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Edited Transcript of RMPJF.PK^H09 earnings conference call or presentation 26-Nov-19 1:30pm GMT

Q1 2020 Green Growth Brands Inc Earnings Call

Toronto Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Green Growth Brands Inc earnings conference call or presentation Tuesday, November 26, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian P. Logan

Green Growth Brands Inc. - CFO

* Julia Fulton

Green Growth Brands Inc. - Investor & Public Relations Manager

* Peter Z. Horvath

Green Growth Brands Inc. - CEO

* Randy Whitaker

Green Growth Brands Inc. - COO

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Conference Call Participants

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* Derek Dley

Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst

* Jenny Wang

Eight Capital, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Green Growth Brands Q1 Fiscal 2020 Earnings Call. (Operator Instructions) Ms. Fulton, Green Growth Brands Investor and Public Relations, will now begin the conference.

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Julia Fulton, Green Growth Brands Inc. - Investor & Public Relations Manager [2]

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Good morning, and thank you for joining us for Green Growth Brands' earnings call covering first quarter results for the period ended September 28, 2019.

On the call today are Chief Executive Officer, Peter Horvath; Chief Operating Officer, Randy Whitaker; and Chief Operating Officer, Brian Logan.

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

Please note, all financial information is provided in U.S. dollars, unless otherwise indicated. Peter, Brian and Randy will share opening remarks, then we'll move to questions. Peter?

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [3]

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Thank you, Julia. Good morning. Thank you for joining our first quarter 2020 earnings call. We're excited to share our progress with everybody.

On our last call, we reflected on the foundational nature of our business in 2019. We made significant investments, and continue to, in both our CBD and THC segments. With the passing of each day, particularly following the quarter that we're speaking to right now, we are seeing -- we are now seeing the ramp-up of revenue that those investments were intended to generate.

Our financials reflect those investments, both capital and expenses in this period that we're speaking to. And they're basically in advance of significant revenue, just through the natural course of opening shops, getting dispensaries positioned, getting growth facilities positioned.

And the natural outcome of this sequencing, like other MSOs in our industry, has us reporting negative cash flows. So that's just some context, but additional context, I think is how long we've been at this, which isn't very long.

While other MSOs have been at this for 5 to 10 years, our business didn't exist before fiscal 2019. In fact, in fiscal 2019, we only had 7 months of sales generated from 1 dispensary and we got 5 months of sales from the first CBD shops and the web.

So move forward to today. Today, our CBD business operates 193 shops plus digital, and it's trending to book more sales in the next 6 weeks than we saw in the first 41 weeks since launching in February.

Additionally, our wholesale business is also seeing rapid expansion, with interest from new customers and reorders from existing customers. For these reasons, 2020, our second year as a business, is where we're making an important transition to scale in both the CBD and THC businesses. 2020 will be the year that scaling our distribution network and consumer-facing capabilities will begin to generate positive cash flows.

This quarter, we had substantial revenue growth in both segments of our business. First quarter revenues were $12.7 million, up 77% to last quarter, driven by the growth of our CBD segment and the addition of The+ Source Henderson, which we took possession of in late August. You may recall that we've been operating this store and the original -- the other Source, Sahara, since January.

Pro forma revenue for the quarter, including The+ Source Henderson, would have been $15.3 million. We've been operating both dispensaries, as I said, and year-to-date, we feel the results support a proof of concept.

And what is that concept? Well, the concept is what happens when you take a highly successful and productive dispensary and add merchant disciplines to the mix? By merchant disciplines, what do I mean? I mean enhancing promotional strategy, new product introductions, assortment strategy, visual presentation and customer engagement strategies.

Then you might ask, okay, well, it's just 2 dispensaries, so what? Well, honestly, I think most of you know, we have a pipeline of 47 dispensaries. So the fact that this year has been focused on just these 2 has allowed us -- it's a positive that we're extracting from the holdup on licenses in Nevada -- it's allowed us to understand how we're going to differentiate ourselves from our competition and prove the theory of the case.

Since January, in these 2 dispensaries, which together, should do something like between $36 million, $38 million, we've seen -- annually, we've seen sales improve significantly to last year. More importantly, gross margins have -- gross margin dollars have increased twice as much as sales dollars, all the time with more transactions and more loyal customers, so very encouraging.

