------------------------------------------------------------- Thanks, Jeff. As Jeff has stated and as we've seen in the release, we reported another successive record revenue quarter as well as our first ever cash flow positive quarter. For the 3 months ended September 30, 2020, the company reported record revenues of $6.2 million, growing 42% year-over-year and 12% sequentially, driven by growth both in Oregon and California markets. Most impressive, and for the first time in our history, we generated positive cash flow from operations of $417,000. For the 3 months ended September 30, 2020, adjusted EBITDA loss was $173,000, which is an improvement of 77% from the prior quarter. Adjusted EBITDA is a non-IFRS measure, which the company considers an important measure in assessing our operations. For a reconciliation of adjusted EBITDA, non-IFRS to income loss before income taxes, please see the notes below. For the 9 months ended September 30, 2020, the company reported revenues of $16.4 million an increase of 34% compared to the 9 months ended September 30, 2019, and surpassing total revenue for all of 2019 in just our first 3 quarters. For the 9 months ended September 30, adjusted EBITDA loss was $1.7 million compared to $5.1 million for the 9 months ended September 30, 2019, a 67% improvement. Same-store sales increased 26% compared to the third quarter of 2019 and 8% compared to the second quarter of 2020. Gross profit before biological asset adjustments was $2.2 million, an improvement of $700,000 or 47% compared to the prior quarter and was 49% compared -- better than compared to 3 months ended September 2019. Total operating expenses were down 22% compared to the 9 months ended September 30, 2019, and 3% compared to the second quarter of 2020, demonstrating the continued cost and containment efforts while we continue to grow revenues. Finally, building on the momentum of the third quarter, the company was adjusted EBITDA positive in the month of October based on our unaudited results. At this point, I'd like to thank everyone who joined the call, and we look forward to continued conversations in the upcoming quarter. Now if you would turn your attention to your screen, Jeff and I will take you through a presentation focused on the third quarter followed by, as become our custom, our frequently asked questions from investors. I'd like to point out the disclaimer, as is in the press release, that we have forward-looking statements and ask you to be aware of those. Jeff, over to you. -------------------------------------------------------------------------------- Jeffrey B. Yapp, Golden Leaf Holdings Ltd. - President CEO & Director [5] -------------------------------------------------------------------------------- Thanks, John. To come off of you, so let's go to our first slide, our mission slide. Our mission remains unchanged: to enhance and ignite purpose and all lives through cannabis. This mission clearly is the window through which we look at the business. We are focused on the health and wellness benefits that plant-based medicine offers our customers. We believe that the long-term growth of the company would be from the 75% of the population that currently does not have a relationship with cannabis. We are focused on new users. To do that, we have to make sure we offer both the best products and, importantly, the best experiences in our stores. Long term, this industry will be competing with large pharmaceutical companies and alcohol, and we have to bring our best game. John, you can stay on that slide, that's fine. John and I will walk you through our third quarter results, when given the challenges we've been through and faced all year, we think, are solid. We are clearly not done with the work here, but we are moving in the right direction and remain very optimistic about the future and the industry. If you could, John, next slide. This slide is just a quick overview on how we're positioned. We're a multistate operation with businesses in Oregon, Washington, Nevada and California. We have strong brands, the same brands across all of those markets. And I think we see ourselves as a builder of consistent and strong brands and products shared across our business. Next slide. I want to spend a little bit -- a second -- no, next, the slide before, please, 8, guiding principles. I want to spend a couple of minutes on this one. So our guiding principles are quality, integrity, clarity, agility and diversity. These are our guiding principles. Highest product quality in the categories we operate in, integrity in everything we do, how we work with our employees, our customers, our partners, investors. Clarity. Clarity drives energy, and energy drives results. Agility, if there's one thing we have demonstrated as an organization is agility. In my career, I had never been part of a team that's had to deal with the things this team has had to deal with and then importantly, not only survived, but thrived: a vape ban, which affected 40% of my wholesale business; a global pandemic no one saw coming; unprecedented social unrest in Portland like I've never seen before anywhere else in the country. And then if that was not enough, wildfires have threatened to burn down the entire state. And despite all of that, this team came through it and came through it really strong. I'm really proud of everyone on this team. Now we can quickly run through the results. So this is -- I mean, you've heard this, but I think we'll say it again because we're proud, year-over-year growth of 42%, a quarter-over-quarter growth of almost 12%. Next slide. Retail, up 25%. Our wholesale business is up 42%. Average ticket. What I love about this is not only traffic growth, but also our average ticket growth by almost 14%, which I'm really proud and that continues. Our adjusted EBITDA performance is up significantly, a $3.4 million improvement trend stronger. And then finally, our cumulative cash flow, up $5.7 million, and our improvement is up $1.3 million. So overall, we have been really proud of the results and proud of the team, what they've been able to pull off, in an almost crazy environment. So with that, we'll move quickly into the questions that -- the frequently asked questions that we've been given before, and we'll take you through them. