Gold Flora Corporation (GRAM) Q1 2024 Earnings Call Transcript

Gold Flora Corporation (OTCPK:GRAM) Q1 2024 Earnings Conference Call May 15, 2024 6:00 PM ET

Company Participants

Laurie Holcomb – Chief Executive Officer
Marshall Minor – Chief Financial Officer

Conference Call Participants

Bobby Burleson – Canaccord Genuity
Jesse Redmond – Water Tower Research
Pablo Zuanic – Zuanic and Associates

Operator

Good afternoon, everyone. Welcome to Gold Flora’s First Quarter 2024 Conference Call for the three-month period ended March 31, 2024.

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 prove to be accurate, and you should not place undue reliance on forward-looking information. Gold Flora undertakes no obligation to update such forward-looking information whether as a result of a 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 both 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, Wednesday, May 15, 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 for joining us. During today’s call, I will provide a high level overview of our recent successes and strategic goals. Then, I will turn the call over to Marshall Minor, our Chief Financial Officer, who will review our first quarter 2024 financial results in further detail, following which we will open the call for questions.

We began 2024 on solid footing, thanks to the work that we completed throughout last year to integrate and optimize our operations to set the stage for future growth. In addition to the integration work, we added substantial cultivation capacity, which has had the positive impact of increasing our revenue 13% sequentially to $32.2 million in the first quarter of 2024.

Our focus on developing high-quality revenue sources has allowed us to continue to deliver strong adjusted gross profit of $17.4 million representing an impressive adjusted gross margin of 54%. With the difficult work largely behind us, we are focused on scaling our operations to drive revenue and profitability, well aligned with our anticipated growth plans for the remainder of the year.

By leveraging our vertical footprint, we are well-positioned to act, quickly to and respond to opportunities while ensuring that we capture the most margin across every step of the process to drive our long-term success. This ability to scale and rapidly act on market opportunities is a crucial competitive advantage for us. It was most recently proven out with the successful March launch of our new brand Gramlin.

In Q4 2023, our team identified a significant opportunity to reach high-volume cannabis consumers with a preference for specific types of flower, pre-rolls, and vape products. Thanks to these robust consumer insights, we worked with our cultivation operations team to grow unique strains, then harvest, manufacture, package, and roll it out to our own retail stores as well as third-party retail stores through our stately distribution channel.

The strength of our infrastructure is what has allowed us to quickly move from a concept to a successful launch in Q1. Consumer response has been fantastic and we are thrilled with its performance to-date. The biggest reason this launch has seen incredible initial success is because of our vertical integration. We grow high-quality, unique strains ourselves in-house at our premier indoor cultivation facilities, and we manage the entire supply chain.

This allows us to offer products at an attractive price point for consumers while capturing significant margin. Our premier cultivation is where it all starts and with last year’s cultivation expansions completed, in Q1, we focused on post-harvest production and building up our inventory levels to meet the high-market demand for our products in the back-half of 2024. As a result, we grew our inventory by $1.7 million in the quarter, which was consistent with our expectations.

In just under a year, we have tripled our active canopy footprint, which now stands at approximately 107,000 square feet, and we estimate our annual flower production to be just over 40,000 pounds when operating at full capacity. With this rapid cultivation expansion, we have gone from processing approximately 300 pounds of cannabis a month to approximately 450 pounds a week.

Throughout the next several quarters, we will continue to optimize and refine our cultivation techniques to capture more margin and enhance our productivity. We expect to fully see the impacts of our expanded capacity in the second half of this year as we recognize full-quarter contributions at the expanded facilities.

To continue to support our growth, subsequent to the end of the quarter, we entered into lease agreements with Innovative Industrial Properties for an additional 53,000 square feet of canopy at two Palm Springs facilities located near our existing Desert Hot Springs campus. This enables us to use our own highly skilled cultivation team to implement our proven grow methods and techniques. This lease will commence once we have the necessary state licenses, and the turnkey facilities will be delivered ready for operations.

We anticipate the first-half of this new capacity will come online in Q1 of ‘25 with remainder coming online in the second half of 2025. This will bring our active cultivation footprint to approximately 160,000 square feet of canopy and add an additional estimated 25,000 pounds of annual flower production with minimal capital investment.

In addition to enhancing our cultivation footprint, we have expanded our production and manufacturing capabilities. During the quarter, we implemented the resources for in-house live rosin production, utilizing our own indoor grown cannabis. We expect our live rosin products to debut during the third quarter of 2024. We’ve also introduced additional kitchen resources that have allowed us to bring production of our Mirayo and Cruisers gummies in-house. These improvements ensure that we continue to capture additional margin across the value chain.

