High Tide, Inc. (OTCQB:HITIF) Q3 2020 Earnings Conference Call September 16, 2020 8:30 AM ET
Company Participants
Krystal Dafoe – Director, Corporate Governance & Listing
Raj Grover – President and CEO
Rahim Kanji – CFO
Conference Call Participants
Andrew Semple – Echelon Investment Partner
John Chu – Desjardins Capital
Operator
Good morning. My name is Sarah, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the High Tide Inc. Third Quarter Fiscal Year 2020 Financial and Operational Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there’ll be a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.
I would now like to turn the call over to your host, Krystal Dafoe.
Krystal Dafoe
Thank you, Operator. Good morning, everyone, and welcome to High Tide first earnings call. Joining me today on the call are Mr. Raj Grover, President and CEO; and Rahim Kanji, CFO. Earlier today, the company released its financial and operational results for the third quarter of fiscal 2020, ended July 31, 2020. These results are available on the company’s website and on SEDAR.
Before we begin, I’d like to remind everyone that certain statements made on today’s call may contain forward-looking information within the meanings of applicable securities laws. Such statements may include estimates, projections, goals, forecasts or assumptions, which are based on current expectations and not representative of historical facts or information. We want to be clear that such forward-looking statements represent the company’s beliefs about future events, plans or objectives, which are inherently uncertain and are subject to numerous risks and uncertainties that may cause the actual results or performance to differ materially from such statements.
Additional information about both the material factors and assumptions forming the basis of our forward-looking statements and risks, and which could cause actual results or performance to differ materially, and the material factors or assumptions that were applied to make certain conclusions, forecast or projections in forward-looking statements on this call is contained both in a readily available document upon request and in our regulatory filings available on SEDAR under the company’s profile.
High Tide does not undertake any duty to publicly announce the results of any revisions to any forward-looking statements in this call, or to update or supplement any information provided in today’s call.
In addition, on this call, we will refer to supplemental non-GAAP accounting measures included adjusted EBITDA, which do not have any standardized meeting as prescribed by IFRS. We believe this non-IFRS financial measure assists management investors in understanding and analyzing our business trends and performance. Please refer to our earnings press release for a calculation of these measures and reconciliation to the most directly comparable measures calculated and presented in accordance with IFRS.
These non-IFRS measures should not be considered superior to as a substitute for or as an alternative to, and should be considered in conjunction with the IFRS financial measures presented on the financial statements listed on SEDAR.
It is now my pleasure to introduce Mr. Raj Grover, President and CEO of High Tide. Thank you. Mr. Grover, you may now begin.
Raj Grover
Thank you, Krystal, and good morning, everyone. Welcome to High Tide Inc. financial results conference call for the third quarter ended July 31, 2020.
As Krystal said, my name is Raj Grover, and I’m the President and CEO of High Tide Inc. With me today is Mr. Rahim Kanji, our CFO.
Beginning today, we plan to host conference calls every quarter in conjunction with our earnings releases. There are a lot of exciting developments going on right now in our company and within the Canadian cannabis retail industry, and we look forward to sharing them with you as the time progresses.
I’ll start this call by providing an overview of our results and other key developments in the third quarter, Rahim will discuss the financials in depth. And after that, we’ll be pleased to answer any questions you may have.
Let me start by saying that fiscal year 2020 so far has been a landmark year in our company’s history. We made a commitment to reporting our first profitable quarter in this fiscal year. And I’m pleased to report that High Tide became the first publicly traded cannabis retail company amongst its peers to report positive adjusted EBITDA, income from operations and positive cash flow from operations in its second quarter of fiscal 2020.
We continue to generate income from operations and cash flow in our third quarter of fiscal 2020. Currently, all of us are facing many challenges because of the COVID-19 pandemic. Throughout these challenges, we have continued to focus on our exciting corporate strategy to provide the best experience to cannabis enthusiasts, achieving operational excellence and maintaining profitability.
My message to you this morning is that High Tide is profitable and is well-positioned for growth in cannabis retail industry with a very positive outlook. Our earnings were in line with our expectations. Revenue for the third quarter of fiscal 2020 was $23.2 million, which is an increase of a 180% over the same quarter last year. Gross profit increased to $9.23 million, up 202% over the same quarter last year.
In Q3, 2020, the company generated income from operations of $2.11 million, compared to a loss of over $4 million in the same quarter last year.
Adjusted EBITDA for the third quarter of 2020 was $4 million, compared to a negative of $3.4 million in the same quarter of last fiscal year. During this period of economic uncertainty, our strong quarter shows how well all of our company’s revenue streams are performing. And having diversified revenue sources, which includes bricks and mortar cannabis retail stores, industry-leading e-commerce platform, grasscity.com, recovering subscription revenue from our data analytics platform called Cabanalytics, and wholesale segment with proprietary designs and licensed cannabis lifestyle products, all revenue streams have shown continued growth and resilience in these uncertain times.
