Planet 13 Holdings Inc. (PLTH) Earnings Call Transcript & Summary

Greetings, and welcome to today's Planet 13 Third Quarter 2023 Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mark Kuindersma, Head of Investor Relations. Mark, the floor is yours.

Thank you. Good afternoon, everyone, and thanks for joining us today. Planet 13 Holdings' Third Quarter 2023 financial results were released today. The press release, the company's quarterly report 10-Q, including the MD&A and financial statements are available on the SEC website, EDGAR and SEDAR as well as on our website, planet13holdings.com. Before I pass the call over to management, we'd like to remind listeners that portions of today's discussion include forward-looking statements. The forward-looking statements in this conference call are made as of the date of this call. There can be no assurances that such information will prove to be accurate that management's expectations or estimates of future developments, circumstances or results will materialize. Risk factors that could affect results are detailed in the company's public filings that are made available with the United States Securities and Exchange Commission and on SEDAR. We encourage listeners to read those statements in conjunction with today's call. As a result of those risks and uncertainties, the results or events predicted in these forward-looking statements may differ materially from actual results or events. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliation to the most directly comparable GAAP measures, please refer to today's press release posted on our website. Planet 13 financial statements are presented in U.S. dollars and the results discussed during this call are in U.S. dollars, unless otherwise indicated. On the call today, we have Larry Scheffler, Co-Chairman, Co-CEO; Bob Groesbeck, Co-Chairman, Co-CEO; and Dennis Logan, CFO. I will now pass the call over to Larry Scheffler, Co-Chairman, Co-CEO of Planet 13.

Good afternoon, everyone, and thank you for participating in our third quarter call. We've made significant progress against our long-term goals this quarter, while continuing to hold our own during the challenging competitive environment in our core market in Nevada. In Q3 in Nevada, we generated $13.9 million in revenue from the superstore, $1.9 million from the curbside and delivery and $2.2 million from our medicine neighborhood dispensary. In total, we generated $18 million in Nevada retail sales. And based on the available data are maintaining our market share at 9% of the total statewide sales. This retail performance in Nevada compares to $18.9 million in Q2 and $17.9 million in Q1. The slight decrease in sales this quarter was due to the standard volatility in the state's tourism event calendar, coupled with lower cannabis prices. In addition to the $18 million in retail sales, we generated $2.2 million from wholesale and other revenue in Nevada compared to $2.4 million the previous quarter. The slight decline in the quarter was driven by 2 factors: we directed more of our product towards our own shelves, leading to a 500 basis point increase in our own brand share of shelf space since the start of the year. This came at the expense of the wholesale sales but will enable us to improve the margins at our retail stores. The other factor was lower orders during the quarter due to the timing of orders for our gummy line and beverage line, both of which will have new formulations launching in the coming weeks. Overall, we are pleased with the performance of our wholesale and brands this year. We've had year-over-year wholesale growth of 34% year-to-date through Q3, driven by increased yield at our cultivation facility increased brand recognition by consumers and fresh new flavors and strengths. During the third quarter, according to BBSA, we had the #1 chocolate brand in Dreamland, a top 4 candy brand in HaHa Gummies and the top 10 vape concentrates in flower branch. All of these brands have maintained consistently strong market share throughout the year, and we're excited about expanding the reach into Florida. In total, Nevada, combined retail and wholesale was $20.2 million in Q3 2023 compared with $21.3 million in Q2 of 2023. Overall, these results aligned with traditional seasonality and current Nevada-wide market trends. Looking ahead of Nevada, we expect continued fluctuations quarter-to-quarter as micro factors like the seasonality of tourist traffic and large event schedules impact revenue at the superstore. For example, the inaugural Las Vegas Grand Prix F1 race is scheduled for November 16 through the 18th. Furthermore, macroeconomic trends like cannabis pricing and the health and consumer will also impact overall Nevada wide sales. We'll continue to judge our success based on maintaining retail market share between 8% and 12% of total Nevada sales and our brands continuing to rank among the top selling by product category. Bob will discuss it later, but we are also focused on driving more noncannabis revenue from the store, maximizing the revenue we generate from the superstore footprint. Turning to California in Q3, we generated $4.6 million in revenue compared to $4.5 million in Q2 2023. This breaks down into $1.9 million of retail, $2.7 million from wholesale compared to $2 million from retail and $2.5 million from wholesale in Q2 of 2023. We've been solely taking more of our California wholesale fully in-house instead of using third-party distributors. This allows us more flexibility with promotions and pricing to drive additional sales. We also have better control of our receivables and cash conversion. We're pleased with the early results from this conversion, and we've been able to accomplish it smoothly without material additional staffing or SG&A requirements. With that, I'll pass it over to Dennis to discuss our financials.