Our platform was built differently here in California. We start with premier indoor cultivation, which empowers us to rapidly seize opportunities to expand our market share. We have full control over our manufacturing and distribution channels and a robust retail footprint in attractive limited license locations. Though all of our cultivation is now online, Q1 results only represent a fraction of our full cultivation capacity. We expect to see the growth in revenue in the coming quarters. This future growth will have a positive impact on the bottom line to help achieve our goal of positive cash flow.

Lastly, I would like to briefly touch on the recent news regarding a significant potential positive shift in the industry. The potential rescheduling by the DEA will likely be a game changer for our industry and could significantly accelerate our efforts to establish an enduring and successful presence, not just here in California, but beyond as well. By removing the burdensome 280E taxes, we would have increased financial flexibility and could better utilize our liquidity to fund operations in potential future expansion more effectively.

Additionally, rescheduling holds the potential for better access to capital, enhanced banking and payment solutions, and progress towards issuers listing in on U.S. capital markets. All of these outcomes would provide considerable growth opportunities for us to advance our business. While we anticipate this will take some time to come into effect, we are incredibly excited by the future prospects.

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 will be going over today can be found in our financial statements and MD&A contained in our quarterly report on form 10-Q. All figures are in U.S. dollars. It should be noted that, we are a U.S. registrant with the SEC and such our financial statements are prepared on a U.S. GAAP basis.

Revenue for the first quarter of 2024 was $32.2 million compared to $28.4 million in Q4 of 2023. Revenue for Q1 was comprised of $26.9 million of retail revenue and $5.2 million of wholesale revenue. The sequential increase in revenue was largely a result of additional cultivation rooms being online during the first quarter of 2024 compared to the prior period in 2023.

Q1 revenue only reflects a fraction of the Company’s cultivation capacity. Gross profit in Q1 2024 was $10 million or 31% gross margin compared to $13.2 million or 46% in Q4 2023. Q1 adjusted gross profit, which excludes operating expenses related to U.S. tax code 280E and depreciation and amortization adjustments was $17.4 million or 54% adjusted gross margin compared to $18.7 million or 66% for Q4 respectively.

Q1 net loss was $13.7 million compared to a net loss of $42 million in Q4 2023. Adjusted EBITDA loss for Q1 was $1.8 million compared to adjusted EBITDA of $105,000 in Q4 of 2023. The reduction in adjusted EBITDA was a result of the timing lag between bringing our new cultivation online and the recognition of revenue from our expanded facilities.

During the eight-week period of cultivation and subsequent post-harvest production time, costs are accrued in advance of product being available for sale. This has since stabilized following our expansion in the quarter. We ended the quarter with cash and cash equivalents of $14.2 million as of March 31, 2024.

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

Laurie Holcomb

Thank you, Marshall. Over the span of several years, we have built an expansive and difficult to replicate vertical platform in California. One of our key differentiators is their disciplined approach to building reliable long-term and profitable revenue.

Our platform allows us to leverage our own network of 16 operating retail stores along with third-party retail stores to sell nearly every gram of cannabis that we produce in the most efficient manner possible. This is a conscious decision to pursue high-quality, recurring CPG revenue opportunities versus chasing bulk sales, and our carefully laid groundwork has positioned us to be one of the clearest winners in California.

With our expertise, fully integrated vertical operations, and robust infrastructure, we are confident that we have the right strategy in place to strengthen our leadership position and begin generating positive cash flow in 2024.

With that, I would like to open the call to questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions] Your first question comes from the line of Bobby Burleson from Canaccord. Your line is now open.

Bobby Burleson

Great. Thanks for taking my questions. Congratulations on making progress on this turnaround and integration. I guess, first of all, you guys really got through your official comments nice and quickly. And, that’s very refreshing. And, when we look at just what you’ve done with Gramlin, it seems like that’s a nice case study in what you can do with a vertically integrated model, such as yours.

And I’m wondering, what inning are we in, in terms of that product kind of scaling into its market potential? I know it just got out the door a couple of months ago. And then, would there be potentially an encore at an adjacent price point or a different form factor? How do you keep the kind of winning streak going and differentiate?

Laurie Holcomb

Bobby, great question. So, we are thrilled with the launch. We launched first with flowers. So, I would like to remind people that between flower, pre-rolls, and vape pens, those three items account for about 80% of all products sold on the shelf. So, our first launch was just loose flower and win really eight. We have been sold out of that for two months. We rolled out effective Monday of this week our vape pens that are all-in-one disposables, and next Wednesday, we’re launching the pre-rolls.

So, we are really in the first inning here, and those are going to be our three primary form factors, flower, pre-rolls, and vape pens. So, we’re extremely excited. And I think, Bobby, what gives us some leverage here is, we have a vertically integrated platform that allows us to continuously produce products, indoor flower at a very high-level, at a very aggressive price point, and still make our margins.