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Jeffrey B. Yapp, Golden Leaf Holdings Ltd. - President CEO & Director [1] -------------------------------------------------------------------------------- John, I think this first one is for you. What is the cash run rate and burn rate for GLH? -------------------------------------------------------------------------------- John S. Varghese, Golden Leaf Holdings Ltd. - Executive Chairman [2] -------------------------------------------------------------------------------- The company used a total of $200,000 in cash from operations for the 6 -- 9 months ended September 30, 2020, and we anticipate existing 2020 with approximately $1 million in cash. As we announced today, October was positive adjusted EBITDA month, which if we continue to stay that way, are -- we're hopefully building cash (inaudible) slowly. Jeff, question #2. U.S. federal legalization will be a major catalyst for the entire market. What else will create value for GLH in the near future? -------------------------------------------------------------------------------- Jeffrey B. Yapp, Golden Leaf Holdings Ltd. - President CEO & Director [3] -------------------------------------------------------------------------------- The company believes that even without federal legalization, which we believe has a strong probability of happening, there are a number of other things that can create value in the near future. Those include continued expansion of our Oregon retail footprint as well as growth in our wholesale revenue opportunity in Oregon. We look to expand the number of stores we have in Oregon and our continued growth in California and the reopening of Nevada, all of which would have -- and potential for operations in that state also, all of which has a very near-term positive impact on our business. John, question 3: GLH continues to have share dilution. How can you address this? -------------------------------------------------------------------------------- John S. Varghese, Golden Leaf Holdings Ltd. - Executive Chairman [4] -------------------------------------------------------------------------------- Until GLH fully resolves its debt position and becomes cash flow positive and EBITDA positive, we will have limited flexibility. If and when we achieve this, we should create further optionality for the company and reduce the need for dilution. Once we can sustain positive cash flow, then any potential future dilution would be for strategic and accretive reasons. Shareholders should keep in mind that this turnaround has been accomplished with very little cash on hand, as the company has not been attractive to capital providers. By necessity, shares have been used to make debt and interest payments were needed. While no one likes dilution, shareholders also need to keep in mind that there are debenture holders that rank in priority to shareholders. The reality is that when debentures were used as a financing tool, it was done to avoid diluting shareholders at a time when everyone anticipated the share price would increase down the road. Due to a bad combination of market forces, poor acquisitions and poor execution, the value of the company has decreased. Until the debt positions are fully addressed, further dilution is possible. The company has posted another strong quarter. It is up to the market and up to shareholders to determine the share price, not management. When people stop selling at $0.025 and holding on to their position, then demand will drive the share price up, as simple as that. Jeff, how did the company address the first wave of COVID? And how are you addressing the second wave? Where has this hurt the company? And where has it benefited? -------------------------------------------------------------------------------- Jeffrey B. Yapp, Golden Leaf Holdings Ltd. - President CEO & Director [5] -------------------------------------------------------------------------------- We have remained unchanged in our approach to COVID-19. At the very beginning of this, we've set 3 very clear principles, and we stuck by them: Number one, keep our employees safe; number two, keep our customers safe; and number three, keep our operations open, and that's without the assistance of any federal aid. We clearly could not participate in any of the government programs. So this was -- we were on our own. I think the thing that we did that has really benefited the (inaudible) was we made a decision to lean in when many in our industry were cutting back, allowing us to pick up market share. We actually added people to our stores, our staff. We wanted to make sure that people were covered if