Thank you, Larry. Before I begin, I'd just like to remind everyone that all numbers on today's call are stated in U.S. dollars, unless specifically stated otherwise. In Q3 2023, we generated $24.8 million in revenue compared to $25.8 million in revenue in Q2 of 2023. This 3.9% decline sequentially is in line with traditional seasonality or seasonal fluctuations. Looking ahead, we expect minimal top line growth from our legacy assets in Q4 as price compression continues to offset the efficiency gains and market share gains we are making. We expect growth to be driven by our Illinois dispensary starting as it starts to contribute sales in December 2023. And assuming we close on the acquisition of VidaCann, LLC Q1 of 2024, our new Florida business will drive incremental sales throughout 2024. In Q3 2023, gross margin took a small step back to 44.7%, down from 46% in Q2 2023. This decrease was driven by a slight decline in wholesale gross margins, primarily in California, where pricing pressure offset the positive impact of bringing distribution in-house. Compared to Q3 of 2022, gross margin is up almost 350 basis points, driven primarily by a decrease in product discounting as a percentage of gross revenue, partially offset by an increase in revenue coming from our lower margin wholesale business. We continue to target 50% gross margin at the retail store level and expect to see gross margin improvement in 2024, once we closed the VidaCann acquisition and generate a higher percentage of revenue from retail and notably the fully vertically integrated Florida operations. Sales and marketing expense for the quarter has been consistent all year at $1.3 million per quarter. We believe this demonstrates our ability to maintain a good active marketing spend where we can efficiently drive more sales and customer throughput with a positive return on investment. There will be a slight increase in Q4 as we open our Illinois dispensary next month and work towards getting that dispensary fully ramped up over the next few quarters. The company spent $11.3 million on G&A consistent with the $11.3 million spend on G&A in Q2 of 2023. Of the $11.3 million, approximately $900,000 was related to the VidaCann M&A transaction and the finalization of our conversion to a Nevada Corporation. We are also carrying additional costs associated with the pre-revenue operations in our Florida and Illinois businesses. During the quarter, we took a $39.6 million impairment charge against our Florida license. This was part of our U.S. domestication process where the company had the fair value all of our assets for the final exit tax return we filed with the CRA, and we engaged a third-party independent consultant to perform a formal valuation of the company's assets for tax purposes. And as a result of that valuation work we determined that the carrying value of the Florida license should be written down. As of September 30, 2023, the company had a cash balance of $36.7 million and no debt. We utilized $1.9 million investing cash flow during the quarter as we finalized the build-out of our Illinois dispensary and continued with high priority upgrades at the superstore, like the consumption lounge and other buildouts at the superstore. Through the end of the year, we expect to spend approximately $1.5 million to complete the build-out of the upgrades in Las Vegas. And looking ahead to 2024, our cash need minor for our existing operations. And as part of the VidaCann transaction, which we expect to close in Q1 of '24, we will pay $4 million in cash on closing and take back a promissory note or take on a promissory note for $5 million that will be due 12 to 16 months post-closing. We are confident that these cash outlays will often be offset by the cash obtained from the sale of our existing Florida license, which is a required regulatory condition of the closing the VidaCann acquisition. We also have an additional property in Florida that could be potentially sold and added to these assets, there are significant cash benefits to the VidaCann acquisition as it replaces most of our CapEx needs in Florida that would have had to been incurred to build out a comparative 26-store retail network and supporting cultivation and production facilities. We expect total CapEx in 2024 to be [indiscernible]. They're between $3 million and $10 million over a 12- to 18-month time horizon. And with that, I'll turn the call back over to Bob to discuss the significant progress we've made this quarter on our growth initiatives and corporate strategy.

