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

Greetings, and welcome to today's Planet 13 Fourth 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' Fourth Quarter 2023 financial results were released today. The press release, the company's annual report 10-K, 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 or 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 these risks and uncertainties, the results or events predicting 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 reconciliations to the most directly comparable GAAP measures, please refer to today's press release posted on our website. Planet 13's 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 and Co-CEO; Bob Groesbeck, Co-Chairman and Co-CEO; and Dennis Logan, CFO. I'll now pass the call over to Larry Scheffler. Larry?

Good afternoon, everyone, and thanks for participating in our fourth quarter call. The fourth quarter was challenging for Planet 13 driven primarily by nonoperating and macro factors. In response, we focused on what we can control. Performance is our core states -- in our core states, reinforcing our balance sheet and cost control and efficiency across the organization. Looking at our core states, in Nevada, we generated $16.7 million in retail revenue, approximately 9% of the state's total retail sales. This retail performance in Nevada compares to $18 million in Q3 2023 and $18 million in Q4 2022. The revenue decline is almost completely driven by a reduction in total market sales and over 20% average unit price compression throughout the year. In terms of market share, the factor we have the best control over Q4 2023 was slightly higher than both of the other 2 comparative periods. In addition to the $16.7 million in retail sales, we generated $1.8 million from wholesale and other revenue in Nevada compared to $2.2 million in the previous quarter and $2 million in Q4 2022. This came as we shifted more of our product towards vertical sales through our own dispensaries, where we capture better margins and have a faster cash conversion. We've also have taken a very disciplined approach to extending products on credit to dispensaries, restricting our sales to other dispensaries with strong balance sheets. According to BDSA, we had a five-fold branded sales of any company in Nevada and had top individual brands across almost every product category. This includes the #1 chocolate brand in Dreamland, a top 4 beverage brands in HaHa Beverages, a top 10 candy brand in HaHa Gummies, and a top 10 brand -- a top 10 vape concentrate in flower branch. In total, Nevada's combined retail and wholesale was $18.5 million in Q4 2023. Once again, this is a 9% share of the retail market in a top 5 brand portfolio, representing a very strong competitive position in the state, great operating leverage and a very valuable base that many MSOs would be envious of. Completing their operations in Nevada, California generated -- I'm sorry, complimenting operations in Nevada, California generated $4.1 million in revenue with $2.3 million from retail and $1.8 million from wholesale. We also officially opened our Illinois dispensary on December 4. We are seeing that dispensary turn to build its reputation following and sales with sequential growth every month since it's been open. It will take some time for us to fully ramp up that store to full potential and optimize our operations in a new state. We now have active operations in 3 states generating a total of $23 million in revenue and a positive adjusted EBITDA. This is an attractive foundation that we will build on in the coming quarters. Looking ahead, our goal is to maintain sales level and market share in Nevada and California in the face of continued pricing compression. In both markets, our primary focus is on efficiency and cost control to generate better profitability. In Illinois, we will continue to tweak our operations to drive increased sales. With that, I'll pass it over to Dennis to discuss our financials.