The CBD business is also growing at a significant clip, each week setting records for total sales as our fleet of shops expand and as we see average shop and web productivity grow. November, which -- we use a retail calendar, so November ended last weekend, and excludes Thanksgiving sales this year. So that -- so November, that 4-week period, generated more sales in 2 weeks than the entire month of October. And in the 4 weeks, generated sales equal to 2/3 of the entire first quarter, which we're reporting in this call and that's all at full price, so very encouraging.

You know, honestly, we've even tested promotions and have seen no impact on selling, no -- by promoting. So clearly, we're in a place where we want to be, which is selling full price and relying on newness and engagement and uniqueness to drive traffic.

Drilling down into the CBD segment, we're entering our first holiday selling season. This is undoubtedly the first true holiday effort or discussion for many CBD business. Because unlike wholesale and web-only businesses, which we track and admire, we are in the best malls in the United States, about 200 locations that see 1 billion visitors annually. Thanksgiving and Christmas mall traffic presents us with an amazing opportunity to introduce our brands to consumers across the country, and we're ready.

I just was reading the Wall Street Journal this morning, the 4 days, Thursday through Sunday of this week, $68 billion in sales, $34 billion on Friday. Now that's down from prior years, but we have no prior years. So we're happy to let all the promotions and all the other retails we're driving to push traffic to the malls to give customers the opportunity to experience our products for the first time.

Back to Q1. I know it's hard to stay on track here, sorry guys. Q1 CBD revenue was $5.1 million, tripling from Q4, so sequentially, up a lot. While we do track performance metrics in each channel, that would be wholesale, shops and web, you should -- because we can track them, we do track them, but the strategy is to look at all 3 channels synergistically, where the aggregate margin of those channels is how we measure success. Now there's a reason for this. We know that physical stores lead customer acquisition and contribute the stickiest customers. People that have experiences with people and with well laid-out stores and product knowledge are more likely to come back to you. So we know this from the other businesses we've been in, and it's true in this business.

The web business fosters constant contact, loyalty and reorders. And our presence in malls and online generates leads from wholesale accounts. This is something we learned, really, it didn't occur to us until last June when we met with some large mass accounts. And basically, we drive -- those retail stores and web drive demand for wholesale sales of our brands as well as white label and contract manufacturing, as in the case of American Eagle's MOOD brand. Something that was unexpected, but I guess it makes sense, because -- and I think I'll get into that later.

So the shops. We started the period with 58 CBD shops and ended with 139. Currently, as I said, we have 193. We partnered with the 2 largest real estate companies in the U.S., Simon and Brookfield, and they represent 75% of our fleet. These malls are showing mid-single digit increases in sales per foot in traffic year-over-year, and we're talking the last several years. This is counter to the lower-tier mall trends and it's counter to the overall mall trend. So that's important for people to know.

We've partnered to gain access to these locations, and this is completely intentional and it was strategic. We now have the largest physical CBD footprint in the country. Each shop, at current selling levels, is equal to over 30 wholesale doors from our biggest competitor and that will continue to grow as we approach shop maturity. Our retail footprint creates meaningful impressions, not only for consumers, but as I already stated, it affects potential wholesale partners because they can see our work in malls, they can leverage our direct consumer insights around assortment, expected rate of sale, sequence of item selling, et cetera. It's not a blind buy, they can know that the #1 item does 4x the sales of the #6 item and plan accordingly. This is a huge advantage.

On the web, web penetration has been continually growing bigger. Every shop we add, every wholesale partner we add creates web traffic for reorder and for exploration in newness. On the wholesale side, we contract manufacturing for American Eagle, their new CBD line, MOOD, which is selling very well, and we expect to continue partnering with American Eagle.

We're in discussion with a variety of potential partners. Every week, we hear from several new interested parties. This is all about prioritization and sequencing and what's the best fit for where we are as a business. So we're considering that every day. We're very proud of our team's work, and we're excited to be in the current selling season, where a week looks like a month. And when I say that, this week should exceed $1 million for -- just in the shops.

And a day looks like a week. A day can look like a week, think about Black Friday. I think Black Friday could be $0.5 million day for us. It's the best time of the year to introduce our brands, our products and CBD for all, to consumers looking for something new, something unique, something that will become part of their ritual, part of their mindset.