Thank you, Dennis, and good afternoon, everyone. As indicated earlier, we've taken major steps this quarter to advance our growth initiatives and become a major player in Florida. On August 28, we announced a purchase agreement for VidaCann, the ninth largest Florida dispensary network. This acquisition accomplishes multiple strategic goals and is good fit within our company. It accelerates our timeline to reach a scale position in the market and significantly reduces the near-term cash requirements. Their medical-focused brands complement our own more experience focused brands and their experienced management team with talent every level from store managers to cultivation to production our key assets. Together, our combined footprint will be almost 30 medical dispenser with cultivation and production capable supporting up to 70 dispensaries. It would have taken us years and tens of millions of dollars in CapEx to reach a scale independently. We've explored acquiring VidaCann and have done diligence multiple times over the years and have been very impressed, by the way, they've made improvements both to the quality of their cultivation with both yields and potencies increasing dramatically. They've also made significant progress to improve the cost structure of their operations. Those improvements in their core operations, the synergies we saw between our respective operations and the time and cost savings developing our own footprint and the attractive price point is why we are so excited about this deal. Our main focus, once we've completed the acquisition is to continue the trend of improving cultivation by bringing some of our best strains and brands from Nevada and California. We also intend to add additional indoor cultivation from more premium flower. The goal for 2024 is to leverage improvements in cultivation and our award-winning brands to improve productivity per store, drive continued growth, increased cash flow and prepare our market position anticipation of eventual adult use legalization. We expect this acquisition to close in early Q1 of 2024, and it will be a significant contributor to our results next year. It wasn't just Florida where we made progress over the quarter. We are on track, as Dennis indicated to open our first dispensary in Illinois in December. And once we open and once it's fully utilized, we believe that location will have the potential to be the second highest generating dispensary in our network. Last week, on November 1, which is a 5-year anniversary of the opening of the superstore in Las Vegas, we released renderings and more detailed plans for our consumption lounge based at the Las Vegas Superstore. It contains 3,000 square feet of food, entertainment and consumption space and will be a perfect place to watch game, try products and simply enjoy a night out. Similar to the rest of the superstore, it has an eclectic art, experiential components and will be a one-of-a-kind experience. But between days, cannibition and our completed grand hallway expansion, which has room for additional entertainment in an event, we are significantly improving the utilization of the superstore, driving additional traffic, helping up new non-cannabis revenue streams, which are beneficial in the current 280-E restrictions. We expect the lounge cannibition and the grand hallway to be ready to host guests on or before April 20, 2024. Looking back at the goals we set this year drive long-term growth. They were to maintain our competitive position in core operations, increase scale and improve profitability and cash flow. We have bolstered our scale and cash flow potential with a clear line of sight to long-term growth with the VidaCann acquisition, launching our footprint years ahead of our previous expectations and at a fraction of the cost. The synergistic combination of business and expanded reach of our premier brands will drive profitability and sales. Along with these expansions of our footprint, the core operations have continued to grow and develop with our own brands, maintaining their high rankings and build-out of the superstore progressing smoothly. Overall, we are well underway to meeting we're exceeding these goals and have a strong balance sheet to continue to execute on our plans in 2024. We believe 2024 will be a fantastic year for growth at Plant 13. And with that, again, I want to thank everybody for participating in the call, and I'd now ask the operator to open up questions for covering analysts. Thank you.

The first question comes from Doug Cooper with Beacon Securities.

Just a couple for me. I just want to confirm, I guess, the CapEx, Dennis. So you have $36 million in cash at the end of the quarter, right? To start the Nevada, you said you spent, I think, $1.5 million -- you need to spend $1.5 million to complete Nevada. Is that what you said?

Yes. If I go back to that, yes, I think we spent $1.5 million in -- we have to spend an additional $1.5 million, $1.8 million. I can't remember exactly. But yes, Doug, it's basically the build out of the lounge, and we've completed the gray shelf for the third-party cannibition museum opening and extending the grand hallway is in progress. You'll see it when you come down, obviously, if you're coming down from MJBiz. And if not, we'll send your video photos of it but yes. And that's really all we need on the Nevada operations. Illinois largely taken care of as it opens, I think we're planning first week of December to get that open. So we've got a little bit more there to spend in Q4, but not much majority of that has already been spent, I think, will be $5 million all in for that open. And so that includes the acquisition purchase of the building and then the buildouts.

