The Cannabist Company Holdings Inc. (CBSTQ) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Columbia Care's Fourth Quarter and Full Year 2019 Earnings Conference Call. I'm your operator for today's call. [Operator Instructions] This call is being recorded for replay purposes. A replay of the audio webcast will be available in the Investors section of the company's website approximately 2 hours after completion of the call and will be archived for 30 days. I would now like to turn the call over to your host for today, Gary Santo, Vice President of Investor Relations for Columbia Care.

Thank you, Rob. Good morning, everyone, and thank you for joining us for Columbia Care's Fourth Quarter and Full year 2019 Earnings Conference call. With me today are Nicholas Vita, our Chief Executive Officer; Lars Boesgaard, our Chief Financial Officer; David Hart, our Chief Operating Officer; Mary Miller, our General Counsel; and Josh Schneider, our Vice President of Business Development. Earlier this morning, we issued a press release reporting our fourth quarter and full year results, which we also filed with the applicable Canadian securities regulatory authorities on SEDAR. A copy of this release is available in the Investors section of our corporate website at www.col.care.com (sic) [ www.col-care.com ], where you can also access a replay of this call for up to 30 days. Please note that the remarks we make today regarding future expectations, plans and prospects for the company constitute forward-looking statements within the meaning of applicable Canadian securities laws. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, which we disclose in more detail in the Risk Factors section of our final prospectus dated March 21, 2019, filed with the applicable Canadian securities regulatory authorities and also found at www.sedar.com. We remind you that any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may update any such forward-looking statements in the future, we specifically disclaim any obligation to do so, except as otherwise required by applicable law. Also, please note that on today's call, we will refer to certain non-IFRS financial measures such as adjusted EBITDA and gross profit margin excluding changes in fair value of biological assets. These measures do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. Columbia Care considers certain non-IFRS measures to be meaningful indicators of the performance of its business in addition to, but not as a substitute, for our IFRS results. A reconciliation of such non-IFRS financial measures to their nearest comparable IFRS measure is included in our press release issued earlier today. Nick will begin his comments today with a high-level review of our accomplishments during the fourth quarter and full year followed by Lars, who will provide an overview of our financial performance. Nick will then discuss our outlook and guidance for fiscal 2020, after which the team will take questions. With that, I will turn the call over to Nick.

