Planet 13 Holdings Inc.
Q3 2021 Earnings Call Transcript

Published: 23 Nov 2021

[Operator:]

Hi, everyone. Welcome to Planet 13 Holdings' 2021 Third Quarter Financial Results Conference Call. As a reminder, this conference call is being recorded on November 23, 2021. At this time, all participants are in a listen only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time. I will now turn the call over to Mark Kuindersma, Head of Investor Relations for Planet 13.

[Mark Kuindersma:]

Thank you. Good afternoon, everyone, and thank you for joining us today. Planet 13 Holdings' third quarter 2021 financial results were released today. The press release, financial statements and MD&A are available on SEDAR as well as on our website, planet13holdings.com. Before I pass the call over to management, we'd like to remind listeners that a portion of today's discussion includes forward-looking statements. There can be no assurances that such information will prove to be accurate that the management's expectations or estimates of future developments, circumstances or results will materialize. As a result of these risks and uncertainties, results or events predicted in these forward-looking statements may differ materially from actual results or events. Risk factors that could affect results are detailed in the company's public filings that are made available on SEDAR. We encourage listeners to read those statements in conjunction with today's call. The forward-looking statements in this conference call are made as of the date of this call. Planet 13 disclaims any intention or obligation to update or revise such information, except as required by applicable law. It does not assume any liability for disclosure related to any company mentioned herein. 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 Bob Groesbeck, Co-Chairman and Co-CEO; Larry Scheffler, Co-Chairman and Co-CEO; and Dennis Logan, CFO. I will now pass the call over to Larry Scheffler, Co-Chairman Co-CEO of Planet 13 Holdings.

[Larry Scheffler:]

Good afternoon, everybody, and thank you for participating in our third quarter call. Today, I'm going to discuss our performance in Nevada and California, and then Bob will provide an update on our other growth initiatives later in the call. Q3 was a solid quarter in Nevada, although one marked with some sales headwinds from COVID resurfacing and changes in the seasonal trends. Nevertheless, we continue to maintain a market share north of 10% in Nevada. Across Nevada, each aspect of our business performed well. In Q3, we generated $22.6 million from the Superstore; $2.7 million from curbside and delivery; $3.5 million for Medizin; and $1.6 million from wholesale and other, a 33% increase over Q3 2020. September results at the Superstore were impacted slightly as we're putting the finishing touches on our expanded floor space, which meant some construction taking place during the month that affected customer experience. The new and expanded area opened on September 21, and the results were clear, especially during MJBizCon and some of the busier weekend days. On completion of expansion of the Superstore, customer traffic increased as did sales on the busiest days. In October, we had multiple days, which exceeded $400,000 in sales. The improved customer flow and experience meant we're able to service more customers in a timely manner on those busy days. We expect this to really pay dividends as large conventions return, more entertainment events take place, and we get back to a seasonably long -- seasonably strong spring-through-summer months. Our own brands continue to perform well with TRENDI seeing 110% dollar sales growth year-over-year according to Headset. It now makes up about 5% of vape sales and 7% of concentrate sales in the state of Nevada. HaHa Edibles claimed 14.4% of edible sales in Nevada, making it the second highest selling brand in the state. Bob will talk about it a little later, and we are extremely pleased with the quality, consistency of our manufactured products, and we're very excited about the opportunity to bring them to other markets. Turning to California. We opened our new store on June 24. During the quarter, it generated $2.4 million. Sales have been impacted by continued absence of overstate tourist activity due to COVID and significant freeway construction in the nearby vicinity. Upon completion of the construction, we expect a boost for the store as it will make it significantly easier to get on and off the highway at our location, but currently is a major obstacle. These numbers have been disappointing to us. And while there are some consolation knowing that our customer reviews are some of the highest in the state and sales are artificially low due to obstacles that are outside of our control, it is one of the key focus areas. Based on what it cost us to acquire and build the store in current run rate, it is approximately 2 times sales. And while this might be in line with the rest of the industry, it is not a number we're happy with. We are continuing to try new advertising methods and growing the delivery business to better optimize this location. Looking ahead to Q4, October was a very strong month for us, but we are aware that traditionally both November and December are seasonally lower as there's less tourist activity and party traffic in Las Vegas. Furthermore, the conventions that typically help us make up the volume during these months are still not fully back. With that, I'll pass it over to Dennis to discuss our financials.