they had to call in sick. We made sure they felt no threat to do that and wanted them to do that. We did not close our stores except in order to evacuate due to increasing fire activity. We provide an essential service to our customers, and our employees were committed to serving those customers. We also increased the cross-train across our departments to improve resource agility to provide support where it's needed, packaging, timing, shipping and delivery. And to put this into focus, I'll give you a quick story. Because of all of the social unrest in downtown Portland, our downtown store was broken into several times. And our crew would be in that store at 2:00 and 3:00 in the morning getting it ready, so they can be open the next day. And I think one of the -- my favorite stories is how pleased our employees were when the next day, customers came and they had not expected us to be open. But we never did and that we always got the store open. So I'm really proud of our team. And clearly, COVID, while it represents enormous personal challenge for all of us, our team has really dealt it with a sense of mission and purpose. And we're really proud of the results we've achieved during it. We think the second wave is, while hugely unfortunate, our plan is not to change how we approach. -------------------------------------------------------------------------------- John S. Varghese, Golden Leaf Holdings Ltd. - Executive Chairman [6] -------------------------------------------------------------------------------- Great. Jeff, does management think a Biden-led government will be more friendly to the industry? -------------------------------------------------------------------------------- Jeffrey B. Yapp, Golden Leaf Holdings Ltd. - President CEO & Director [7] -------------------------------------------------------------------------------- Clearly, we feel the government is starting to recognize the benefits of plant-based medicine and the legitimacy of the state-level cannabis industries, which have grown to overwhelming majority in the United States. The movement speaks to the momentum that our federal government cannot ignore. Our company would benefit from rescheduling due to the access to banking tax reform and traditional capital relationships. Our hope is that it will move forward in a very positive way with some urgency in the coming year. -------------------------------------------------------------------------------- John S. Varghese, Golden Leaf Holdings Ltd. - Executive Chairman [8] -------------------------------------------------------------------------------- Great. A question that's been asked -- yes, it's -- yes. -------------------------------------------------------------------------------- Jeffrey B. Yapp, Golden Leaf Holdings Ltd. - President CEO & Director [9] -------------------------------------------------------------------------------- Go ahead. Go ahead. -------------------------------------------------------------------------------- John S. Varghese, Golden Leaf Holdings Ltd. - Executive Chairman [10] -------------------------------------------------------------------------------- I have been asked to explain the Chalice debt restructuring and its implications and how -- what we'll do with the remaining debenture. I think one of the -- before I even get into it, I think one of the important points is, I think Jeff and I have told you, we focus on the operations. That's all we can do. We were asked what's holding the share price back. The only other answer we have left is potentially the debt overhang. And so we then embarked upon a conversation of what can we do to deal with it, given -- again, given our limited position. So we talked to our founders of -- at Chalice. With their support, this restructuring accomplishes a few very material things for GLH. On an accretive basis to today's share price, we have managed to reduce the cash payment by 50%, amortized the remaining cash payment over a further 60 months that starts in May 2022 and, by placing the shares into escrow, ensured that significant selling pressure will not arise. That Chalice Group agreed to this restructuring is a strong vote of confidence in the management team and the turnaround that has been made. Like management and the Board, that they believe the company is significantly undervalued, hence, evidenced by their willingness to accept the shares at USD 0.06 when it closed $0.02 yesterday. Management will continue to -- our intent is to work with the other debenture holders in a similar fashion in the near future. Those are our questions. In the deck which will be posted, we've given you the updated capital structure, which will be netted off and adjusted for the Chalice earn-out. And we will -- let's see here, just make sure I get to those pages. Yes, we've got all the various adjustments, which you can check online. With that, Jeff and I would like to thank you for joining us today. We appreciate your continued support and look forward to being back in touch with you after the end of the fourth quarter. Thank you, everyone. -------------------------------------------------------------------------------- Jeffrey B. Yapp, Golden Leaf Holdings Ltd. - President CEO & Director [11] -------------------------------------------------------------------------------- Thank you very much for your time today. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- And this concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.