Okay. And then the consumption lounge, that's incorporated in that $1.5 million still the spend or that's on the consumption lounge?

Yes, that's incorporated into that additional spend requirement.

Okay. And then Florida, obviously, taking care of, you've got to spend $4 million cash upon closing to the shareholders, I guess. And then CapEx, you said $3 million to $10 million?

Yes. So it's going to -- I look at the $4 million we have to spend and the note we take -- we're taking on should largely be washed out with the sale of our existing license and additional cash will come in from that license sale as well as the sale of -- we've got a 20-acre parcel of land that's in the [indiscernible]. We've got some interest in that already as part of that license sale process, and then we've got another other assets that are building that we haven't erected yet probably worth a couple of million that we can still. So I look at selling the license and taking VidaCann, we'll end up with net cash out of that. And then the CapEx on balance of the Florida, assuming VidaCann closes, it's going to depend on how fast we roll out additional stores. The capacity of the VidaCann production and cultivation facility will probably spend $2 million to $3 million to put the indoor, grow in, enhance their greenhouse. We do have a plan. We are working with them on that. And then that will allow us to greatly expand the product offering in their existing 26 store network. They have capacity to double that -- the number of stores using that existing growth. So there's not a lot of additional investment we need in the grow itself. It's just how many stores are we going to roll out, how fast, what location does Florida go adult use in '24 on the vote, and then we build a superstore, does it state medical. We won't know the answer to that, whether it's on the dollar or not probably until I think I was reading today sometime in January, February. So that's all going to impact what the CapEx looks like in Florida in '24. We're still kind of 3 to 10. But net-net, we should come out.

Also to that, if you start $36 million, you got some cash in from the sale of the license and maybe some buildings after the VidaCann closes and after Illinois is open, you should still be north of $30 million, I would say, right?

Yes, we should. Yes.

Okay. The write-down of the Florida license by $39.6 million. You paid $50 million, correct?

We paid $55 million all in, in September of '21. We -- the proceeds for that $55 million we raised it at CAD 7 30 back in February of '21, way into Florida. Obviously, the market is very different now than. We had to do that formal valuation as part of our domestication to Nevada and looking at where we think that license will trade, coupled with the valuation report we had and what we filed with the CRA that led to us having an impairment charge. So we'll finalize that number depending on what we end up selling for, I think.

I guess I'm just trying to get at, you think the value of that license that you're assuming to be for sale is around $15 million or $16 million?

Yes, probably in that ballpark, right, if you back out fixed assets we have -- that have down there in that range for sure.

Yes. Logistics, the $55 million minus $39.6 million this is the difference, if that's what the...

Yes, for sure.

Okay. Any hurdles still to get over to -- for the closing of the VidaCann or is it sort of just regulatory stuff right now?

Well, it's regulatory and the big hurdle is the finding a buyer for our license that will pass the OMMU process, right? So it's a bit of both. I mean, that's the biggest one. We have obviously made the applications in Nevada, vetting the shareholders who are taking on getting regulatory approvals in the states that we need to. But the gating item will be that and the cannabis license.

Okay. Just moving on to pricing, Bob, Larry, you mentioned that some weakness in pricing in Nevada. To what extent in terms of percentage or where do you see pricing going there? And maybe you could segue Illinois and pricing there? And just your thoughts in Florida, I know one of the MSOs came out today during their call and said Florida remains the most profitable state in the country, I guess. So just maybe your thoughts on what -- how you see the market progressing in Florida in terms of pricing and profitability metrics?

Well, Doug, it's Bob. Obviously, we're excited about Florida, about what it represents. I mean we're still, of course, dealing in a medical market, you got, what, 950,000 car mobile state-wide. It creates some opportunities. Being a forced integrated market, you don't have the level of competition that you have in Nevada, for instance, with multiple players in different segments. Again, we're comfortable where we are, where we're going when we close the transaction that will be price competitive. We'll be priced at similar to what VidaCann is doing now. We think we can get some price increasing with our new strains that we're moving into the market in some of our product lines. And so we're excited about that. But going back to your earlier question on Nevada. Nevada is a challenging market. I mean, as we indicated on the call, it's going to continue to be challenging. There's just a lot more competition in the market. They've continued to issue licenses for new stores. It's created a lot of compression. We've been able to hold our own. We're going to continue to do that. One thing that is going to do, we believe, is create opportunities for us to expand our footprint here in the state. We see a lot of receivers now or a lot of operators now rather that are pushing toward that receiver situation. And we see some upside there. And so that creates opportunity. It allows us to get our products into our stores and not be reliant upon third-party producers. So again, it's going to be tight, and we're going to just continue to put our head down and push through it, and we'll come out the other side stronger.