In the press release, we included a link to our $0.07 holiday campaign, and I encourage you to take a look at that. We expect sequential CBD segment growth to continue at a rapid pace, and we expect Q2 CBD sales will exceed $10 million.

Now I'm going to ask Randy to share updates on our MSO segment.

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Randy Whitaker, Green Growth Brands Inc. - COO [4]

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Thank you, Peter. Good morning, everyone. As Peter mentioned, this is our first quarter reporting sales for more than 1 dispensary. MSO revenues for the quarter were $7.6 million, a sequential increase of 38%. Including Henderson for the full quarter, pro forma revenues were $10.1 million. Combined, The+ Source dispensaries, plus our wholesale business, are producing at an approximately $40 million annualized run rate.

While we acquired Henderson this quarter, as Peter mentioned, we've been operating the location since January. Calendar year-to-date, our combined sales are up 6%, product margin is up 23% or $3.2 million to the same comparable period last year. We're extremely proud of these figures and believe they are reflective of the retail and operations expertise that we bring to cannabis.

To further highlight our retail strength, I'd like to take a moment to talk about the cannabis brands we've created in Nevada. I believe what we have done with these brands is an incredible illustration of what it means to be a merchant-led organization. 8/Fold was The+ Source house brand prior to our acquisition. It was a good brand but we knew we could reinvigorate it and make it better. Our merchants and marketers fully rejuvenated the brand by working with our in-market cultivation and production team to reimagine the strains and to reposition the brand around consumer mindset. We are now in the fifth seasonal launch and have seen tremendous results. We've doubled the sales of the product upon relaunch compared to our previous performance.

Our other brand, CAMP, was built from scratch and launched on 4/20 this year. It's the first solvent-less product in the state, which means it is the cleanest, purest form of vape or concentrate, which is more important than ever given the recent vape health concerns. This premium product immediately became the #1 category seller at launch and has performed strongly since, even at an elevated price point.

We recently launched a new product line that offers strains in 3 different product forms. Compelling brands, quality, differentiated and product assortments are a result of being a merchant-led company and, we believe, will continue to set us apart from our competition. As we grow CAMP and 8/Fold, we'll continue to share product innovation and performance updates.

We are eager to bring our brands and expertise to more dispensaries in Nevada, Massachusetts and Florida. The rollout of our additional 7 dispensaries in Nevada has been slower than anticipated. Like certain other license holders, we remain subject to an August 2019 injunction in Nevada, which prohibits the state from providing final approval for the 7 provisional retail licenses awarded to The+ Source as part of the December 2018 award process.

In addition to vigorously defending both the validity of our licenses and the process used by the state, we have also appealed to the Supreme Court of Nevada, seeking both a stay of the trial court's injunction and the motion to expedite the appeal.

Finally, we have filed a request seeking an order compelling the state to have The+ Source removed from the scope of the August 2019 injunction. That motion will be heard on December 9, 2019. We're optimistic that we will reach a resolution in the near term. And when we do, we're positioned to open our Reno store and move forward with the other sites we've secured.

In anticipation of opening additional dispensaries, we've also ramped up cultivation and production in Nevada. And we are very proud of the quality and breadth of flower and concentrates our team is producing, including the brands I discussed, 8/Fold and CAMP.

We were able to wholesale surplus flower during the quarter, resulting in $1.8 million of revenue, which is a sequential increase of 70%. In the near term, we will balance our output with our own demands and the demands that exist within the wholesale market. Long term, we expect to use the product we produce to supply our own network of dispensaries.

During the quarter, we closed on the acquisition of Spring Oaks, which grants us the ability to open up 35 dispensaries in Florida. We have also secured a long-term lease, which enables us to operate an existing cultivation facility in Alachua, Florida.

Currently, we have 40,000 square feet available and plenty of additional land for expansion. Subsequent to the quarter, in October, we received cultivation authorization from the State of Florida. We expect our first harvest this spring and anticipate offering a comprehensive assortment of flower in the State, providing our patients with the greatest strain choice.

We have also made significant progress towards securing the real estate required to scale quickly. And finally, in Massachusetts, our Northampton dispensary construction is underway. Subsequent to the quarter, we received a provisional approval from the Massachusetts Cannabis Control Commission for our adult use dispensary cultivation and production licenses. We're excited to move forward in this important stage as well.

Peter, I'll turn it back to you.