Thank you, Gary. Welcome, everybody, to this morning's call. 2019 was an incredible year for Columbia Care. As we began the year, we were a 7-year old private company with 13 dispensaries in operation across 7 U.S. markets with a little over 750,000 sales transactions since inception. Through the support of our investors and the commitment and hard work of our team, we opened more dispensaries in 1 year than we had in the previous 7 combined, doubled the number of markets we operated in. Our dispensary count currently stands at 35 with 6 additional locations awaiting final regulatory approval to open, bringing the total to 41. Regulatory delays for both facility and product launches affected our plans in 2019 and continue to drive time lines into 2020. But with the capital plan behind us and most of the regulatory approvals behind us, we're very excited about an execution-focused year. In terms of state, our successful launch of adult sales in Massachusetts resulted in significant overnight revenue growth. Persistent demand has resulted in our Lowell, Massachusetts location now expected to annualize it at a roughly $24 million revenue run rate with fourth quarter revenue up 204% compared to the prior year. Adjusted EBITDA margins were roughly 34%, and annualized revenue per square foot was over $4,200 per square foot. With our Boston dispensary in the late stages of obtaining approval for adult sales, we expect Massachusetts to have a significant impact on our 2020 performance. We also expect Boston to be another strong performer. Pennsylvania continues to be an outstanding market for us with revenue up over 91% since the first quarter of 2019. In the 5 quarters since opening, our Pennsylvania market has achieved positive EBITDA, free cash flow and returned our initial investment. In addition to Pennsylvania, New York, Massachusetts also achieved positive EBITDA by the end of 2019 with another half dozen markets expected to cross over in early 2020. We continue to innovate in 2019 with the national launches of our CNC Card and CC@Home delivery service. CNC, as you may again -- as you may know, is the nation's first legal credit card for the purchase of cannabis products and following a successful pilot program in New York, are now active in 8 jurisdictions: Arizona, California, Delaware, Florida, Illinois, Massachusetts, Maryland and New York and available online. The credit metrics continue to be strong with a 63% approval rating, almost $3 million in purchases and less than 1% in bad debt. CNC has had a positive impact on the average basket size in both dispensaries, yielding more than 20% average gain, and through our home delivery program with over a 25% annual average gain. And we continue -- we are continuing to explore ways in which we can expand the program to the broader market by introducing partnerships nationally. Our home delivery service is active in 3 jurisdictions now and while still early days of our national rollout, is already producing impressive results as the average basket sizes are approximately 60% higher in dispensary purchase in the jurisdictions where it's active. We successfully launched our Columbia Care platinum CBD products in the U.S. in both retail and e-commerce channels and continue to see our presence in the European markets with the first sales of our platinum CBD products in December. On the M&A front, we continue to be on track to close our acquisition of The Green Solution, Colorado's market leader, and with as many as 7 of our medical markets potentially converting to adult use in the next 18 to 24 months. The addition of TGS' expertise and product portfolio geared towards the adult use markets, it cannot come at a better time. Towards the end of the year, we delivered on our promise to identify nondilutive sources of capital, closing on our first sale-leaseback transaction valued at about $34.5 million. While we may not have accomplished all that we set out to do for the year, I am proud of the progress we've made and the position we've developed for the company going into 2020. With that, I'll turn it over to Lars.

Thanks, Nick. I'll begin by discussing some key items from our fourth quarter of 2019, starting with revenue. We reported total revenues in the fourth quarter of $23.2 million, an increase of 111% over last year. Our growth was entirely organic as we added no new business through acquisitions. In addition to our revenue, our partner in Ohio saw an encouraging start with $1.4 million in sales from 4 dispensaries in their first operational quarter. Our gross profit before fair value adjustments was $5.5 million, an increase of $1.6 million or 40% over last year driven by volume growth of our business and offset by production costs of some of our facilities undergoing completion during the quarter. We recognized a positive impact from fair value adjustments related to biological assets of $12.7 million compared to a negative impact of $4.5 million in 2018. The increase was driven by high capitalized value of biological assets. Operating expenses for the fourth quarter was $34.7 million compared to $18.6 million last year. The increase was primarily caused by an increase of $4.5 million in salary, benefits and facilities expenses, $4.3 million in share-based compensation expense as well as increased promotional expenses and depreciation. Our adjusted EBITDA for the third quarter -- sorry, the fourth quarter was a negative $13.9 million compared to a negative $2.9 million in the previous year. The lower adjusted EBITDA was primarily caused by higher operating expenses. And as of December 31, our cash balance was approximately $47.5 million. Now turning to the results for the full year of 2019. Our reported revenue for the year was $77.5 million, an increase of 97% compared to 2018, again, driven by organic growth of our dispensary network and increased per store sales. Once again, our reported revenue does not include sales of $1.4 million by our partner in Ohio. Gross profit before fair value adjustments was $20.6 million, an increase of 25% compared to 2018. We recognized a positive impact to gross profit from fair value adjustments related to biological assets of $16.3 million compared to $0.7 million in 2018. That difference was driven by a decrease in the fair value of inventory sold during the year. Operating expense in 2019 was $129.8 million compared to $50.8 million for 2018. The increase was primarily due to $20.3 million increase in share-based compensation; an increase of $17.2 million related to salary, benefit and facilities expenses; $14.4 million increase in professional fees; and $11.1 million in noncash listing fee expense, reflecting the consolidation of assets acquired in our reverse takeover transaction in April. Adjusted EBITDA for 2019 was a negative $46.9 million compared to negative $11.1 million in 2018, and that difference was primarily due to higher operating expenses. With that, I'll turn the call back to Nick.