Thank you, Larry. Before I begin, I'd like to remind everyone that all numbers on today's call are in U.S. dollars unless specifically stated otherwise. And I'm also confirming that there have been no changes to the numbers discussed on today's call from what we issued in our earnings pre-release on February 27, 2024. The company generated $23 million of revenue in Q4 2023 compared to $24.8 million in Q3 2023. This 7.5% decline was largely driven by a decline in the wider Nevada market, which was down 10% sequentially in Q4. Historically, we've seen a 7% to 10% seasonal sequential decline in Q4 when compared to Q3. In Q4 2023, we outperformed the wider market and we're able to expand our market share in Nevada and benefited from the diversification of our portfolio to outperform single state Nevada operators. Looking ahead, we expect mid single-digit top line percentage revenue growth from our legacy assets as price compression continues to offset the efficiencies and market share gains we have made. We are seeing month-over-month growth from our Illinois dispensary, although it currently makes up a relatively small portion of our overall revenue. The larger growth opportunity both this year and longer term is the anticipated closing of the VidaCann transaction with their attractive position in the Florida market and the possibility of adult-use legislation in Florida, which is expected to be on the ballot this November. Gross profit was $11 million in Q4 2023 compared to $11.1 million in Q3 2023 and $10.7 million in Q4 2022. Our ability to maintain gross profit in the face of price compression, lower -- and lower revenue is a testament to our overall focus on maintaining our target gross margins, which resulted in a 435 basis point improvement year-over-year, with gross margin in Q4 2023 being 47.8%. The improvement in gross margin came as a result of a targeted promotional activity and kept costs in check, a higher share of vertical sales and improved product procurement, leading to lower cost of goods sold. Sales and marketing expense for the quarter has been consistent quarter-over-quarter during the year at $1.3 million per quarter. We view this as the right level of marketing spend, but are always looking to optimize its value, which includes for the next couple of quarters, directing a higher proportion of the marketing spend to Illinois, where we're building our reputation and further targeting our efforts in Nevada as we open our lounge and drive additional traffic to the superstore. The company spent $8.8 million on G&A during Q4, down from $11.3 million spent in Q3 2023. Within that $8.8 million, we spent approximately $1 million in onetime costs related to M&A, the divestment of our Florida license and legal proceedings related to the El Capitan matter. We continue to focus on cost control and operating -- operational efficiencies across all of our operations. This is one of the biggest focus areas for the company in 2024 and will be one of the bigger drivers of profitability improvement for us. The result of better gross profit and strong cost control was a positive adjusted EBITDA of $1.3 million this quarter compared to a loss of $600,000 in Q4 2022. As of December 31, 2023, the company had a cash balance of $17.3 million, made up of $5.4 million in restricted cash and $11.9 million of cash. We received $3.4 million of the restricted cash on February 1, 2024, and anticipate receiving the final $2 million sometime in Q2. The company continues to hold about $884,000 in long-term debt related to our property in Beatty, Nevada with no additional outside debt. Subsequent to the quarter, the company entered into an agreement to sell our Florida license, which is a prerequisite of closing the VidaCann transaction for $9 million in cash. Bob will talk about -- more about the legal process regarding the El Capitan matter. Knowing legal proceedings can take an unknown amount of time to resolve and the massive opportunity in front of us in Florida once we close the VidaCann transaction, we took the decisive step to reinforce our balance sheet by raising equity capital. We purposely kept the raise small at $11 million, enough for us to be well capitalized to execute Florida ahead of potential adult use in the state and to continue increasing our scale in our home Nevada market. This will put us on a pro forma cash balance of $33 million post VidaCann after satisfying the $4 million cash portion of the VidaCann transaction. We have approximately $2.5 million of CapEx commitments remaining to complete the Grand Hallway, The Day's lounge and final payments on the Planet 13 Illinois construction project. The closing of the VidaCann and the related branding costs -- and related rebranding costs will be primarily funded with the proceeds of the $9 million sale of the existing Florida license. We're also evaluating the recent tax position taken by one of the larger MSOs in order to determine what, if any, IRS refund Planet 13 may be eligible for. We will update the market as we progress with this initiative. I will now turn the call over to Bob to discuss the significant progress we've made during the fourth quarter and throughout the year on our growth initiatives and corporate strategy.