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [5]

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Thanks, Randy. Sounds like we've been busy. I tell you, it's great to hear this. Anyway, okay, so we're more than halfway through our second quarter of 2020. There's probably 5 weeks left. So as we look ahead, past the New Year, this is what we're going to be focusing on: preparing for spring 2020 Florida and Massachusetts openings. It's exciting because while we had the flexibility to open almost 200 CBD shops which, I guess, we're going to get to soon enough in the next few weeks, we haven't been able to open more dispensaries on the cannabis side of the business and we're looking forward to seeing movement there finally.

Moving forward with Nevada licenses as fast as possible, and I think Randy just gave you the update on that. We're optimistic, we always have been, we have a solid application. Nothing's -- I don't think anything we've done this in question, it's really the bigger process and the state.

We're looking forward to growing brand awareness in our THC and CBD businesses and brands. And it's notable that each business has several brands that are being put out there in front of customers. And we're excited about the potential. Also realizing, this is a sequencing thing. Wholesale has not been at the top of our list but now it's going to move towards the top of the list because what we're seeing is the margin expansion and reach of wholesale is now easy to justify in our plan. And again, it follows the introduction of the product in our own retail channels. So that's been very synergistic. And we expect growth in the combined segments, both THC and CBD, will result in continued substantial sequential growth and a pathway to profitability.

So with that, I'll turn over to Brian to share the financial update for the quarter.

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Brian P. Logan, Green Growth Brands Inc. - CFO [6]

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Thanks, Peter, and good morning, everyone. As I recap our first quarter results, I'll make reference to certain segment information, which can be found in our earnings announcement that was released yesterday after market closed.

Our results for the quarter reflect continued momentum towards meaningful revenue and operating at scale. For the quarter, sales were $12.7 million, which represents a sequential increase of 77% over the prior quarter. As Peter mentioned, this was driven by growth in both our MSO and CBD segments.

By segments, starting with MSO. First quarter revenues were $7.6 million, representing a sequential increase of 38% over the prior quarter. This was mainly driven by the acquisition of our second The+ Source dispensary located in Henderson, Nevada, which was completed in late August. Had The+ Source Henderson been included in our results for the full quarter, first quarter pro forma MSO revenue would have been $10.1 million.

On a combined basis, the 2 The+Source locations are generating annualized sales volumes of over $35 million and best in retail annualized productivity of approximately $15,000 per selling square foot.

During the quarter, MSO wholesale revenue was $1.8 million, a 70% increase over the prior quarter, reflecting a full quarter of operations from our second Nevada cultivation facility that we acquired prior quarter. This facility will support future dispensary openings in Nevada, and we believe it will drive gross margin improvement as we shift to allocating more of this product in our own network of dispensaries.

MSO gross margin for the quarter was approximately 40%, and operating expenses were approximately 25% of sales, which included approximately 540,000 of preopening costs related to future dispensary openings.

As we look ahead, we are targeting second quarter sales of over $10 million for the MSO segment. In addition, as Randy mentioned, we are making progress in Florida and Massachusetts, and we continue to anticipate opening our first dispensaries in those states in spring 2020.

Shifting to the CBD segment. Revenues for the first quarter were $5.1 million, up approximately 200% to last quarter. This growth was mainly driven by an increase in our CBD kiosk shop count from 58 to 139 as well as by an increase in web sales and wholesale orders. We have rapidly deployed shops across the country, which is creating brand and product awareness and is benefiting our entire ecosystem, including web and wholesale.

We opened our first CBD shop in mid-February. And today, just over 9 months later, we have 193 shops open in 34 states. With a solid foundation now in place, we are shifting our focus to operating and growing at scale.

For the second quarter, we expect CBD revenue of over $10 million, driven mainly by retail sales ramp-up during the holiday season as well as from new shop openings. For the quarter, CBD gross margin was positive 11%, up from negative 11 -- 47% in the prior quarter. Despite the improvement, gross margin continues to be impacted by costs associated with new product testing and development as well as by rolling these unlicensed products that were still underdevelopment and just recently launched. We expect to see further CBD gross margin improvement over the coming quarters as we gain economies of scale.

CBD operating expense for the quarter was $11.2 million, reflecting an increase in new shop openings, including approximately $900,000 of preopening-related expenses. As we move forward into the second quarter, we expect to see selling and marketing costs increase due to new shop openings but to improve significantly as a percentage of sales.