Okay. Any [indiscernible] I use word for this, but any open sight for California, I mean, is there any silver linings in the horizon that could see the market improving there?

Boy, that's a tough one. California is an even bigger challenge, particularly in the Orange County area on the retail side, the cultivation business is doing quite well. As you've seen, the numbers are ticking up quarter-over-quarter. We're excited about that. We've got a really good facility. We've got great products coming out of it. It's just in the Santa Ana area or greater Orange County, we're seeing more and more storefronts being licensed, for instance, Costa Mesa and now it looks like Huntington Beach coming into the market. In addition to the 30-plus stores in Santa Ana now, again, we're pushing through it. We're doing the best we can. But nothing has changed, Doug, from my perspective since we opened the doors. Our biggest challenge down there is the illicit market. And until the state of California gets serious about reining that in, all operators, license operators are going to continue to struggle for a bit. And it's just -- it's out of control, and they're so brazen and the delivery services that are not regulated, selling illicit products, and it seems as though the regulators continually just turn a blind eye. So a lot of talk out of Sacramento, very little action.

Dennis, is California breakeven or close to breakeven? Just what was the cash flow likely to California?

Yes. I mean, obviously, we're trying to get it to breakeven on the retail side. The wholesale piece of it, as Bob mentioned, makes money. Again, every time a new dispensary opens, we see an impact on our revenue. So it's been a challenge to get it to breakeven but it's got -- its close.

Okay. And final one, just Bob or Larry, on the consumption lounge. So the revenue model is you're not charging -- you're hoping that these guys obviously buy product in the store and go next door or across the hallway to go consume. And then the revenue is going to be coming from food and beverage predominantly?

Well, hopefully, Doug, the revenue comes predominantly from buying product, THC product. But yes, we'll have ancillary opportunities for customers, plenty of food of opportunities, plenty of drink opportunities outside of alcohol. But we think that we aren't -- initially, our model isn't to charge an admission fee. But it certainly is structured and set up to allow customers to experience equipment on a rental basis to use those products once they buy them. So -- and we've got gaming opportunities in there that will be for charge. We haven't even opened the facility now, and we're probably twice a week in inbounds from different groups and wanted to rent the entire venue for a night or 2 or -- so we think there's a lot of upside there. But again, this is new for all of us. We haven't done that. What we are very confident in is that just having this type of operation on site is going to drive additional traffic, particularly to the extent that we're going to build this out.

Again, just to add, just to add, we've got plenty of capacity in our restaurant. We think there's going to be a huge plus to help out with Trece on the -- filling that ] capacity, serving food over there also at the consumption lounge.

Okay. And then Illinois plans to open in December, and that's pretty straightforward there. So any particular comments in Illinois we should be cognitive of?

No. We're just really excited to see it come together. It's -- I just can't -- we think it's going to be a fantastic store for the entire region up there. It's different. It's something they've been clamoring for. And we're just -- we can't wait to open the door.

[Operator Instructions] Up next, we have Pablo Zuanic with Zuanic Associates.

Just a quick follow-up on the last question in terms of keeping, you said opening the lounge and all those facilities by April 20 of next year. Is there anything in terms of permits is still pending? Or it's just about an all timeline in terms of build out? I'm just trying to understand what -- if you're in full control of the timeline? Or there's still something pending?

No, Pablo, this is Bob. I'm going to talk to you. We're excited, yes, we're very comfortable we'll meet that timeline or beat it. That's just -- that's kind of an outside target date for us. There are obviously operational challenges with building facilities now given lead times for equipment, particularly large ticket items like AVA systems. But we're comfortable we're going to meet that. We've got everything in place. We've got a lot of bodies in the facility every day, and the construction folks tell us that they're moving at a pace that they represented to us when we went into the contracts and the assures are going to get open by them.

