Gold Flora Corporation (PNK:GRAM) Q4 2023 Earnings Call Transcript

Gold Flora Corporation (PNK:GRAM) Q4 2023 Earnings Call Transcript April 8, 2024

Gold Flora Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, everyone. Welcome to Gold Flora’s Fourth Quarter and Full Year 2023 Conference Call for the Three Month and 12 Month periods ended December 31, 2023. Listeners are reminded that certain matters discussed in today’s conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties relating to Gold Flora’s future financial or business performance. Any such forward-looking information is based on certain assumptions and is subject to risks and uncertainties that could cause actual results to differ materially from historical results or results anticipated by the forward-looking information, including the risk factors detailed in Gold Flora’s continuous disclosure filings that can be accessed via the U.S. Securities and Exchange Commission website at www.sec.gov or SEDAR at www.sedar.com.

Forward-looking information provided in this call speaks only as of the date of this call and is based on the plans, beliefs, estimates, projections, expectations, opinions and assumptions of management as of today’s date. There can be no assurance that forward-looking information will be proved to be accurate and you should not be such a reliance on forward-looking information. Gold Flora undertakes no obligation to obtain such forward-looking information, whether as a result of new information, future events or otherwise except as expressly required by applicable law. In addition, during the course of this call, there may also be references to certain non-GAAP financial measures, including references to adjusted EBITDA and adjusted gross profit which do not have any standard meaning under GAAP and therefore may not be comparable to similar measures presented by other companies.

For more information about forward-looking information and non-GAAP financial measures, including a reconciliation of adjusted EBITDA to the most directly comparable GAAP measure, please refer to the company’s annual report on Form 10-K, including Management’s Discussion and Analysis available on the SEC’s website and SEDAR. I would like to remind everyone that this call is being recorded today, Monday, April 8, 2024. I will now hand the call over to Ms. Laurie Holcomb, Chief Executive Officer of Gold Flora. Please go ahead, Ms. Holcomb.

Laurie Holcomb: Thank you, Operator, and thank you to everyone who’s joining us. During today’s call, I will provide a high level overview of our recent successes. Then I’ll turn the call over to Marshall Minor, our Chief Financial Officer, who will review our fourth quarter 2023 financial results in further detail. Following this, I will briefly discuss our strategic goals, then we’ll open the call for questions. Looking at the results, the work that we have completed to build a unique and differentiated platform consisting of our premier indoor cultivation, vertical operations and deep consumer insights is enabling us to extend our leadership position in California. We continuously evaluate every facet of our vertically integrated operations with a focus on delivering high quality, profitable revenue and eliminating unnecessary costs.

As an example, our focus resulted in the decision to sell one underperforming dispensary and close select distribution centers. Despite the short-term impact on revenue, this improved consolidated margins and profitability as fourth quarter results demonstrate. Our focus on profitable revenue and not just sales volume is a distinctive factor that separates us from operators more focused on bulk wholesale revenue and driving volume but not necessarily profitability. Ensuring our revenue is profitable and derived largely from our CPG operations, including owned brands and retail storefronts, further insulates us from third-party challenges and other operators often encounter. With this focus on quality revenue, gross profit is up 16% sequentially to $13.2 million or 46% gross margin and on an adjusted basis was $18.7 million or 66% adjusted gross margin.

Strong results when compared to some leading multi- and single-state operators. In line with our substantial improvement gross margin, we recorded positive adjusted EBITDA for Q4 2023. This milestone was achieved due to the optimization of our platform with a focus on cost savings, profitable revenue and margin capture across the value chain. In addition to optimizing our platform, we broadened our areas of strength and expertise. We grew our cultivation canopy, completing the buildout of our Desert Hot Springs campus and by reactivating cultivation in San Jose at our Caliva and Airfield Supply Company. These operations have come online swiftly with a small contribution in Q4 and are now helping drive 2024 performance since many of the first harvests were collected following the quarter and year end.