Thank you, Lars. I'd like to take a few minutes to discuss our accomplishments since the end of the year and provide an outlook for guidance for 2020. Since January 1, we launched adult use in Illinois, which has been an unmitigated success. We completed our Aurora cultivation and manufacturing facility in Illinois, which is great because it gives us access not only to a retail channel for our products, but also the wholesale market. We opened our San Diego manufacturing facility, allowing us to introduce our highly formulated sort of pharmaceutical-quality products into the California market, which is obviously a huge wholesale opportunity for us. We had 6 additional dispensaries: 4 in Florida, one in New Jersey, one in Virginia, built and awaiting final regulatory approval to open, bringing our total count to 41. We have received approval to sell flower in New York, which is a huge, huge step in the right direction for the New York program. We were approved to begin cultivation in New Jersey. We were awarded a dispensary license in Utah. We were awarded a processing and dispensary license in Missouri, subject to the completion of a management services agreement. We achieved the first OTC sales of our Columbia Care Platinum products that are manufactured in the United States, but sold in the U.K. We added depth and public company experience to our Board with the additions of Frank Savage and Jeff Clarke. And we established a Strategic Advisory Board, appointing former directors John Howard and David Solomon as inaugural members to work directly with management team as we look at M&A landscape and frankly, the opportunity set out there. In 2020, Columbia Care will continue to transition from its hyper-growth strategy to really optimizing the value and the cash flow characteristics of each license jurisdiction and really developing scale in each market. As a practical matter in providing our guidance for 2020, Columbia Care has not incorporated changes in the regulatory environment, including the potential positive impact of any future transitions from medical-only markets into adult-use markets despite our expectations and experience regarding several of our markets that are expected to convert in near term. We are also excluding our recent wins in Missouri and Utah as well as any new market openings, the development of additional assets, future M&A and additional pursuit activities. In assessing the ramp for our newer facilities, it is also important to note that the markets that have been open for 12-plus months are typically providing positive EBITDA contribution before corporate overhead. Also, while on the subject of facilities, I want to mention that our efforts to optimize our dispensary build-out plans in Florida, where we are able to take advantage of temporary pop-up locations in place of traditional dispensaries, allowing us to reach our target population and optimize revenue with much less capital invested and an improved labor model. As a result, we've revised our dispensary count to 14 in Florida, all of which will be operational by the end of the first quarter with an additional 6 to 8 temporary locations throughout -- that will be positioned throughout the state to complement our home delivery activities that will give us depth in each of our local markets. For the fiscal year 2020, the company expects the following pro forma -- the following performance. Pro forma guidance assumes the full year integration of The Green Solution. Stand-alone revenue of approximately $155 million to $180 million driven primarily by the continued growth throughout the company of the existing 35 dispensary and wholesale operations; the opening of the 6 dispensaries are currently awaiting regulatory approval, including new market launches in New Jersey and Virginia and then 4 additional dispensaries in Florida; the completion of the second medical and adult use dispensary in Illinois; the 6 to 8 temporary pickup locations in Florida. Pro forma revenue is expected to be in the range of $234 million to $265 million. So with TGS continuing to grow their market share in Colorado, gross margins on both a stand-alone basis and pro forma basis, excluding the impact of charges in the fair value of biological assets and inventory sold, are expected to reach more than 40% during the fourth quarter, ramping each preceding quarter. We expect to achieve adjusted EBITDA breakeven in the fourth quarter on a stand-alone basis and in the third quarter on a pro forma basis. A full year CapEx is expected to be in the neighborhood of $25 million to $30 million on both a stand-alone and a pro forma basis with roughly 50% of that occurring in first quarter as the remaining 2019 growth initiatives are completed. We look forward to an exciting 2020. As of now, we've completed our 2019 capital program. We expect to leverage our fixed assets to drive profitability in each market as well as on a coordinated -- consolidated basis. Shareholders should expect our pace of activity to increase as we continue to execute against our desire to make Columbia Care the best-in-class and most trusted global cannabis provider with the highest return on shareholder value. With that, we will open up the call to questions. Operator?