Moving to head office. General and administrative expense for the quarter was $9.7 million, down $1.1 million from the prior quarter, driven mostly by savings and professional fees, which were partially offset by a severance charge of $420,000 and technology-related write-offs of $570,000.

For the second quarter, we expect to see a meaningful reduction in head office salaries, driven by actions we took during the first quarter. For the first quarter, net loss and net loss per common share attributable to owners was $30.2 million and $0.15, respectively, which included nonoperating charges of $6.3 million.

Excluding nonoperating charges and certain other mostly noncash charges, adjusted EBITDA loss for the quarter was $15.2 million as detailed in our MD&A. For the second quarter, we expect to see an improving trend in adjusted EBITDA loss, driven by higher sales and gross profit along with lower general and administrative expenses, partially offset by higher selling and marketing expenses.

Turning to the balance sheet. We ended the quarter with a cash balance of $6.8 million. We are currently working on various options available to fund both our obligations and to execute our strategic business plan.

We continue to be pleased with the progress, and we look forward to sharing our results from our first holiday season during our next earnings call.

With that, that ends our opening remarks, and we'll now open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes Derek Dley of Canaccord.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [2]

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I'm just wondering if you can talk about some of sell-through you're seeing at the CBD kiosks. Like have you seen good sort of reorder uptake from the kiosks? And more importantly, from some of your retail partners on the wholesale side?

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [3]

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Well, yes. I mean, our largest wholesale partner right now is American Eagle and they're in about 500 stores. And we delivered goods to them. And that was late September, and we actually had some orders land in October. And they did a 3-week floorset, some of you might have seen, where they -- this is kind of dramatic, they dedicated their windows of a denim-based business to their MOOD brand, which is CBD-based personal care product. So they did that for 3 weeks.

It's pretty exciting to see that. We're curious about it, we didn't know how it was performing. We got a reorder within 7 days. So that was an unexpected positive, and we're acting fast, we're also continuing to work with them to develop products going forward. So that's exciting.

In terms of our own shops, and this is something we've learned from our friends in retail, in our own shops, we're performing on plan. We had a really strong Labor Day weekend, which is not unusual for -- we've seen this from the very beginning that Mondays and Tuesdays, the weekdays, I'd say we probably get less than our share of traffic.

And then weekends, we get more than our share. And then holidays, we get even more than our share. But then, we were disappointed in some of the selling in September, which is in this report. And it turns out mall traffic was down significantly for a number of reasons, for all retailers in September and October.

Happily, we're now beating plan, we have an aggressive plan. And we didn't have to change anything, it's just a function of traffic. So -- and again, in our business, our plan is a total guess because we don't have any last year information. We have some understanding of personal care seasonality that we picked up to build a plan.

So right now, we're -- you can tell by our commentary, we're pretty excited about our -- pretty excited about what we're seeing right now. It makes it kind of fun to have this call.

Let's see. And we're seeing about a 28% return on our website, which is where we're going to measure and customers returning at a rate of about 28%. So that's -- seems extraordinarily high.

We're seeing good metrics in the early reads with our customers. And that's -- again, that's kind of -- I think you asked the question for a very specific reason. You may have heard us or you may have assumed that this is a loyalty game, and that's what we're counting on, that we become part of people's health and wellness regimen and that the reorders happen predominantly on the web, drives occasional visits to stores and that we earn their business with constant flow of newness as well as everything that they wanted and enjoyed the last time. So yes, sell-throughs are looking very encouraging right now.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [4]

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That's helpful. When you mentioned that the personal care seasonality that you -- and I get your business wasn't around last year, so it's difficult to say with pinpoint accuracy. But what should we think about in terms of seasonality? I'm assuming your Q -- your fiscal Q2 or calendar Q4 would be the highest-selling period for personal care items?

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [5]

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Yes. And I think already stated on the Q2 on both segments -- I'll make it easy for you guys, we stated that we should exceed $10 million in each segment in the second quarter. And we wouldn't say that on the call if we weren't confident. And it's -- so it's -- unless something extraordinary happens, that's what we're seeing. And you know, a lot of it happens -- the real indicator is this weekend. And we just know from our decades of experience that what you see this week really sets the tone for the rest of December. What's exciting for us is we're not running mature, established retail businesses. So we're not looking at comp store sales in these shops right now. Next year, we will. And next year, when we -- what I'm hoping is next year when we're running comps, we're not up against promotions. Because that's the dread of every retailer, is they get into this downward spiral of discounting and competing with others. And it's really no reason to do that when your product is unique in the marketplace.