With the recent cultivation expansions, our active canopy footprint is now approximately 107,000 square feet and we estimate our annual flower production to be over 40,000 pounds when operating at full capacity utilization. Most of this high quality production will be used in our first-party CPG-branded products. Excess flower is sold by our bulk wholesale team profitably but at lower margins. With a minor impact on Q4, most additional revenue from the cultivation expansion will begin to be reflected in the first quarter of 2024. We view our premier indoor cultivation vertical operations as one of the biggest competitive advantages. With this platform, we can be nimble and quickly respond to opportunities gleaned from real-time consumer insights from our robust retail footprint.

Our industry-leading cultivation, manufacturing and distribution team enables us to respond quickly to opportunities in our fast-paced industry sector. A good example of this is a quick and successful build-out of our newest brand, Gramlin. We identified an area of growth and disruption in the market, and during Q4, our team rapidly built this new brand and designed it to appeal to high-volume customers that frequently purchase flower, vape and pre-roll lines. A highlight of this brand is that it uses multiple proprietary genetics, growing efficiently at our own cultivation platform on the same campus as our other CPG production facilities. Our vertical structure allows us to deliver high-quality products and unmatchable speed to market while still providing great value offerings for our consumers.

Gramlin launched during Q1 2024 and is now available at our first-party retail stores, as well as through our stately distribution operations across California. Looking at our distribution operations, we continue to grow our position with an 8% increase in the number of third-party dispensary accounts buying from stately. Lastly, turning to our retail footprint, we have centralized our marketing efforts across all of our locations to better leverage a heavy digital and in-store push. This has allowed us to be more efficient and maximize our return on marketing spend while still providing unique and differentiated offerings that are tailored to each market that we serve. In addition, this has helped us to create a deeper partnership with leading third-party brands to offer our consumer-based exclusive promotions, pricing and activations.

In November, we also opened our latest retail store located in Corona, California. This new King’s Crew dispensary houses our curated range of first-party brands, including a robust offering of our exclusive genetics grown in-house by Gold Flora, and has carefully selected third-party brands to meet a wide range of consumer preferences. Our attractive retail footprint and limited license jurisdictions and consumer-centric owned brands played a pivotal role in maintaining and growing our market share while the overall market space declined. While the market as a whole declined, we have been able to capture more customer attention and spend, demonstrating the resilience and long-term potential for a purpose-built company. We are incredibly proud of the speed and success we have achieved in integrating all of our operations following our merger in July.

This includes realizing and identifying significant synergies with approximately $30 million in annual cost savings. We substantially completed the work to combine our businesses into one strong and unified company by year-end, entering 2024 with a solid foundation for profitable growth. We built this difficult-to-replicate platform over many years, adding the necessary strategic pieces when the time was right. This has built an enterprise ready-to-win California. With our expertise, our truly vertical operations and our comprehensive infrastructure, we believe we have the right combination to enhance our leadership position and achieve our goal of positive cash flow generation in 2024. Now, I would like to turn the call over to Marshall, who will discuss the financial results of the quarter.

Thank you. Marshall?

Marshall Minor: Thank you, Laurie, and good afternoon, everyone. As a reminder, the results I’ll be going over today can be found in our financial statements and MD&A contained in our annual report on Form 10-K. All figures are in U.S. dollars. It should be noted that we are a U.S. registrant with the SEC, and as such, our financial statements are prepared on a U.S. GAAP basis. Revenue for the fourth quarter of 2023 was $28.4 million, compared to $32 million in Q3. Revenue for Q4 was comprised of $25.4 million of retail revenue and $3 million in wholesale revenue. As Laurie discussed, the sequential decline in revenue was a result of our strategic decision to close underperforming assets that were impacting profitability. Our first-party brand portfolio, which includes Cruisers, Gold Flora, Mirayo, Caliva, CURRENT, Monogram, Roll Bleezy, Jetfuel, Sword & Stoned and Aviation, represented approximately 22% of total retail revenue in Q4.