Right. And I know it's hard to estimate this, but you said in the past that I think 4% of tourists go to a superstore, right? And I've been trying to think whether a 4% number good or bad. I have no idea what percent of tourists per take, right? But I'm thinking of 4% is still very low, right? So you still -- everybody hears about the sphere, right? I'm just wondering how high that forth number could go, and it's probably hard to estimate, but is it 4% the number that you've been happy with? Or do you see a lot of upside to that number?

Well, again, this is Bob. And Dennis, Larry can jump in. But I'm never happy with the number. I don't like it to be 10%. We're going to continually work to grow traffic. I think the combination of having consumption on site now, coupled with the museum, is going to be a big traffic generator for us. This is truly a destination resort now. We've got several other lease opportunities that we're negotiating now. So this is going to be an amazing opportunity for the cannabis consumer to come in and spend 15 minutes on a purchase or spend 4 or 5 hours here. And it's so unique. It's so different. And this next phase of construction allows us to really make this a true cannabis entertainment complex. So we hope to grow those numbers. Certainly, we want to get everybody that's a contour, a user or just cannabis curious to come to the facility and enjoy it.

Yes. And then Pablo, it's Dennis. I'll add to that. Just on the percentages. I mean, it depends on your percentage of tourists. If you use the $55 million estimated tourists were more like of the 2% of the tourists actually come to the superstore given that you've had 1 million to 1.5 million customers in any given year. So there is -- if we can get to 4% of the $55 million, that would be fantastic, too. We would double the number of customers. So it really depends on what stores you're using as the tourist numbers. So we're happy to have go into more detail on the estimates and where we get in front. But...

On the same subject, on the same subject, I know that there's been a big jump in the number of stores, right, in Nevada in general. But in terms of the stores that would be 1 to 3 miles within the super store, is there a new competition in terms of stores near the superstore for -- in terms of options for tourists or that hasn't changed so much?

Well, we do have 1 large store that opened up recently this year actually Thrive, which is just at the north of us on Sammy Davis drive. But I don't see anything coming in now in the near term that doesn't run [indiscernible] of the distance separation from the Las Vegas Strip. So there are additional licenses that will come into the market, but I don't see anything or I haven't seen any applications recently that put it right down here on the strip or adjacent to the stripe.

And then 1 last one. So it's the same subject, but I guess flipping the equation, right? So I think you said in terms of the sales of a superstore, 80% tourists out of owners and then 20% local. How has that -- how has your ability to attract local change over time up to this point? And I'm not talking about the lounge and the museum that would also help cater to locals, but making more of a destination for locals. But has the attractiveness of the superstore with locals change match or not really? Because you added delivery, you did add some services that you would make a thing that things we have improved with locals, but some color there?

Well, I don't think that, that ratio is going to change much. And again, historically, pre-COVID, through COVID, and now post-COVID, those numbers have consistently tracked in that 80%, 85% on Nevada using this facility in the dispensary. And this is a tourist-built facility that's going to continue to drive tourist customers. Now we do see a fair amount of local coming through our drive-thru facility on site here that are locals. And they're typically working on the strip, and they come by here, go through the drive-thru as they're heading home in the suburbs.

I want to add one last one if you can answer, but you talked about stores that are in receivership, right, that you will be looking at that as a way to expand in Nevada. If you begin to add stores in Nevada, I suppose you would call everything under the Planet 13 banner, right? Or you would rather have the medicine? Because I don't know how much equity medicine has in terms of adding more stores in Nevada?

Yes, that's a good question. We anticipate as we expand the footprint if we do, rather, they'll probably Planet 13 branded stores. That seems to be kind of the direction we're going as a company now. All of our Florida stores, for instance, will be branded as Plant 13 and the rollout. The only 1 that is not Planet 13 is medicine, which is our original store. And we've had some internal discussions about converting that over at some point as well.

This is Larry. We probably also we'll call it the Planet 13 neighborhood stores for the smaller versions versus the superstore. There was a little distinction when they get on their website and understand what they're getting to when they come to Las Vegas.

Okay. We have reached the end of the question-and-answer session. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.