Thank you, Dennis, and good afternoon, everyone. Let me start with our ongoing growth projects, and then I'll talk a bit about our recent raise, cash position and ongoing legal action. We took a substantial step in January 2024 towards the closing of VidaCann, as Dennis indicated. We entered into a definitive agreement to sell our redundant medical marijuana treatment center license for $9 million. This is one of the biggest requirements toward closing the VidaCann transaction. And with this out of the way, we've effectively cleared the way for closing and are just awaiting final regulatory approvals. This is a tremendous opportunity for Planet 13. With potential adult-use coming, for it will be the most exciting cannabis growth market in the United States, and Planet 13 will secure a sizable position that has built-in tailwind. To put this into context, analyst forecast order could be a $6 billion market opportunity, triple today's medical-only market. And Planet 13 will have approximately 5% of the stores in the state. We've been very pleased with VidaCann's performance since we announced the acquisition. Their team is performing at a very, very high level, driving sequential growth in the fourth quarter and significant increases in both flower and milligrams of THC sold. Their medical focused brands complement our more experienced focused house of brands. And together, our combined footprint will be almost [ 3 ] medical dispensaries with cultivation and production capable of supporting up to 70 dispensaries. Once we've completed the acquisition, our main focus will be to continue building on their amazing trend of improving cultivation. We also intend to add indoor cultivation for more premium flower to expand the assortment of brands, strains, products, and price points at their dispensaries and to make them more productive on a per store basis. I won't comment on our exact time line for closing, but will note we've cleared every hurdle required. As indicated, we've sold a redundant license, and we're simply waiting on final regulatory approval to close on the transaction. The deal is also good -- offers good insight on how we are thinking about capital allocation going forward. We are very focused on profitable positions in markets with good growth tailwinds or an increasing profitability, market share in [ Galena ] Nevada, for instance. We are making progress on both capital allocation goals. In Nevada, we are on track for the opening of our Day's consumption lounge in early April, and Cannabition will follow shortly after and sometime in mid-spring. Day's consumption allowance contains approximately 3,000 square feet of food, entertainment and consumption space and will be a first of its kind entertainment venue in the entertainment capital of the United States. It is the perfect place to watch the game, try products and simply enjoy night out. Both Day's and Cannabition are aimed at driving greater customer traffic, productivity and profitability in our core Nevada operations, allowing us to generate more cash and reinvest back into exciting growth markets. Turning to our ongoing legal proceedings and cash position. I'm limited at this point, what I can say in as much as the company is subject to ongoing legal actions. As a quick summary, however, the SEC registered investment advisor that we have employed to handle treasury services, the Planet 13 embezzled money from the company's accounts. To date, we recovered $3.4 million of that and expect to recover an additional or $2 million rather in short order. That is the cash position that was held with the share. In relation to the other $16.5 million, we have initiated a lawsuit against El Capitan as well as its founder Andrew Nash and his wife and additionally, we've named Casa Verde and Casa Verde's managing partner, Karan Wadhera as defendants. We've also obtained emergency equitable relief, which includes the appointment of a special purpose receiver to locate Planet 13's funds and an injunction to prevent further embezzlement and to assist Planet 13 in securing its funds and other compensatory damages, which brings me next to our capital raise that closed on March 7. We know that the legal recovery process can take time. And given the scale of opportunity in front of us in Florida, we thought it prudent to do a capital raise to reinforce our balance sheet and make sure we had the funds required and available to execute on that opportunity along with the optionality to have more scale in Nevada and to increase profitability should the opportunity present itself. We recognize that this wasn't the ideal time for capital raise and that with the potential for rescheduling on the near-term horizon, we could have probably gotten better terms if we waited. Having said that, we think the opportunity in Florida is just too important and that's why we chose to do a small, very focused raise that will allow us to execute on that acquisition. Looking at our full year performance in the context of our goals, we've had positives and we certainly had negatives. We succeeded in executing against the factors in our control. We maintained our market share in Nevada, controlled costs and improved margins. We've executed on our growth plans, opening a new dispensary in Illinois, adding scale in Nevada and entering into an exciting flower market. On the negative side, the criminal actions of an outside SEC registered financial advisor had a negative impact on our balance sheet strength and the Nevada cannabis market as indicated, continue to see price pressure. We've taken steps to address these negatives and have set Planet 13 up for an exciting future. The likely adult-use conversion in Florida and the increasing possibility of rescheduling are major catalysts on the horizon that, combined with steps that we've taken internally, will drive growth, profitability and shareholder value. And with that, again, I want to thank everybody for participating in the call today. And we'll open up for questions from covering analysts. Thank you.

[Operator Instructions] First question comes from Pablo Zuanic with Zuanic & Associates.

Look, Bob, I'll start with Florida. I guess, can you try to quantify the need for CapEx there if that market goes to rec? I think you've said that you have enough cultivation to support 70 stores. I'm trying to understand what's the size of the CapEx you are looking at in Florida if we get rec? And related to that, and I know it's very easy to play Monday morning quarterback and you talked about the timing of your capital raise. By April 1, we're supposed to hear from Supreme Court in Florida, right, that we may have it in the ballot. People are expecting rescheduling news in the summer, we're just surprised about the timing. And while understanding that you may need the capital to expand in Florida and not lose out on the opportunity. But just more color in terms of the CapEx for Florida, expansion plan there. And then number two, maybe why not have waited a couple of months on the race.

Pablo, it's Dennis. Bob, I'm not sure if you want to take that or not. But CapEx, we'll start in the first part, Pablo, CapEx potential for market. The market goes to rec. Obviously, we think it's going to be a bit of a scramble both given going direct and the potential for 22 new licenses coming on board, but we want to be in a position to move quickly to expand that Florida store network from the current, what we think, will be 26 VidaCann stores, 4 to 5 Planet 13 stores at the start, kind of growing that to, as you mentioned, that 70-store network. So with that, we would also need CapEx on the cultivation facility. Yes, it has the capacity to service those stores. We want to make some improvements to HVAC, lighting, and humidification, so we can grow premium branded flower in there, consistent with what we have in the Nevada market. So we'll have a bit of CapEx spend to enhance the product offering that VidaCann currently has as well as introduce our own branded products into that market. So we see it as a big market opportunity that could be a huge amount of CapEx. As I mentioned in my comments, like in a post closing of the VidaCann after spending the $4 million on the cash component of that acquisition. After the raise, we'll have $33 million in cash, which we think is more than enough to build out the cultivation initiative, grow the store network aggressively and then be positioned to start and locate and potentially start the construction on one superstore in that state to kick it off. So that's -- we're not spending all of the money in Florida, but that's the main initiatives that we're looking at as well as keeping a cushion on the balance sheet for potential other opportunities to expand in the Nevada market. If we could pick up 1 to 2 additional retail locations in the Nevada market, we think we could greatly enhance our margin profile in that market because we could use more of our products vertically in those new locations as opposed to selling into the wholesale market. So that's the opportunity we see on the CapEx side and then timing as to why now. We're a conservative group, as you may have known on the way through, unfortunate that we were the victim of that of the fraud from El Cap. Hoping to recover that money as much of it as we can, but again, saw the opportunity to raise a small amount of capital, seed the company with some decent quality institutional investors in this raise and get everybody positioned, so that once these initiatives that are in the macro environment hit like the Florida initiative on the ballot. Again, it's on the ballot. We'll find out April 1 if it's on the ballot, but that's not until November until the vote. And rescheduling, we've been around the story rescheduling and safe banking for 5 years. I know we're at the cumulation of the DEA review, but there's no guarantee that, that goes positive. If it does, fantastic, it lifts all the boats and we could potentially come back to the market if the shares perform accordingly. But if it doesn't and the DEA comes out against it, we saw it take some small money now as an insurance policy to make sure we can execute on our plans as we see it in Nevada and Florida.