Gross profit in Q4 was $13.2 million with a 46% gross margin, a 16% improvement compared to $11.3 million with a 35% gross margin in Q3, respectively. Q4 adjusted gross profit, which excludes 280E adjustments to operating expenses, including depreciation and amortization, was $18.7 million with a 66% adjusted gross profit margin, compared to $16.8 million adjusted gross profit with a 53% adjusted gross profit margin for Q3, respectively. Q4 net income was a loss of $42 million, which included non-recurring and non-cash items, which are further detailed in our 10-K. And to reiterate Laurie’s earlier point, we achieved positive adjusted EBITDA on Q4, which came in around $105,000 for the quarter. We ended the year with a cash and cash equivalent of $22.5 million as of December 31, 2023.

With that, I would like to turn the call back over to Laurie.

Laurie Holcomb: Thank you, Marshall. Over the quarter and the year, we executed on several initiatives to further drive our platform to profitability and grow our role as a leader in California. This has strongly positioned us for future growth and to achieve our goal of positive cash flow generation in 2024. These actions have derisked our platform, ensuring that we have very minimal reliance on third-party operations and enhanced our margin capture at every step of the supply chain, ensuring we have reliable, high-quality supply, controlled costs, extraordinary product quality, and competitive pricing. Our vertically integrated, purpose-built operations give us the ability to succeed, while other operators are struggling in California or exiting the market due to their inability to compete and scale here.

2023 was a crucial year for us at Gold Flora and we’ve done the necessary work to start 2024 on an incredibly strong footing. With that, I would like to open the call to questions. Operator, please go ahead.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question calls from the line of Jesse Redmond from Water Tower Research. Please go ahead.

Jesse Redmond: Hi, Laurie. Hi, Marshall. I just had a question if you could give us some perspective on what you’re seeing on the overall demand for indoor flower in California.

Laurie Holcomb: Yeah. Hi, Jesse. Thank you for your question. So, I believe at the height of cultivation licenses in 2018 and 2019, there were approximately 18,000 annual and provisional licenses. As of today, there’s less than 5,000 annual licenses and because of that decline in the number of licensed growers and facilities, we’ve seen prices actually increase.

Jesse Redmond: Any particular metrics around those price increases on a percentage basis in the order of 5%, 10%? Any numbers you feel comfortable sharing there?

Laurie Holcomb: Certainly above 10%. So, I’d say…

Jesse Redmond: Okay.

Laurie Holcomb: … it’s probably been between 10% and 15%, and that would be on the bulk wholesale level.

Jesse Redmond: Okay. And also, continuing on the flower theme, can you tell us about your cultivation capacity in Q4 versus what came online in the first quarter of this year?

Laurie Holcomb: So, we had approximately, let’s see, 22,000, 32,000, 42,000, we had about 42,000 square feet of canopy in Q4 that was producing and as we transition into Q1 it’ll be 107,000. So, we have doubled our production capacity from Q1 moving in — from Q4 of 2023 moving into Q1 of 2024. And in Q1, I will just say that that staggers. So, even though it’s coming on in Q1, it won’t be at full capacity until Q2.

Jesse Redmond: And will the driver of turning on more capacity be more a product of opening more retail and a need to feed those stores or more driven by the health of the California CPG and wholesale market?

Laurie Holcomb: Yeah. It’s — the majority of our product is going to go into our own CPG product, and I will tell you, currently, we are selling every gram of flower that we produce. So the additional…

Jesse Redmond: Oh! Well. Great.

Laurie Holcomb: … capacity is coming on at a good time.

Jesse Redmond: Great. Thank you very much.

Laurie Holcomb: Thank you, Jesse.

Operator: Thank you. And your next question comes in the line of Bobby Burleson from Canaccord. Please go ahead.

Bobby Burleson: Hi. Thanks for taking my questions. So, I guess, the first one is just understanding kind of where the growth is coming from in 2025, bringing on cultivation. But I’m wondering what’s happening with the store count, is it essentially a flat year for store counts and you’re just going to be better utilizing the store footprint through the additional cultivation?

Laurie Holcomb: Yeah. So, we — as mentioned on the call, we brought on one additional retail store in Q4 of last year, we’ll be bringing on at least one more store in 2024 and the growth is going to come from the excess, from the new capacity of cultivation moving into our own consumer packaged goods, not only through our own retail store, but through third-party retail stores.