[Dennis Logan:]

Thank you, Larry. And before I begin, I would just like to remind everyone that all numbers discussed on today's call are stated in U.S. dollars unless specifically noted otherwise. As Larry mentioned, in Q3, it was a strong quarter in Nevada and a first step for us in California. The company generated $32.8 million of revenue in Q3 2021, a 45% improvement over the same quarter last year. Revenue growth was driven by a continued improvement in Las Vegas as COVID restrictions eased and tourists returned. We had increased sales volume at our Medizin dispensary, increased wholesale operations in Nevada and the opening of the company's Orange County location. Gross margin before the impact of biological assets declined to 53.4%, down from 56.9% in Q2 2021. The decline in gross margin was primarily driven by a lower mix of in-store sales at the company's Nevada Superstore location in Q3 when compared to Q2 2021. Gross margins in Nevada were consistent from Q2 to Q3 as we saw a relatively stable mix of tourists to local customers and a strong return of third-party product slotting fees and cross-promotion opportunities in the quarter. Across our business, we continue to target gross margins in excess of 50% for the long term. Sales and marketing expense was $1.9 million in Q3, up marginally over Q2 2021 as we ramp marketing activity in both California and Nevada. We expect this to be at or near the high watermark as we are starting to optimize spending in California based on the return on investment we are seeing from each marketing channel. The company spent $13.1 million on G&A in the quarter, up from $10.9 million during Q2 2021. As we alluded to on the last quarterly call, we expect Q3 2021 to be the high watermark for G&A expense as a percentage of revenue, primarily driven by the opening costs related to California and a onetime spike in labor cost in Las Vegas from onetime retention bonuses that were paid to new hires and existing employees in order to maintain and attract high-quality people during the COVID-related issues in Nevada. The company is in the process of transitioning to becoming a U.S. domestic corporation and registering with the SEC. This involves the company switching to U.S. GAAP effective January 1, 2022, implementing Sarbanes-Oxley compliance and becoming an SEC registrant by preparing and filing a Form 10 registration statement. During Q3 2021, we incurred approximately $400,000 in fees as a result of these costs related to these initiatives. This sets the company up though for potential uplisting to a recognized U.S. exchange and broadening of our shareholder base if the existing federal rules are changed through either a SAFE Act or similar federal reforms. As of September 30, 2021, the company had a cash balance of $74 million. The company spent $55 million in the quarter to acquire the Florida license, which as of September 30 was listed as restricted cash on our balance sheet. Final payment for the Florida license occurred on closing on October 1, 2021. As Bob will discuss further in his comments, the company is actively looking for a Chicago location for a Superstore as well as expansion in Florida for our neighborhood dispensaries. Once we have plans in place, we will update our shareholders on the expected CapEx requirement, but we expect to have enough cash on hand for the initial build-outs in both states. Looking ahead to the transition to U.S. GAAP reporting, the main differences in our financial statements will be the accounting for warrants, which are priced in Canadian dollars and which will entail them to be treated as a derivative liability as opposed to equity and where changes in the underlying warrant values are recognized through the income statement as opposed to the statement of changes in equity as well as the treatment of biological assets and leases. So with that, I'll pass the call over to Bob.