That's very good color. Can I just have one more thing in the meantime? Just -- I'm sorry, -- the only thing -- and that's very -- that color is very much appreciated, of course. The expansion of the store network to 26 to 70, you will not start that until we know what happens with the ballot in terms of not only being in the ballot, but actually getting that 60% approval, right? Or are you going to expand the stores immediately?

Yes, for -- you're right, Pablo, to go to the 70 definitely to go, but we see -- we do see a lot of opportunity to continue to grow that store network, not necessarily to 70, but definitely will be 31 before the end of the year and probably 40 midway through early 2025. Just on the medical-only side because there is still some opportunity, we think, in the medical side, both store growth and enhancing the product offering in the existing VidaCann network and raising their per store revenue above where it currently is. So we do see some definite near-term growth potential even on a medical-only basis.

And I guess just for the audience in the case of VidaCann deal, obviously, you seem very -- you are very committed to it. And -- but is there a breakup fee in the case that anyone decides to walk away from the transaction for whatever reason?

There's a small -- I think there's a small fee to cover legal fees on either side, but that's only in the event that it gets past the point of regulatory -- the regulatory approval gets denied. I don't think like both sides are highly committed to it. We've made the application with the Department of Health on both the sale of our license and the acquisition of VidaCann and we're waiting in the queue for potential approval. And so we're hopeful that it goes through and we're behaving as if it will, but you can never say never.

Right. And look, I mean, I'm sorry, just one more, and I'm sure there's people in the queue here. But the way I look at the numbers, there's a big opportunity to make those stores more efficient, right? And you've talked about it in terms of introducing your brands and making a number of improvements. But I'm just wondering about how they are performing right now. You talked about some sequential growth. In terms of volume per store, based on the OMO data that we all have access to, they are somewhere worse performing in the states. So I'm just trying to understand whether there are some structural issues there? Or this is something that Planet 13 can quickly fix once you take control of the business?

I would start by saying, Pablo, you're right, VidaCann management recognizes that and they've taken big steps to improve the quality of their flower and the consistency of the yields and the consistency of the flower offering in that market. They do like the fact that we have an existing brand network that we can bring down and put into the production side of the equation and use some of our expertise to really enhance that premium quality flower offering. VidaCann is not public, but they are definitely improving on a quarter-over-quarter basis, and we're seeing it on a weekly basis in the reports that they're sharing with us that they are improving on their own. We do think that the combination of the 2 companies and the 2 teams together will greatly enhance the ability of the VidaCann grow to meet the flower quality standards that we think will really drive growth in the existing store network.

And one very last one. You talked about the $33 million you're going to have pro forma cash after the VidaCann deal closes. Of course, this is factoring the recent equity raise. But maybe it's an obvious question to ask, but what assurances can you give to investors or what lessons have you learned to make the investment public more comfortable that this won't happen again, right, in terms of steward of the cash? Sorry, for asking.

Yes, fair question. Part of the issue we were introduced to the external investment advisor by one of our banks. As you know and everybody knows, cannabis banking is challenging. We had a situation where we had a bank that wouldn't or couldn't hold the level of cash that we had. They introduced us to LCAP to act as a suite to hold our excess cash. They're FBO accounts. Subsequently, we're not allowing the company to ever enter into an FBO situation again, need to have direct control overall of our -- all of our bank accounts. We've opened up new accounts with banks that have now come into the marketplace that are more, I would say, more conventional banks that we can utilize. We're also utilizing the credit union network for some of our operating activities. And just taking steps, also added Lee Fraser on to the -- to an executive role, where he's spearheading the internal audit initiative and just kind of tightening up our controls to make sure that, that situation doesn't present itself again.

[Operator Instructions] Okay, we have no further questions in queue. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.