Bobby Burleson: Okay. Great. And then, in terms of the cost structure, as we look at 2024, where do you guys have the most ability to kind of contain costs or reduce costs? Maybe I’m thinking mainly just on the OpEx lines, just curious what you can do there potentially for leverage?

Marshall Minor: I think really the efficiency comes from now that we have more cultivation online. It basically makes the cost of growing lower. So, we’ll obviously achieve greater margin from both a flower perspective and a CPG perspective. Operationally, well, we are still — though we’ve completed the integration of the two companies, there’s still some efficiencies that we are evaluating that we plan to evaluate additional potential cost cuts and other synergies throughout the year.

Bobby Burleson: Great. And then just my follow-up, I guess, is just on the types of margins you think you can deliver on the EBITDA line at some point as you kind of grow into your footprint and are running at a more kind of normalized cost structure. What kind of potential EBITDA margins do you guys think you can achieve with the business as you have it now, but improved and this is not on — there’s no timeframe here?

Marshall Minor: No. I think from our perspective, our goal is to continue to deliver positive adjusted EBITDA throughout 2024 and beyond. And as Laurie mentioned, as this new capacity comes on, it will yield additional revenue to the company both from a retail perspective, as well as a wholesale perspective. I think we’re going to target — we’d like to internally target our EBITDA margins kind of how some of the larger multistate operators are already performing now, being that that’s kind of where we’re budging in and running the business towards.

Bobby Burleson: Fantastic. Great. Thanks for taking my questions.

Laurie Holcomb: Thank you.

Operator: Thank you. And your next question comes from the line of Scott Fortune from ROTH MKM. Please go ahead.

Scott Fortune: Yeah. Good afternoon and thanks for taking my questions. As far as your store mix, it sounds like your own products, I think, you mentioned 22% or what’s the percent level of that vertical mix you’re selling into your first-party stores as you bring on capacity? You have a lot more room to sell your own products into the stores. Just kind of help us understand that mix strategy currently and where you can go from your own stores and drive margins with the store levels from that standpoint?

Laurie Holcomb: Yeah. Scott, thanks for the question. So, 20% is — 22% is where we are now, and clearly, if we can, as an internal number, we’re targeting 30% and above. And what we were missing to capture that extra percentage was really this new brand, Gramlin, that targets the 21-year-old to 35-year-old everyday smoker. We launched that. We had tremendous success at Hall of Flowers. We were essentially sold out in one day. And that’s an area where we will be able to pick up shelf space in our own first-party stores to drive that number up above 30%. I think once you start eking up towards 40%, you’re maximizing your store capacity. So, our next internal goal would be above 30%.

Scott Fortune: Perfect. And I’ll follow up on that kind of Gramlin launch you have. Obviously, you have a lot of brands out there. Just kind of a little more color on the positioning of that product line. You mentioned new, strange, high quality, at the right price, kind of strategic pricing here. But just kind of help us understand kind of where it’s best positioned and hopefully not cannibalizing other brands. Just kind of step us through that, that would be helpful?

Laurie Holcomb: Yeah. Thank you. So, here’s what we’re looking at. We are one of the largest indoor cultivators in the State of California. And with that, we’re able to produce our flower at a very competitive price that allows us to put the consumer package good on the shelf at a price it’s hard to compete with. So, the products that we’re launching Gramlin with are going to be vapes and mylar bags, and vape pens, and pre-rolls, like dog walkers. We feel that — those three categories take up 80% of the top tier categories, as you know, in California. And that’s really the market for Gramlin. It’s going to be priced right and it’s going to go up against the top 10 brands.

Scott Fortune: Got it. And last one for me, maybe a little more color on the overall California market. Obviously, the retail environment is challenging out there for a lot of retailers that you’re selling into. But just more color on what you’re seeing for potential M&A on the retail side. There’s a lot of distressed assets versus quality assets. But just kind of a little color on, you said you’re going to bring on one more store in 2024, but just your opportunity to maybe potentially expand retail going forward here, just kind of your strategy there?