So yes, I mean, it's way more exciting to talk about the business in -- on November, was it 25th? 26th than July 20, when really nothing is happening in the marketplace. So thanks for your question.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [6]

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And then just talking -- looking at the margin in the CBD business, sequentially, you saw some good improvement there. What should we think about in terms of medium- or longer-term gross margin and, ultimately, EBITDA margin goal for that business?

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [7]

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Yes, so I'll let Brian jump in. But we look at product margins, which don't include some of the things that get -- the geography for a public company reporting is different than your internal reporting. So product margin is ultimately product cost, sales less product cost, less markdowns and a few other little things. Those margins are as good as we saw in any other personal care business. So I'm talking 70% to 80% margins, which is exciting for someone who spent a lot of time in apparel.

In apparel, 6 -- mid-60% margins are awesome, mid -- if you're in a department store, 40s is typical, 50s is not unusual. So that's great. But there's a lot -- in that margin, geography is a lot of development costs as well as the product development payroll is in there as well.

And when you're doing -- when you're developing the product but you don't have a shop or you only have a handful of shops, the margin looks really bad, because it's a fixed cost, and there's very little variable sales.

Now we're entering that period where the variable sales and margin are scaling, and the fixed component that goes into the reported margin is fixed, it's decreasing as a percent of total. So we should see -- what you've seen in our past quarters should be the lowest numbers you ever see from us, and the degree of change should be significant every quarter.

I don't know if -- we'll see what Brian's comfortable saying beyond that.

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Brian P. Logan, Green Growth Brands Inc. - CFO [8]

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No, I think Peter nailed it on the head there. I would say that we haven't provided specific targets on gross margin or operating margin at this point for the CBD business. But we do expect to see that trend in both those to continue to improve quarter-after-quarter. And we saw a nice improvement in Q1 versus Q4 in our gross margin rate. And we saw a nice improvement in the decline in the operating margin rate as well. And so we would expect to see that continue to improve as we get scale in the business and grow the top line. I'd say that while we haven't given a target, we expect it to be in line with what we would think others in this space are producing.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [9]

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Okay. That's helpful. Just switching gears a little bit, just to the MSO segment or the Cannabis segment. When I think about The+ Source, can you comment on what percentage of sales or products at The+ Source are your own? So like, I'm thinking about it from a consumer lens as private label penetration, what percentage are we seeing going through The+ Source?

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [10]

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Yes. So it's -- historically, it's been around 20%. Currently, it's probably running more like 25% as we introduce new products and new strains. And we see that continuing to grow, and it's kind of a test-and-learn approach. We'll find out what the threshold is.

I think from a commercial sensibilities perspective and consumer preference perspective, our belief is that you really don't want to exceed more than 50%. We're looking forward to seeing what happens when we get in Florida where 100% of the product is your own brand. I think consumers like variety. It's kind of like going into a wine store and all you get is Robert Mondavi. That would be kind of boring for pretty much anybody, while it's great wine still.

So I think in -- so in Nevada and Massachusetts, we're looking forward to seeing as much as 50% of our assortment being our own product, probably realistically, more than 25% and less than 50%. And then having the best product that's available in the marketplace for consumers at a value price, that's part of the draw. It's -- you need a marketplace that has constant newness, is associated with best quality and also value. So we're going to deliver that. That's -- we're very convinced that that's the right formula because we operate 2 dispensaries that are doing $15,000 a foot, and we're growing the sales. It's -- we think that there's way more potential to both of those dispensaries as we go and rework the flow and continue the product development. So lots of upside there.

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Operator [11]

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(Operator Instructions) Your next question comes from Jenny Wang of Eight Capital.

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Jenny Wang, Eight Capital, Research Division - Analyst [12]

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Just a first question for me, a follow-up on the previous question. For the $10 million that you mentioned in Q2 that you're expecting for each segment, is that the CBD segment versus the MSO segment? Or are you referring to, kind of, the CBD kiosk segment and then the CBD wholesale segment?