So, margin enhancement for us is a big deal, but being completely vertical in California and being able to offer these prices that are hard for other operators to compete with is our strategic advantage.

Bobby Burleson

Great. And then, that’s a nice segue to maybe into my second question, which is, the other part of the story is you’re de-risking as you consolidate operations and kind of, make tough decisions. And, it seems like you’re through a lot of that but, maybe you can just elaborate on that process of de-risking and if there’s additional kind of savings or dry powder or tweaks there that we should expect this year?

Laurie Holcomb

Yes. I think, so in terms of the business combination and the merger and the cuts, I think we are majority through that. Where we were looking at the continued growth was, we went from about a 1,000 pounds a month in December to 3,000 pounds a month in January. And, getting that product into consumer packaged goods, there’s just a lag because you’ve got your harvesting and post-processing. And I think, that bumpiness in Q1, we’re through that as well. So, we should start to see that flat line, moving through Q2 and into Q3 and Q4.

Bobby Burleson

Fantastic. And then, my third question, and final question is just on the exogenous factors that you can’t control, right, in terms of the environment that we’re in California. It’s a very tough market, can be very rewarding as well. And I’m wondering, what’s the quality of receivables, that you have in terms of selling into a customer landscape or maybe certain folks might be stressed. How are you managing that process?

Laurie Holcomb

Yes. We’re very fortunate. We’ve never had a large AR, simply because we’ve been very disciplined on terms, and we literally have just been flat on AR for months, if not if not over a year. So, our AR is that, we don’t see any problems with AR at this point. But, again, it’s because we do not give lengthy terms, and we’re very disciplined on doing credit checks if we decide to give terms.

Bobby Burleson

And that in no way encumbers your growth, it sounds like. There’s plenty of runway

Laurie Holcomb

Correct.

Bobby Burleson

When you’re very controlled like that. Okay. Great. Thank you for answering my questions.

Laurie Holcomb

Thanks, Bobby.

Operator

Your next question comes from the line of Jesse Redmond from Water Tower Research. Your line is now open.

Jesse Redmond

Hey, Laurie. Hey, Marshall. Congratulations on the quarter.

Laurie Holcomb

Hello.

Marshall Minor

Hi, Jesse.

Jesse Redmond

I had a question. In less than a year, you’ve more than tripled your cultivation capacity, with these projects completed and producing. Can you walk us through the impact you expect additional capacity to have on performance for the rest of the year?

Marshall Minor

Jesse, I think from our perspective, though all the canopy rooms or, let’s just say, online growing in Q1, it still only represented a fraction of the flower that was being produced. I think, it’s going to be, we’ll see the fruits of all that labor going into Q3. We’re kind of working through all as Laurie mentioned, a lot of the post-processing now, packaging, getting things into CPG format and kind of out, into the third-party as well as into our stores this quarter.

And, we’ll start seeing the kind of fruits of our labor, 3Q and 4Q. So, it should be, you should see us, we should have a meaningfully a meaningful kind of ramp-up in revenue and profit in the back half of this year as all that cultivation capacity is now being harvested and put into pack into CPG format.

Jesse Redmond

So, the revenue side, maybe I’m reading less potential change in Q2 and stronger changes in the second half of the year?

Marshall Minor

There’ll be some, I think, meaningful changes in Q2 and then it’ll continue to grow in Q3 and Q4.

Jesse Redmond

Okay. Great. That’s helpful. And, any broader observations in terms of what you’re seeing in the California market for flower pricing?

Marshall Minor

I think, from a wholesale flower pricing, we don’t do much of that. We did some of that in in Q4, and in Q1. I think, from our perspective, putting it into CPG format and distributing it to our own stores. I think, we’re insulated from some of those kind of up and down flower pricing. But, I don’t think we have at that exposure compared to some of our competitors.

Laurie Holcomb

And, Jesse, I think, you and I discussed this earlier, but in the heyday, there were about 18,000 cultivation licenses in California divided between provisional and annual. Today, there’s about 5,100 and of those only 3,600 are annual licenses, which means that, you have the right to continue operating. They’re sort of grandfathered in. So given that, I believe, in my opinion, the bulk wholesale price has probably stabilized.

We’ve seen a bottom. And, we have seen some increases, although not meaningful, right? We haven’t seen 50% price increases, but we have seen some increases.

Jesse Redmond

Yes. That’s consistent with my observation. It seems like it’s flat to improving, which feels like a win these days.

Laurie Holcomb

Yes.

Jesse Redmond

And last question, just to build on, Bobby covered it a bit, but I did notice SG&A declined again this quarter. How much more room do you think you have there? And, how would you encourage analysts to look at modeling that looking through the rest of 2024?

