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

Greetings, and welcome to today's Planet 13 First Quarter 2024 Conference Call. [Operator Instructions] It is now my pleasure to turn the call over to your host for today, 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' first quarter 2024 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's 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 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 reconciliations 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 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, the floor is yours.

Good afternoon, everyone, and thanks for participating in our first quarter call. This is an incredibly exciting call that comes at the critical junction for multiple important milestones for Planet 13 and our industry. Within the next few weeks, we've opened DAZED! consumption lounge, a truly unique cannabis entertainment venue. We're on the verge of closing the acquisition of VidaCann, adding 26 stores in one of the most exciting potential adult-use states in our portfolio. And on the federal level, we are getting closer to federal reform. The biggest and most likely of possible reforms is rescheduling that could bring cannabis from a Schedule I control substance to a Schedule III. This will remove the unfair impact of 280e and allow us to be taxed the same way as every other U.S. company. This change would be transformational, have an impact on our net income, operating cash flow, balance sheet and cost of capital. To give you an idea, last year, we paid over $10 million more in taxes under 280e regulations than we would have normally. That money could have been reinvested in our business to further growth and profitability initiatives. The changes that are coming over the next few quarters and years will fundamentally change Planet 13's growth trajectory, profitability and valuation. Turning to our performance in the first quarter. We are shifting how we talk about our operation going forward to reflect the upcoming acquisition of VidaCann and our growth plans. The 3 categories are in the Las Vegas SuperStore and its attractions; our Neighborhood store network, which includes Illinois, Nevada, California, and soon to be Florida; and wholesale and lifestyle. In Q1 2024, the SuperStore generated $13.6 million. This is roughly on par with the percent of state revenue we generated last year during the seasonally slower tourist period. As we will pass a seasonally slow part of the year, and with the opening of our lounge, we will continue to see incremental gains from the SuperStore. Revenue from our Neighborhood store network grew 20% from Q1 2023 to $5.1 million. This is driven by the opening of our Illinois dispensary in late Q4 and the combined strong performance in the Nevada Neighborhood store. Bob will talk about it more, but this will be the biggest area of growth with the upcoming addition of VidaCann. Based on the last publicly available data for VidaCann, which is their 9 months ended September 30, 2023, they averaged $8 million per quarter. That undersells where they are today. Over the last year, they have seen a 60% increase in the volume of flower sales that are sold per Florida state data. We'll continue to build on this momentum with additional stores, our brands, cultivation and product improvement. Between the SuperStore and our Neighborhood Network, we generated a total retail revenue of $18.7 million, a 1% sequential decline. On the wholesale side, we generated $4.2 million, a 2% sequential increase. This is driven by continued strength to our Neighborhood wholesale position and our sought-after branded products. According to BBSA, we had the fifth most branded sales of any company in Nevada during the Q1 and the second-highest selling edible portfolio. This continued success is a testament to the brand equity we built with consumers. 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 of the numbers on today's call are in U.S. dollars, unless specifically stated otherwise. In Q1, Planet 13 generated $22.9 million in revenue compared to $23 million in revenue in Q4 of '23. This essentially flat quarter sequentially was driven by increased revenue from our Neighborhood store network and wholesale, which was offset by seasonal and Nevada-wide market declines to the SuperStore. Looking at next quarter, we will see growth primarily driven by our neighborhood stores with the acquisition of VidaCann, which we expect to close in May and contribute a month of revenue in Q2. We also expect our Illinois dispensary to continue to grow sequentially. Along with the Neighborhood stores, we are seeing the SuperStore generate month-over-month improvement with the addition of DAZED! consumption lounge and the recent opening of the Breakfast Junkies inside the SuperStore complex. Gross profit was $10.5 million in Q1 2024 compared to $11 million in Q4 2023 and $10.9 million in Q1 2023. This translates into a gross margin of 45.8% in the quarter compared to 47.8% in the fourth quarter of '23 and 43.7% in the previous year's comparable period. The lower sequential gross margin was driven by a lower share of total revenue from the SuperStore, which traditionally has higher margin, and more revenue from our wholesale business that typically has a lower margin. We've maintained our sales and marketing expense at $1.3 million during the quarter, consistent with all of last year. During the quarter, we directed more of the spending to support the newly launched Illinois dispensary. And following the end of Q1, we have focused more of our spend towards supporting the opening of our DAZED! consumption lounge at the SuperStore and supporting our house-branded products. The company spent $10 million on G&A during Q1, up from $8.8 million spent in Q4 2023. As part of that, we had to spend $2.2 million in legal, audit and professional fees associated with our year-end audit, with VidaCann, our capital raise and ongoing litigation against El Capitan. Excluding that, we've been able to maintain consistent G&A spend even with the addition of another dispensary and staffing increases for the launch of the lounge. Both G&A and sales and marketing will improve as a percent of total revenue once we close and integrate VidaCann and benefit from the significant operating leverage generated from higher revenue. While we've demonstrated good cost control, we suffered from lower operating leverage in the quarter, resulting in a $0 adjusted EBITDA in the quarter. We expect adjusted EBITDA to improve throughout the year as we realize more and more of the benefits of increased operating leverage from our growing revenue. As of March 31, 2024, the company had a cash balance of $22.8 million. In the quarter, we used $1.45 million in operating cash flow and $2.9 million in CapEx for the finishing of the DAZED! consumption lounge, upgrades at the SuperStore and some final payments on the Illinois dispensary build-out. We have approximately $9 million of CapEx planned for the rest of 2024 focused on upgrades to the cultivation manufacturing in Florida, along with the additional Florida Neighborhood store rollouts that we plan to add. Turning to our tax strategy. In light of the recent news around rescheduling, we have filed protection claims for the past 3 years that allow us to go back and refile amended returns. For this year, we will be accruing our taxes as before on the income statement, but we'll be paying based on estimated tax liability under a normalized non-280e tax treatment. This will have a significant and positive impact on our cash flow over the course of the year. And with that, I'll turn the call over to Bob to discuss our multiyear growth plan.