Laurie Holcomb: Sure. So, we — if we were to do an M&A or expansion in California, retail would be the likely category. I’d say we are opportunistic, but we don’t need to do a deal. So, if something comes to us and there’s an opportunity that makes sense, we are picky when it comes to retail. We like limited license cities. We prefer coastal. We prefer where there’s a lot of tourism, although we don’t necessarily rely on that. And the one thing that we are seeing in California as a trend, we are seeing cities, local cities and municipalities, start lowering local taxes. So, as an example, and I think this shows how far California is in front of some markets when you look at legislative risk. So, in San Jose, as an example, we were spending or paying the city $139,000 per license to operate there and the city just lowered that from $139,000 to $30,000 per store.

As you know, we have three stores in San Jose, so that’s a meaningful impact and we’re starting to see other cities in California that we operate in also decrease their taxes. So, we’re getting, we’re moving sort of the egg for the snake, as you would say, in terms of legislative risk in California.

Scott Fortune: That’s great. I appreciate that color and I’ll jump back in the queue.

Laurie Holcomb: Thanks, Scott.

Operator: Thank you. And your next question comes from the line to Pablo Zuanic from Zuanic & Associates. Please go ahead.

Pablo Zuanic: Thank you. Hello, Laurie, and Marshall. So, my first question, maybe if you can, and I’m sorry, I joined the call a bit late, this might have come up already. In terms of the shareholder structure, can you remind us, if there’s any lock-up periods for any of them after the merger, where the structure stands right now? The reason I’m asking is that we’ve seen apparently some selling pressure. I don’t know if it’s insiders or some of those post-merger shareholders. This talk has been quite volatile. So, any follow-up you can provide in regard would help? Thank you.

Marshall Minor: Yeah. So, the management team, Laurie, being the largest shareholder, we were locked up one-year post-merger. So, I think, some of it, we don’t understand necessarily where the selling pressure is coming from, but it’s not insider shares, obviously.

Pablo Zuanic: Okay. And I suppose that, FactSet and Bloomberg, the wire services, have the right percentages in terms of percentage of insiders on now, right?

Marshall Minor: I haven’t…

Pablo Zuanic: Right now.

Laurie Holcomb: It should be above 20%.

Pablo Zuanic: Okay.

Marshall Minor: Yeah. Above.

Pablo Zuanic: That’s good. Okay. And just moving on, in terms of the metrics that you’re giving at the store level, correct me if I’m wrong, but I think you said one more store in 2024. I thought before the plans were for adding more stores than one or it was always a plan to add one, or if not, did anything change the way you’re seeing the market?

Laurie Holcomb: No. One store is already in the queue to be opened, and then, I think, we were just talking about M&A, if we were to do any M&A through the remainder of 2024 to add any more stores on.

Pablo Zuanic: Right. Okay. And then, in terms of on the same topic, when I look at townships in California municipalities, Costa Mesa being one of the new ones in the OC, are you seeing — are you expecting more townships, municipalities in the OC to start granting permits and will they do so in a license-restricted manner? What can you share in terms of what you’re hearing in that regard?

Laurie Holcomb: I think the cities are actually, unfortunately, slowing down and it’s a long process. So, you have to get on the initial ballots and then make your way through the selective process of obtaining a license in a city, and unfortunately, I think the state needs more dispensaries, certainly in some of these cities and it’s slow going. We — there are some that are opening, Pablo, but not as many as you would think and we would be very…

Pablo Zuanic: Okay.

Laurie Holcomb: … we’re opportunistic in applying for those new licenses, but cautious that it takes a few years.

Pablo Zuanic: Okay. Thank you for that. And then one last one. I think we all understand the California story and the opportunity you have there and that’s the way you have presented the investment case. But given the continued challenges in that market and the fact that you do have cash in the balance sheet and some flexibility compared to other operators, would you at some point start looking at other states versus doubling down on California or the one that…?

Laurie Holcomb: Yeah. I — as you know, California is the only market we know. So, I think, if you can get California right, which is the most competitive market in the United States, we’ve been under Prop 215 since 1996. Once under the new rules and regulations, January 1, 2018. And if you can make it here, you can sort of make it anywhere. So, we would, if the opportunity is right, look for out-of-state expansion where we can apply best practices and healthy adjusted gross margins under severe price pressure, we think we have a winning formula to do that.