[Bob Groesbeck:]

Thank you, Dennis, and good afternoon, everyone. The Q3 was all about setting Planet 13 up for future growth. We won an Illinois dispensary license lottery through a social equity partnership. Illinois has long been one of our targeted expansion areas. It has a large population, significant tourist counts and a robust adult use market. We expect the license to be issued in the first half of next year, and are in the process of identifying a strategic location for our first Planet 13 Superstore there. We've acquired a vertically integrated license in Florida, arguably the best medical market in the nation and one with adult-use upside. Our plan over the next year is to open a network of neighborhood stores, modeled off of our highly productive and successful medicine store, supported by cultivation and manufacturing. We expect this to be followed by 2 to 3 Superstores as we have closer to adult use and have the ability to supply and support a wider variety of products. We are aggressively working to meet the OMU requirements of 6 open dispensaries and cultivation within the first 12 months, and we feel confident about meeting and beating those time lines. We're moving forward with our cultivation and production facility modeled off of our Las Vegas operations. On the dispensary side, we have our team in place scouting our priority markets for locations that fit with our vision. We have proven our ability to build, open and operate retail. We've excelled in the growing and manufacturing of cannabis products. The one thing we haven't done as good a job as some of our peers is acquiring multiple licenses. This has historically slowed our growth and is why the Florida license is such a great fit. It allows us to open as many stores as we want unrestricted by licensing issues. One of the big differentiators for us in Florida is that we have strong relationships with a lot of popular West Coast brands through store in store and premium branding and product placement relationships. We anticipate bringing some of those brands with us into Florida, along with our extremely popular TRENDI, Dreamland and HaHa brands, giving us a competitive edge in both diversity and quality of products. I'm extremely excited about the Florida opportunity, and I plan to personally move to the state full time in the near term to oversee and guide our expectation -- expansion and expectations in the market. In Nevada, we expect the lounge regulations to be finalized by the end of this year or early next year. We started on the back-end design, but we are waiting for the final regulations to be adopted before we really dive into construction in earnest. We also expect to receive approval for the next phase of our cultivation expansion here in Nevada and plan to start construction on that facility in early Q1 of next year. It will be great to be able to offer more of our popular Medizin branded flowers in both the Superstore and our neighborhood locations. At the start of the year, we had operations in only Nevada. By the end of this year, we will have secured licenses in 4 states and expect to have a meaningful presence in all 4 by the end of 2022. We are well on our way to achieving our 5-year objective of having 8 or more Superstores in strategic Tier 1 markets, supported by networks of neighborhood stores and cultivation. We also still have over $70 million in cash to pursue cost-effective M&A that increases our vertical integration in California, our build-out in Florida, bolt-on local dispensaries and our cultivation assets in Nevada and pursue opportunities for new Superstores, the next one planned for Chicago as mentioned earlier. We have an incredibly solid base of operations in Nevada and are growing multistate in a significant way as mentioned. This positions us for a very exciting 2022 and beyond. And with that said, I again, would like to thank everybody for participating in today's call. And I would now ask the operator to open the line for questions. Thank you.

[Operator:]

And your first question is coming from Doug Cooper from Beacon Securities. Your line is live.

[Doug Cooper:]

Why don't we start off in Nevada. Larry, I just want to make sure I heard you right. I think it was $22.3 million from the Superstore in the quarter. Is that right?

[Dennis Logan:]

Yes.

[Doug Cooper:]

Okay. So that was down slightly from Q2, by my notes, $24.3 million. You mentioned, obviously, the reasons. As you look into 2022, if everything comes back as expected, with the increased floor space, what do -- increase the number of cash registers and so forth. What do you think this asset can do in 2022?

[Larry Scheffler:]

It was $22.6 million, I think you said $22.3 million.

[Doug Cooper:]

Okay, $22.6 million, okay.

[Larry Scheffler:]

Right. Yes. Well, again, if you remember, I don't know if we have -- we talked this a while in August, we saw 100,000 people through the store in 1 month. September, we hit 120,000. In October, we hit 130,000. So I guess if you want to do the math on that, it's continuing to grow. We get the conventions back. We're expecting a significant increase. But even with COVID here and Las Vegas, only back 75% during those 3 months at the most with the tourists coming back to Vegas, we're still increasing by that much. We're still expecting a lot.