Thank you, Dennis, and good afternoon, everyone. The last few years, we've dealt with the shrinking Nevada market that has weighed on our top line growth and operating leverage. Despite the strong performance of our team, we haven't been able to outgrow the top line decline in the statewide as a whole. What we've learned is that scale is becoming more and more important to drive the necessary cash flow and the importance of being in markets with growth tailwinds. We have a growth plan that checks those boxes and has the potential to significantly increase our revenue over the next couple of years. We will do that by growing our retail revenue from an $80 million base in '23 and our wholesale revenue from a $17 million base. On the retail side, it comes from closing, integrating and then growing VidaCann and our new Florida business. We are on the verge of closing VidaCann, adding 26 stores to our network. Their team has been doing amazing work. Over the last year, they've increased the volume of flower they are selling by 60% based on improving cultivation and dispensary operations. The management team there has absolutely proven their operating chops and are a great addition to the Planet 13 team. Their operations today exceed the $8 million in quarterly run rate achieved through Q3 of 2023, posting significant growth over the last few quarters. The addition of Florida is incredibly exciting as it is the state where we see multiyear growth tailwinds. Adult-use is on the ballot this November and the state is setting up for potentially over $2 billion in additional demand, including Planet 13's specialty, the 120 million annual tourists in Florida who can't purchase cannabis today. The second pillar of the retail growth is increasing the size of our Neighborhood store network. Beyond the 26 new stores from VidaCann, we have an additional 4 Planet 13 stores currently under construction or in final permitting, bringing the total store network to 30 stores in the near term. The third pillar of our retail growth plan is the continued leveraging of the SuperStore as a one-of-a-kind lifestyle experience and brand-building platform. As indicated, we opened our DAZED! facility on April 5. The reception by our guests has been outstanding. They love the ability to interact with the products in a unique space designed to elevate the experience. Along with so much else about the SuperStore, this is an incredible opportunity for us to build brand equity with cannabis consumers from across the United States. In addition to the lounge, our food junkies and the recent opening of our plaza at Planet 13, we have CANNABITION opening soon, along with Koolsville, the tattoo parlor, following shortly thereafter. They fall in line with our goal to continually build out the SuperStore as a true entertainment venue. Additionally, I think it bears mentioning that these 3 additional attractions are all third-party operators, and those 3 respective operations will generate significant rent revenues for the company going forward. The second part of the growth plan is growing our wholesale business. We've seen the success of our brands in the Nevada market where we are a top player, including the second-largest branded edible portfolio in Q1. We are also unique in knowing that our products have made positive impressions across the U.S., thanks to the brand-building power of the SuperStore. Over the course of this year, we will be expanding distribution of our products to bring Planet 13 brands to more states and more customers. A couple of weeks ago, we launched our medicine branded topicals powered by Planet 13 in our store, wholesale and online. This is the first of many plans we will talk about throughout the year to get our brands into more states and in front of more Planet 13 fans in a capital-light manner. Likewise, we anticipate rolling out our Planet 13 lifestyles brand in the next 30 to 60 days. Between the retail, wholesale and lifestyle brands, we have an exciting pathway to drive future growth and bring Planet 13 from a local brand with a national following to a truly national brand. Our growth plan, combined with the exciting upcoming federal reform, position Planet 13 for better revenue and cash flow growth over the next couple of years, all supported by a strong balance sheet and an experienced management team. And with that, I'll open the call for questions from the covering analysts.

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

Just regarding Florida, in terms of that 60% volume growth that VidaCann has seen, can you talk about what drove that? Was it that it become more price competitive, loyalty? Did they improve capacity? I mean it's still the same number of stores, right, so a significant torque in terms of revenue per store, but just talk about what drove that. And second, related to Florida, you talked about adding 4 more stores, I think, from 26 to 30. Not sure if you need to add more capacity here. And how are you handicapping the decision in terms of how much more to invest in Florida ahead of the ballot or wait for the ballot and then maybe not be ready by May next year but at least have some optionality and flexibility there.