Marshall Minor

So Q1, you compared to Q4, as we mentioned on previous calls, Q4 still had some of the legacy payroll still running through there. But, though we’ve made majority of our cuts in Q3, we still had kind of severance payments, etcetera, rolling through Q4. We don’t have as so Q4 in the beginning of Q1. Most of that is kind of, worked through the system, but we still continue to evaluate across all channels cost savings. So, we’re not done. We’re still sharpening our pencils, but I think the kind of impact isn’t going to be as big going forward.

Jesse Redmond

Great. I appreciate the answers. Thanks very much.

Laurie Holcomb

Thanks, Jesse.

Operator

[Operator Instructions] Your next question comes from the line of Pablo Zuanic from Zuanic. Your line is now open.

Pablo Zuanic

Thank you. Good afternoon, everyone. Look, just staying on the subject of the capacity increase and of course, you’ve communicated very clearly. If we try to quantify that increase, that ramp in production that you’re going to have available by the second half, one thing is when you increase capacity and try to bring it to market to third-party stores, it’s very different from when you’re feeding your own stores, right?

Obviously, that’s easier in that sense. But, can you quantify what fraction of that expanded capacity goes to your stores? I think you’re at 22% owned brands or something trying to go to 30%. It’s one thing if 10% of additional capacity is going to go to your stores and there are 90% has to be sold to third-parties versus 90, 10, right? Can you just give some idea of how that would work? I mean, keeping in mind that I think 30% is a threshold you’ve talked about in terms of own brands at your own stores? Thanks.

Marshall Minor

I think, Pablo, we’re kind of evaluating that on a kind of a demand basis right now. When we’ve launched Gramlin, we met with huge success in the market. So, as our sales team is out there looking, talking to third-party buyers, we’re kind of trying to weigh that kind of supply demand, between splitting it between our stores and third-party retailers.

I think, ultimately, it will probably land in that kind of 50-50 range. But also, we’re also mindful of, we just don’t want to necessarily flood our stores with our own products, because we have to have to prove it out within the system and not lose our retail customers. So, I think it’s a delicate balance. And, we’re going to bring on additional kind of SKUs as well. So, it’ll naturally increase over time at our stores. So, we’re just kind of working through that process now.

Pablo Zuanic

Right. And just to be clear, when you say 50-50, you mean of expanded capacity, half goes to your stores and the other half goes to third-parties, right? But you’re still keeping to a 30% threshold internally at the stores in terms of when brands being sold at the, I’m just trying to understand the difference there. If you see it, do you see my point, right, the difference you’ve gone.

Marshall Minor

No, that’s correct. That’s correct.

Pablo Zuanic

Good. Thank you. And, then just moving on, if we can talk about cash burn, I mean, you’ve gone from $32 million end of September, 22 December, now $14 million, how should we think about that? How should we model that? Thanks.

Marshall Minor

I mean, right now, you can see as once we close the transaction, we slowed the burn down pretty dramatically. We actively manage cash flow and our cash balance, and we’re still taking decisive steps to control costs and preserve our cash position. The Company is currently evaluating, financing options to strategically add liquidity to the balance sheet, as we kind of ramp-up capacity in our production going forward.

Pablo Zuanic

Thank you. And then just related to that, you mentioned 280E, we can try to calculate and model for companies what would be the refunds if we go back a few years, but in your case, it goes to a merger that’s more difficult for us. How do you think about that? I mean, do you have room or space, based on past filings to make backward claims and refunds or are you thinking about provisioning without 280E going forward? Just more color in terms of how you’re thinking about 280E right now, and if you can quantify the impact for your business? Thank you.

Marshall Minor

Yes. So, from a 280E perspective, we are in the process of as many other, MSOs and public cannabis companies, we are going to file amended returns to get some refunds coming in the next few months. But, from a provisioning standpoint, we’re still going to, we’re not going to change the way we provision. And, I think until there’s a true change to the, kind of IRS rules. But, at this point, we’re going to do the refund, but still provision as if 280E is still there.

Pablo Zuanic

Right. Can you try to quantify the refunds roughly?

Marshall Minor

I think it’s for this Company, it’ll be north of potentially north of $10 million.

Pablo Zuanic

Thank you.

Laurie Holcomb

Thank you, Pablo.

Operator

There are no further questions at this time. I will now turn the call back to Laurie Holcomb. Please continue.

Laurie Holcomb

Thank you, to everyone who joined us on the call today. We appreciate your continued support. I also want to express our appreciation to all of our Gold Flora team members for their continued hard work and dedication. I look forward to sharing our progress over the coming months. Thank you, and have a good day.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.