[Operator Instructions] And our first question today comes from the line of Vivien Azer with Cowen.

So Nick, it sounds awfully prudent to not bake in any regulatory change embedded in your assumptions around guidance, but it does sound like you're constructive on the potential for regulatory change, likely, I would expect, weighted to the back half of this year. Can you just add some more color on the 7 markets, probabilities, where your most -- or at least optimistic or encouraged?

So I guess what I would like to do is simple. The 7 markets we expect to have movement, let's call it, in the next 18 to 24 months are Arizona, DC, Delaware, Maryland, New Jersey, New York and Pennsylvania. I think that there's been a lot of discussion about Florida potentially being in 2022, but that would really -- that's really sort of a question mark right now. Each one of those markets has different dynamics, but it's fascinating because you look at in market like New York, as an example, 20 million residents, 250 million visitors a year. That could easily become the largest market overnight in an adult use environment. New Jersey has a significant existing sort of, let's call it, base of residents, but significant, significant, significant demand for expansion and growth akin to what we've seen in Massachusetts and Illinois. And if you -- you may recall that it's been our experience that when you see this transition occur, revenue jumps almost overnight, between 3 and 5x. And so it's not sort of a really tapered process. It's almost a sea change. But then you have markets like Washington, D.C., where there are 600,000 residents and people might not think that's so exciting, but they have over 25 million visitors a year. So now you begin to look at a market that is sort of in the same order of magnitude as something like Las Vegas, which is huge. And so the conversion to adult use opens up a whole range of opportunities that go well beyond the traditional definitions of an available market on a local basis. David, do you have anything to add to that?

I think the outline that Nick described in terms of the timing for all 7 markets, I think, is accurate. It's hard to pin down the definitive time line for some of those. I think Arizona, we know, is probably in 2022, early 2022. The others, I think it's sometime between the later part of this year and sometime in 2021. But as Nick mentioned, we haven't incorporated that into our guidance for 2020.

Got it. That's really helpful. Let me just ask a follow-up on this, and then I'll jump back in the queue. Just, Nick, as a point of clarification, just from a process standpoint in DC. Can DC actually legalize for adult use unilaterally? Or can Congress over all that?

So it depends on who you ask. I think that the DC government believes they have the right to do that, but there are obviously sort of governance -- let's call it speed governors through the federal funding process that could inhibit the time lines. It really depends on how the ranking members on the oversight committees in Congress view. Obviously, with a democratic Congress, we think that chances are higher than not. But there has been a significant interest in -- there's been a significant interest expressed from a number of the DC council members to push this through.

Our next question comes from the line of Matt Bottomley with Canaccord.

Just wanted to touch base on the availability of additional capital through potential sale and leasebacks and maybe if you could just line up your cash position at year-end of about $50 million, your 2020 CapEx budget of $25 million to $30 million and then the interim cash burns until you inflect into adjusted EBITDA or even cash flow positivity. And just if there'll be a need for those further sales and leasebacks or if it'll be more opportunistic in that nature.

So in the first quarter, we've provided guidance and we've talked about it in the past, we expect to close another sale/leaseback in the first quarter. We are always looking out for additional sources of non-dilutive capital, and obviously, the credit markets have been interesting for a number of other market participants. And so we actually have met with a number of credit investors, although nothing has been disclosed to the marketplace. It's -- we have no debt currently. We only have cash. So the view of the company and what's changed is that now that we're done with our capital plans or capital -- sort of the portfolio is fully built out and as you see a moderation in CapEx going down this -- in first quarter and then again in the second quarter, as each one of these markets transition not only to EBITDA but cash flow positive, we think it's appropriate to begin looking at the entire balance sheet, not just the equity side of the balance sheet. So we're going to be opportunistic, but there is -- we're also trying to be very thoughtful and very timely in when and how we bring in that capital. So I think it would be reasonable to expect to see us sort of continue to sort of push our balance sheet to be as -- to give us as much financial and strategic flexibility as possible.