Pablo, I'll take a start, and then Dennis can follow. I think the pickup on flower is obviously operational efficiencies. They've done a fantastic job of bringing a new technology, increased lighting, significant upgrades to cooling, so the quality of the product has been greatly enhanced. That, coupled with the fact that we'll now be moving our product lines into Florida, we think, will just provide an additive for both quality and for options for customers. And at the storefront, they've done a fantastic job at really increasing traffic and awareness to the customers with respect to the increased quality. And that's really what's driving all of this. It's been a fantastic increase in not only quantity but the quality material they're producing out of both the grow facility and the production operation.

This is Larry Scheffler. I think I'll say, too, that we've talked with them. We have talked to them about marketing, also on what we do here. They've also taken the position of instead of matching other people in Florida and having high prices and then giving discounts off and on, they went to a 1 single unit price discount, the same price every day. The people have really grabbed ahold of that idea, they like it. And they've also given a money-back guarantee if you don't like the product. With those two initiatives, it is, again, another big part of why they're doing so well right now.

And then, Pablo, it's Dennis. With respect to your question on additional capacity, there's enough capacity there, as we've mentioned in the past, to expand the store network significantly, specifically with the upgrades that VidaCann team has started on that were mentioned by Bob as well as what we plan to do once we close this transaction. So we see the ability to take the store count to almost double where it is today with the existing footprint on the cultivation and production. So not a huge lift there. Most of the CapEx in Florida will be on the build-out of that store network as well as some upgrades to the greenhouses that we talked about before. And then your comment on the ballot. I mean, I'll take a first stab, and then Bob and Larry can both weigh in. Our view, and I think it's shared by the VidaCann team, we're happy it's on the ballot, we're excited about it being on a ballot, but we don't really see adult-use coming into effect until 2026 at the earliest. And so we're not really planning for a 2025 build-out. We will focus on building out the balance of '24 and part of '25 with the medical only that will then be turned into the neighborhood adult-use stores, on adult-use adoption. And then at that point in time, we'll start looking at SuperStore locations and potential build-outs of SuperStore in Florida where it makes sense.

Understood. And then, of course, the investment focus is going to be in Florida, but in the past, despite your concerns about the Nevada market, I think you also talked about adding more stores, Neighborhood stores, in Nevada through acquisitions. Or that's really just off the cards, that's not the plan?

No, we still would like to do that, yes. Go ahead, Bob.

No, I was going to say, yes, that's still on the table. We've taken a look at a couple of opportunities recently. We just haven't been able to commit, but we're still moving ahead with that. We think 1 or 2 more stores would fit nicely within the portfolio.

And one last one. Regarding California, I mean I'm just trying to understand how much of a cash drain is the Santa Ana store. Of course, you won't publicly say if you're planning to close it at some point. But I'm just trying to understand how should investors think about that store in terms of cash drain and where we are in terms of its recovery.

Yes. I'll take the first cut. Pablo, I think the plans that we have in place, specifically with consumption events that we hold there, and we have applied for consumption lounge license outside in the atrium, we think, with the addition of that, we will be able to get that store to a breakeven positive cash flow by the end of '24. So I don't think there's a huge drain on that store through the balance of '24, but we've got our hope set on that consumption license and turning that thing into a cash neutral, cash positive and really using it and leveraging the Planet 13 brand in the California market.

Right. Look, I'm going to add one more. It's the first time I think I heard you talk about on the CPG side of things, making Planet 13 a national brand, which, of course, makes a lot of sense. So I guess a two-part question. Remind me, in the case of Florida, are all the stores going to be rebranded Planet 13? Or will they remain as VidaCann? But then more on the CPG side of things in terms of wholesale and building a national brand, would you consider getting into hemp derivatives, right? I mean, Curaleaf, on their call just earlier today, talked about some of their initiatives there and the operational scale advantages that you have of selling in many states, right, not just where cannabis is legal. Is there a way to build the Planet 13 brand? Is that something you're looking in derivatives? I know you complained about that in Nevada in the past as a source of competition, but just I'd like to hear what you're thinking about hemp and how will that help the Planet 13 brand, if in any way?

So on the first part, all the VidaCann stores will be rebranded Planet 13. And of course, that won't happen overnight. It's probably a 6- to 9-month process. With respect to hemp, that's an interesting option. We're taking a hard look at that. Again, we have to be cognizant of what's going on in the delta-8, delta-9 space as well. There are a lot of issues there. There's a concerted effort in Washington to close of those loopholes. So we're going to continue to monitor that and see if it makes sense for us. We think in the short term, Pablo, as we mentioned, right now, it's important for us just to get the Planet 13 name out into the marketplace across the country. And that's really what our lifestyles brand will do. It will allow us to really do business in all 50 states and offshore for that matter. And we think that's one avenue, and we think that makes the most sense right now for us. But we'll continue to look at other options to sell product. Again, hemp is not as clean as a lot of people think it is. There are certainly obstacles and pitfalls going down that path as well.

Okay. Gentlemen, we have no further questions in the queue. This concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation.

Thank you.

Thank you.