[Bob Groesbeck:]

Well, Doug and if I can add to Larry's point, One of the things that has changed considerably here, we weren't allowed to cater to international tourists until the last few weeks. So for the most of the year, we've seen zero international tourists. So we see some significant upside there as we close out the year and start moving into early next year.

[Doug Cooper:]

And Bob, you mentioned the lounge, we'll see what the regulations are finalized. Let's assume they're finalized in Q1, and then you can start immediately constructing the plan. What's the budget on that? And what's the time line? So that would be sort of finished construction at the end of 2022 and then open 2023? Is that the sort of idea?

[Bob Groesbeck:]

Yes. So as far as the CapEx required to build that, I'm going to kind of hold off on that now, Doug, because we're designing it now. So we really don't -- I don't want to guess. We'll certainly update shareholders when we get that finalized. But timing-wise, again, we're hopeful, as I said, that we get adoption of the final regs here by the end of the year in Q1. Let's assume that happens by the end of Q1, the construction time line, we're estimating is probably maybe 6 to 9 months at least. As we experienced here in the expansion of the Superstore, the latest expansion, we had significant delays due to COVID and supply chain issues. So we don't see that improving here in the near term. So we could anticipate that going upwards into Q3, maybe in Q4 of next year before it's finally opened. But again, we're going to move it as aggressively as we can. We're designing the facility now in anticipation of the regs being finalized. So we're going to move as quickly as we possibly can.

[Doug Cooper:]

And just before I leave Nevada, with the new owner of your facility across the street, any comments or ideas what their plans are for what it might mean for increased competition or just any thoughts there?

[Larry Scheffler:]

Also, Larry, I'll just add, too, that we welcome them, like Bob just said, and we'd like to have discord or as the Amsterdam the cannabis for Las Vegas. It will drive even more

[Doug Cooper:]

Okay. California, so $2.4 million of sales in the quarter, that was open the entire quarter, I guess. Are you seeing -- how does that ramp from July through September? And how has it been in the first 1.5 months of Q4?

[Larry Scheffler:]

So Dennis, we'll let you speak directly to that, please.

[Dennis Logan:]

Yes. So Doug, it's been pretty consistent. There's been some small growth kind of 3%, 4% growth month-over-month. And that's sort of -- that is continuing into October and November like Vegas is a bit softer. So I think it's going to come in between $800,000 to $850,000 a month in Q4.

[Doug Cooper:]

$800,000, $850,000 a month in Q4. Okay. And then you think like what is going to be the sort of to bust it open in terms of -- in terms of people -- I guess, the local have to know is there, they're going to get there -- so what is your expectation how quickly this can ramp. I mean it's obviously -- as you said, it's starting off slower than expected, so maybe you can give us some indication of your expectations for this in 2022.

[Bob Groesbeck:]

Well, Doug, it's Bob. Obviously, still very bullish on Santa Ana. It's COVID has had a greater impact, particularly on the tourist market in Southern California than even here in Vegas. So again, I don't like to use that as an excuse but it's just a reality. And it's had a meaningful impact to everyone down there. And of course, now with the seasonality, we're out of the beach season, so there's really not a lot of play there. We're just going to keep plugging. We're trying to build the delivery platform. I think that's important. And as Larry mentioned in his comments, I think once the freeway improvements are completed down there, I think it's going to open things up quite a bit as well. But it's just a function of identifying those markets and really those markets and targeting them. The other thing we're combating in California, of course, is just there are a lot of stores there, and there's still a lot of legal operators. So some of that is out of our control. But I think our philosophy still to once we get you to the store, you're going to be coming back again. And that's -- we're excited about that. People like it once this

[Doug Cooper:]

And just moving on to Florida then. So you have to have a 6 dispensaries open in the cultivation within 12 months. Does the clock start ticking on that since you closed at October 1. Is that the sort of deadline date? And I guess when can you give us a bit firmer time line and when you think you'll be producing revenue in Florida?