Perfect. And then just another quick question. If you could just provide any more color, obviously hasn't closed yet, but on The Green Solution. Clearly, it's a good chunk of your guidance for 2020. Looks like it's a good little operation there with respect to its margin profile. So you had mentioned in the release, the ability or the plan to increase market share there. So maybe just a little bit on the dynamic of Colorado and sort of the pros and cons, I guess, of ramping that up.

So what I'm going to do is turn it over to David quickly to give some of the sort of the micro comments. But I think what you've noticed is that we've always been very targeted in how we approach each market and why we try to build a critical mass in each market. We have tried to target, let's call it, the super states, New York, Florida, California. But among those super states are actually markets like Colorado, because even though it only has between 6.5 million and 7 million people, it has a very significant tourist mix. And frankly, it's the second largest cannabis market in the world. And so their leadership, not only from a manufacturing efficiency perspective but also from a distribution perspective, has been overwhelmingly sort of scaled by their ability to interact with their consumers using technology and frankly, having very well-recognized brands and product offerings that are very well suited for those markets. And so all of those have contributed to their success. But let me turn it over to David, and he can sort of provide a little bit more granularity on how they -- on what we would expect to see and how we would expect them to sort of deliver on 2020.

Sure. Thanks, Nick. So within their footprint, including the 23 dispensaries, we're opportunistically looking at 2020 to take advantage not only of the retail opportunity, but for the first time, wholesale. They had a very successful outdoor harvest late in 2019. And therefore, based on what we see from a supply/demand perspective in the state of Colorado, there's still going to be a shortage from a supply perspective. So I think we're -- the team and the TGS team is well positioned to take advantage of that. It's still a highly fragmented market with respect to market share, even though TGS is the leader. So we continue to think that organically, there's an opportunity to grow the business, both at the retail and wholesale level. What we've looked at in terms of the initial 2020 outlook for TGS is just strictly organic growth, both retail and wholesale.

And if I could just add, one of the things that's interesting about Colorado, I know we've talked about this before, but their experience in Colorado going through, let's call it, the medical cycle and then the first phases of the adult use cycle, now more of a sort of a moderation in the sort of a pricing volatility in the let's -- and the sort of the operating environment, that's a cycle we would expect to see occur in every one of our markets that's converting from medical to adult use. So the skill set that they've developed to sort of not only capture leading market share, but drive margins, drive cash flow and then drive innovation, all of that is transferable into our new markets. And we're already beginning to see some of those insights taper into other markets and sort of really begin to have an impact on the way we sort of think about businesses -- the business going forward.

Our next question comes from the line of Andrew Semple with Echelon Wealth Partners.

Just wanted to see if you guys had any additional color on the vape ban in Massachusetts. Obviously, that's behind us now, but wondering if there's going to be any kind of normalization impact on gross margins in Q1.

Do you want to start?

Yes. This is David speaking. I think our business in Massachusetts continues to see improvements in the gross margin line. Internally, that's a result of us bringing new cannabis online and improved yields. So I think the data point that everyone's looking at in Massachusetts is what the wholesale market pricing is going to do in 2020, and I think that's going to be a reflection of the incremental cannabis that is going to or not going to come online in 2020. We continue to see demand across all of the categories, all of the SKUs without question. And so we're reasonably -- we're optimistic about the gross margin profile for our business in Massachusetts on a year-over-year basis, '19 heading into 2020.