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [13]

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No. So I think we're thinking of it as we expect to exceed $10 million of sales from CBD, all channels, and we expect to exceed $10 million of sales from the MSO segment. And by the way, good note. The second biggest day of the year, the biggest day of the year is 4/20, April 20, the second biggest day of the year is, what's the day? Tuesday? Tomorrow is the second biggest day, Green Wednesday. And I think it's therapy for family time over the weekend is what I have come to understand. Haven't tried it myself though.

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Jenny Wang, Eight Capital, Research Division - Analyst [14]

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I see. Got it. And in terms of seasonality that you mentioned, should we be expecting kind of a slight decline going into Q3, Q4, if Q2 is kind of your strongest quarter for CBD sales?

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [15]

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Well, there's a few things going on. So it's kind of -- I mean, I'll try to describe a graph, a chart. So you've got seasonality of a business. Let's say your business is not growing. There's a seasonality. Every week is different. The fourth quarter in the CBD business -- so on the MSO business, there's almost no seasonality. And it's because people buy cannabis like they buy milk and eggs. It's just -- it's an item that's replenishment. There's a few days that are highlighted probably where volume gets compressed into those days from surrounding periods. But generally, it's flat.

In our personal care curve, we seeing that the fourth calendar quarter or the second fiscal quarter should be the biggest quarter if all things are considered even. So then let's take it -- so that's 1 level. So a shop, if it didn't grow, would -- the biggest quarter would be the fourth. However, our shops, we're looking at run rate, which is the annualized volume expected from the shops. So if a week is -- let's just say this week is 5% of the year is what you would expect it to be, you can take the sales of that shop, that day -- that week, divide it by 0.05 and that would tell you what the new run rate is.

We're expecting the run rate on each of our shops to increase as we progress through time. We will see -- we see a few weeks where it doesn't move. And then just the last few weeks, we saw a significant increase in addition to the seasonality. So run rate, I think, will be another thing that increases as shops move towards maturity and people become more familiar with the brands and the locations.

The other piece that's going to complicate guessing first, how far is first quarter going to drop off of fourth or will it drop, is the wholesale business.

The wholesale business has no seasonality to it right now for us. It's basically -- we've got a series of accounts lined up and we're adding them to the best of our ability. And I think a lot of the work is going to be happening in 2020 in terms of adding accounts. So that's a bunch of elements that will affect the calendarization.

So we're learning this at the same time you are. It's -- it makes it exciting, I guess. But yes, so the thing is, you would expect first quarter to be down if all you looked at was seasonality. You might expect it to be down less if you look at run rate increasing. And it might actually be up if you add wholesale accounts in the first quarter. I'm talking first quarter -- first calendar quarter. I get very confused, sorry. I'm probably confusing the hell out of everybody in the call. Third fiscal quarter, first calendar quarter.

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Jenny Wang, Eight Capital, Research Division - Analyst [16]

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Got it. Okay. And I'm just wondering in terms of the revenue run rates, is there kind of a mature revenue rate that you're targeting for each of your mall-based shops? It looks like this quarter, it looks like your shop's doing around $120,000 a year run rate-wise. Is there, kind of, a targeted number for the long term?

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [17]

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Yes. So we think -- actually we're annualizing higher than that now. We've seen good progress in the last 4 weeks. And the target -- see, we have a target for every single shop based on the location in the mall and the quality of the mall. And these are guesses, but some people call them forecasts. So that target, when we aggregate the target, it comes out to about $380,000 per location.

And most retailers, when they take a real estate, when they open a new location and they're mature, they typically start at 80% or 85% of the maturity and they give themselves 3 years to get to maturity. Our -- right or wrong, our maturity curve right now is 5 quarters to get to 100% of target. We like how aggressive it is. We like the fact that you make money well before, at the shop level, well before you get to that target. So yes, the annualization is probably closer to $200,000 as we exit this quarter. And we will continue growing sales till we reach about $380,000 per location at maturity.

If we're off by $40,000, it's okay. Because as I stated earlier, we're driving web sales, which at American Eagle and at Victoria's Secret, we were not looking at just stores, we were looking at stores plus web. In fact, looking at unit comps is very misleading, especially in businesses that have apparel because the returns from the web make yourselves negative on a Monday or a Tuesday of the week.