[Bob Groesbeck:]

So Dennis, why don't you jump in on that, please?

[Dennis Logan:]

Yes. So Doug, the clocks are ticking on closing. The first piece of that is obviously, again, the cultivation up and running, which we are in process with now. And then finding, as Bob mentioned, we've got a team on the ground in scouting out locations. I know Bob and Larry and the team have been down there several times. We do have some locations lined up meaningfully. It's going to -- it takes 12 weeks to get a crop off. So I'm looking at probably no earlier than Q3, most likely probably won't see revenue until Q4 but you'd have to guess on that one that's sort of on the time line.

[Doug Cooper:]

Okay. And then just finally, on Illinois, you expected a license, I think you said in the first half, I think that's what you said, guys. So you're looking -- you think -- can you get the location prior to receiving the license and start building? And then do you would you expect that to be open in Q4 as well? Or is that a '23 thing?

[Bob Groesbeck:]

No. We're also will be a '22 thing. And a midyear projection, obviously, can move up considerably. The reason we we've referenced that timetable, Doug, is just because of the outstanding litigation, we've got pending cases. So everything is kind of bottlenecked until that's resolved. That being said, we've moved forward. We're aggressively looking at multiple locations, and we intend to Tier 1 for the Superstore here shortly. So that obviously -- that relationship will be contingent upon the licenses issuing from both the City of Chicago and state. But again, it's a process, and we'll get there, and we're comfortable that once those final approvals are issued, we'll be well on our way to getting a store opened.

[Doug Cooper:]

And this is my final one, and then I'll jump back in the queue. $70 million in cash remains to, I guess, open Florida, open California -- excuse me, open Florida, open Illinois and continue to fund some losses in California. Is that -- so you're -- you think you have sufficient cash I guess is the question.

[Dennis Logan:]

Yes. Doug, it's Dennis. Yes, we do have sufficient cash. And I would also point out, like we are looking at rightsizing California for the current revenue run rate until that freeway gets revamped and we can ramp up the distribution. So I don't expect to continue to lose the money that we lost in Q3 go forward in California. So…

[Bob Groesbeck:]

And Doug, yes. Let me just go back there if I want to -- with respect to Chicago, our license is not encumbered by litigation right now. I just want to be clear with that. Our license is clean. It's the process that's being held up. The state's not permitting -- or approving applications until that litigation is cleaned up. So it's really a function of the state getting that resolved. We're moving forward in all other respects.

[Operator:]

The next question is coming from Greg Gibas from Northland Securities. Your line is live.

[Greg Gibas:]

You mentioned G&A being a high watermark in Q3 here. How should we expect that to trend maybe as a percentage of revenue going forward?

[Dennis Logan:]

Well, Greg, it's Dennis. So the dollar value is going to come down quarter-over-quarter and then it's just going to depend on how quickly we can ramp the revenue to get that percentage. So we have had onetime costs, as we indicated in this quarter to the tune of about $1 million related to the U.S. domestic corp conversion and the state that we had to pay people. And again, we are going through optimizing our spend and making judicious cuts where we can to continue to enhance that margin profile at the EBITDA level in Nevada as well as California. So I think you can -- you'll see the overall G&A come down and then as a percentage of revenue depends on where revenue goes, so..

[Greg Gibas:]

And do you guys have a sense of when the freeway construction issue will be complete or subside?

[Bob Groesbeck:]

Yes, Greg, it's Bob. We were told, well, about several months ago when we contacted the state that they were looking between 14 and 18 months for that project until it is completed or substantially completed. But they said that, that can move. So that's really the best we had from Caltrans.