Yes. And I would say that Massachusetts is a good metaphor for what we're seeing in a number of our markets where we've seen new cultivation and manufacturing capacity to come online, whether it's California, Ohio. You sort of -- you go through the laundry list of all the capital projects we completed in 2019 and then in the first part of 2020. Those results -- up to and in Florida, with those results, we'll now begin to really sort of reap benefits in a material way. So one of the main drivers of cash flow for us is going to be to sort of isolate low-hanging fruit at the gross margin line and then push it down through the income statement.

Great. With respect to New York, taking a hard look at adult use sales, is that a marketplace where you may look to add cultivation capacity kind of within a 12-month time frame? I believe you hold an option for an additional 180,000 square feet at your current location. Or is that something where you would prefer to see the regulations come up first before making a decision?

It's funny. We've always tried to be very prudent in spending on cultivation and manufacturing. The return profile is very high, but what we don't want to be stuck with is sort of a Taj Mahal that we're unable to leverage over the long period over a longer time horizon. New York and in fact many of the East Coast markets have an undersupply issue right now, even in the medical setting. So for example, if you look at New Jersey, it's critically undersupplied. So our plan, to the extent that we end up making any additional decisions to expand our cultivation, let's call it, the second half of this year, it would be exactly in New York, it would be in New Jersey, it would be in the states that are transitioning so that we don't run into the same supply and gross margin issues that we've encountered in places like Illinois and Massachusetts. It's a good problem to have because anytime demand outstrip supply, that's fundamentally positive. But we -- obviously, because we're the market leader in a place like New York, we want to make sure we use the transition as an opportunity to actually solidify our position and consolidate additional market share. So we are -- the short story is we are looking to expand. And whether it's at our existing ability or by combining other facilities into the portfolio, we're going to be very opportunistic.

I appreciate the color there. With respect to your CNC Card, is that something where we can say it is in all of your dispensaries today? Or is that deployment that is still ongoing? And if you've got any updates on kind of the consumer uptake of that, that would be appreciated.

Couple of things. So it's ongoing, and we're rolling it out. We haven't really invested a lot into marketing yet. We just finished the rebranding exercise that we will be unveiling in the second quarter. But part of that process involves bringing on partners. And so we've had a number of conversations with some large operators in individual states and multi-states' technology platform providers. And so this has really graduated beyond being simply a Columbia Care sort of platform piece. We think this is much better served as being an opportunity for the entire market, not only B2C, but also B2B. Especially in markets like California where everyone is getting destroyed by working capital issues, this could be a major sort of pivot point for the industry. And so more to come on those specific details, but we've been working on this very quietly behind the scenes. And we're very excited about it because in each market, there's been an organic pickup and the trend line has been the same across all of the major statistics in terms of performance and contribution, and the numbers just speak for themselves. So we're thrilled that we're at the point we're at. And frankly, we think it's going to have a big impact nationally.

Our next question is from the line of Jason Zandberg with PI Financial.

Just looking at your guidance for CapEx in 2020. Just wanted to know if you could provide what the priorities are of that CapEx, given a significant drop down from what you spent in 2019. Just wanted to kind of get an idea of where you expect to deploy that money.

So the -- so in the first quarter, it's really to pay the bills for everything we finished up in 2019. So it's just sort of odds and ends left over to sort of perfect infrastructure build-out. But for the rest of the year, it's really maintenance CapEx. There may be some projects here and there. For example, the additional dispensary in Illinois, we maybe -- for example, we just found out we were able to open up 5 more dispensaries in Virginia. So there's no shortage of potential uses. But what we're really focused on right now is allocating capital into markets where we think we could drive cash flow fastest. So for example, one of the prior callers asked about New York. Our view is that by leaning into New York in advance of transition to adult use, we can really outperform a lot of our competitors, and we can really drive cash flow from operations and scale. And so it really becomes a question of prioritization rather than sort of opportunity set. And the prioritization today is to lean into markets that are going through that transition process because we know what a profound impact that has, not only at the local level but at the corporate level. Lars, do you have anything to add to that?