So you have to look at these channels in aggregate. And as I mentioned earlier, the big aha moment back in June was that wholesale is being driven by the existence of these retail channels, that significant wholesale accounts are encouraged by the fact that we have direct consumer feedback of selling, that we understand which formulations, which SKUs, what the sequencing of those SKUs are; which one is the #1 most important one, which categories are the most important. So we're able to provide our wholesale accounts with insights that a straight wholesaler could not provide because they don't control their product and their own channel.

So it really is this aggregation of all 3 channels which is the strategic way to look at this. And also that's the way we're going to drive shareholder value.

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Jenny Wang, Eight Capital, Research Division - Analyst [18]

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Got it. And maybe moving forward to adjusted EBITDA. I'm just wondering for, kind of, the trends going forward, should we be expecting -- kind of, looking at Q4, Q1, it seems to be pretty consistent. Going into Q2, Q3, should we be expecting that to kind of trail down a little bit? And then maybe eventually hitting positive? Kind of, what's the timing that you're expecting or you're targeting for that?

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [19]

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Yes, so Brian is going to jump in. But it's -- we're -- we can't, especially in this -- in a call like this, we can't really tell you definitively when that's going to be. I think we agree with what you described the trend is: EBITDA losses will decrease, that's right, significantly with each quarter. And EBITDA, at least an adjusted EBITDA, profit is within sight. When we say within sight, I'd like to think we have accomplished that by the time we have this call next year. That's kind of a squishy answer but it's probably all I can commit to right now. I just want to make sure Brian had nothing to say.

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Brian P. Logan, Green Growth Brands Inc. - CFO [20]

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No that's -- I think you nailed it again. Jenny, I think we do expect to see that adjusted EBITDA loss to continue to move in the right direction as we move into the second quarter in particular. We mentioned it in some of our prepared remarks that we do expect that adjusted EBITDA loss to improve. And our expectations are that it will continue to improve over the next coming quarters.

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [21]

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Yes. I mean the big thing, the most obvious thing, is we've got these shops in the CBD business which we're free to open and we can expand fast. And they're doing a couple of hundred thousand dollars a year each. They're going to do maybe $300,000, $400,000 each. You open 1 dispensary and it's $10 million, at least the ones that we're planning based on the real estate. We've got a couple that are doing around $18 million each. It's a game changer. I get it, there's federal income tax 280E on those -- that part of the business. But the faster we open dispensaries, the faster we'll get to adjusted EBITDA positive and plain old EBITDA positive and plain old profit positive. That's really the game changer because we do have these 2 businesses combined, and a lot of the capital went into the purchase of the Nevada business and the licenses in Florida and Massachusetts. So we've got to -- to get a return on that capital, we've got to get sales.

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Jenny Wang, Eight Capital, Research Division - Analyst [22]

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Got it. And maybe just last one for me. In terms of your balance sheet, what are some methods that you would consider to improve your, kind of, source of cash flows or operating cash flows in the near term?

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [23]

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Well, I think we're subject to the marketplace same as everybody else. A year ago, it seemed like a brilliant idea to go public and get equity-based funding. I think there are some -- some of our competitors who didn't do that are probably torn because they're happy that they're not trading at 25% of their price a year ago. But on the other hand, where are they going to get capital other than expensive debt? So we're navigating exactly the same waters as everybody else. And right now, we're very happy that the family that largely supports us took the lead in providing a backstop that's been previously announced, and we're happy to have that.

That gives us some comfort. We also know that they're going to be in our corner no matter what. And we're constantly looking for sources of other capital, whether it be debt or other opportunities, because we've got to be on the lookout. I remember hearing Steve White of Harvest say the very same thing. It's like, when would you ever stop looking for capital?

So yes, that's kind of where we are. We don't have anything concrete to share. But obviously, we all put out press releases as soon as we have a new source of capital, and we'll be happy to continue doing that as we go forward.

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Operator [24]

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There are no further questions at this time. Please proceed.

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Peter Z. Horvath, Green Growth Brands Inc. - CEO [25]

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So thanks, everybody. Thanks for dialing in. Really appreciate your time and attention, patience. And it's been a hell of a ride. I think it's going to start getting more fun though. We're pretty excited about where we're headed. So looking forward to seeing all of you at investor meetings and in conferences going forward in the next call. Thanks.

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Operator [26]

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Ladies and gentlemen, this concludes our conference call for today. We thank you for participating and ask that you please disconnect your lines.