[Greg Gibas:]

And if I could follow up on Florida. Given that state is kind of in land-grab mode right now, are you seeing a lot of attractive opportunities there. Just wondering if you can provide some color on maybe what markets are attractive and how many opportunities are still available? And I guess maybe when we would see your first location being announced?

[Bob Groesbeck:]

Okay. Well, that's -- let me take a stab at that. The entire state looks attractive to us. We're obviously longer term on the Superstores probably going to focus in on 3 of the larger metro areas, that being Miami-Dade County, the Tampa Bay region and of course, Orlando. But as far as the traditional neighborhood store goes, the Medizin model that we referenced, we can see that fitting well 15 or 20 of the larger cities in the state. I mean the beauty of Florida is just it's got a very large population. And so we're really excited about that. We've looked at already probably 10, 15 sites, potential sites. From a timing standpoint, I'm guessing we'll be able to announce something here soon. We've identified a couple that we think are very, very attractive. It's just now a function of getting the paperwork in place. But we're excited. And we think when we do make the announcement, our shareholders will be very pleased.

[Larry Scheffler:]

Yes. And the only thing I'll add, this is Larry, is that we're looking at everything we're giving our growth by a lot of people also in Florida, private operators like to do a merger possibly with Planet 13. So if that happens, of course, it gives us a jump start on that, but it's -- everything has to be checked out, but it looks very promising on a number of fronts. So whether we do that or nothing really works out that we think is a good buy and good fit for Planet 13, then we'll still always move ahead with the stores like Bob said and the grow and then the stores and the neighborhood stores.

[Operator:]

The next question is coming from Robert Asadi, private investor. Robert, your line is live.

[Unidentified Analyst:]

I wanted to congratulate you on the quarter and everything that you've been doing. I had a quick question regarding Vegas' expansion. I know you have the option, I believe, to buy the lot next door, which will double the space. And I saw recently that you have plans to make a cannabis museum, which I think is a fantastic idea, to bring in other types of possibly maybe older generation that doesn't possibly tend to marijuana as much when they go to Vegas. But you also have the lounge and I'm curious if you have anything else in the works that's sort of -- to build out that and making this massive marijuana complex beyond what you already have going.

[Bob Groesbeck:]

Robert, this is Bob. Thanks for the call. So with respect to the lounge and the museum, they're basically going to fill out the balance of our facility here, the main facility, 112,000 square feet. So as I said earlier, we're working on the lounge regulations now and doing our design work. Same with the museum. That will be a third-party space. And they are working very diligently with our architects and designers to put something together. So we're going to label those as phases 4 and 5, respectively. And my guess is they'll both probably commence construction within a very short window of one another. So that will comprise the balance of the complex, as I said. Now with respect to the location next door, that isn't a purchase option. If we secure that property, it will be a lease. But yes, we are looking at that to incorporate into the complex. And it will be a valuable addition to what we want to do. But again, it's -- we've got to finish out phases 4 and 5 here in the main building first.

[Unidentified Analyst:]

Awesome. And then one follow-up on the lounge. You probably -- I'm assuming you're not going to be able to answer this. But you, as a company, seem to have the building or the makings of sort of like really cornering the , then you have the Ricky thing in OC, you obviously have like Lil Wayne, you have Mike Tyson, you're cornering a lot of this market already in sort of the sports entertainment world with sort of brand partnerships and exclusivity. I'm curious if you have any plans to or if there's anything you can expand upon and maybe how you plan on utilizing those connections and exclusive deals with like these people that have massive followings maybe in the lounge aspect or like a concert aspect for -- in any regard to that moving forward?

[Bob Groesbeck:]

Well, again, this is Bob. Good question. I do think we'll -- obviously, we'll leverage those relationships to the extent we can to drive traffic to the lounge. So there's been a lot of interest. And I can't go into much more detail on that right now, Robert. But stay tuned because it's pretty exciting. It's going to be an amazing venue.

[Operator:]

There are no further questions in queue. That's all the questions we have time for today. Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.