The COVID-19 pandemic brought on many challenges, including regulatory hurdles with respect to our operations status as an essential service. We faced many challenges in Ontario, Alberta and Saskatchewan. However, our team worked tirelessly through all of these challenges by providing a safe environment for employees and customers, and even managed to open four stores in Ontario.
We managed the regulatory challenges by quickly shifting to a click-and-collect model, when the Ontario government removed the essential services designation, which resulted in the requirement to temporarily close all of our Ontario locations and switch to click-and-collect only. After the third quarter, we opened a premium store location in Banff Alberta, a world renowned year-round tourist destination.
We’re also extremely proud of our customer loyalty program called Cabana Club. To-date, approximately 57,000 members have joined the club. Currently, over 50% of our daily transactions are completed by Cabana Club members. Our club members enjoy receiving SMS and email communications, highlighting new and upcoming product arrivals, member only events and special offers.
In the beginning of the year, the company launched its data analytics service named Cabanalytics, and started generating recurring subscription based revenue. The company continues to realize significant increases in its data analytics service through a growing subscriber base.
Our e-commerce platform, grasscity.com has been operating for 20 years as an online retailer of smoking accessories and cannabis lifestyle products. Grasscity attracts approximately 7 million users to its online store each year, and has had over 34 million unique users join its online forum since inception. High Tide’s ongoing investment in Grasscity to refresh its online sales platform increase its searchability, alignment supply chain with RGR and Famous Brandz and optimize its distribution channel has resulted in significant growth in market share and daily transaction volume.
Grasscity enables the company to leverage its vertical integration to improve order fulfillment, customer reach, product margins and overall profitability.
Revenues in the company’s wholesale segment increased by 85% being an increase from $1.2 million from the same quarter last year to $2.6 million this past quarter. The company’s wholesale segment attracted significant number of new wholesale and distributor clients, due to its proprietary designed and licensed products.
While showcasing a strong operational performance, we also focused on strengthening our balance sheet by restructuring a $10.8 million debt that was originally to mature in December 2020, which was restructured as a non-interest bearing loan, maturing in 2025. Subsequent to the third quarter, we also extended maturity of an additional $2 million loan to September 30, 2021.
After the third quarter, we entered into a definitive arrangement agreement to acquire all the issued and outstanding shares of Meta Growth Corp. On closing of this transaction, High Tide will become the largest cannabis retailer in Canada with annualized pro forma revenue of approximately $148 million.
The Investor Presentation that provides an overview of this transaction has been updated to include, High Tide’s and Meta’s recent financial results and is available on our respective websites.
High Tide remains focused on the fundamentals of being a profitable retailer, while continuing to leverage cannabis and its related accessories to the company’s manufacturing and e-commerce business portfolio. High Tide’s diverse mix of consumer channels provides access to layered insights and context unavailable to our competitors, enabling the company to understand North American and global cannabis user preferences in real time.
The company believes that achieving positive cash flow from operations, the restructuring of $10.8 million of debt into an interest free debenture due in 2025, and the pending acquisition of Meta Growth has strongly positioned High Tide to execute on strategic growth objectives for the remainder of fiscal 2020 and beyond. The company is well-funded and operationally prepared to further its expansion in Ontario, as Canada’s largest and most underserved market.
With that, I will now turn the call over to Rahim Kanji, our CFO to discuss our financial results.
Rahim Kanji
Thank you, Raj, and welcome everyone. In the third fiscal quarter of 2020, the company recorded consolidated revenue of $23.2 million, being an increase of $14.9 million or 180%, compared to $8.3 million in the same quarter last year. Compared to the prior quarter-ended April 30, 2020, the company recorded an increase in consolidated revenue of $3.6 million or 19%.
Revenue comprised mainly of sales through our bricks and mortar cannabis retail locations, our e-commerce platform grasscity.com, our wholesale division and recurring subscription revenue from our data analytics platform Cabanalytics. The revenue also included royalties earned from franchise and branded locations.
Revenue from our retail segment increased by $13.9 million, or 209% to $20.5 million in the third quarter of 2020, compared to $6.6 million in the same quarter last year. Compared to the second quarter of 2020 revenue from our retail segment increased by $2.7 million, or 15% in the third quarter of 2020. The increase in our retail segment was bolstered by our best in class e-commerce platform, grasscity.com.
Grasscity.com is the most established online platform for smoking accessories, and cannabis lifestyle products. Our investment to further enhance grasscity.com platform since the acquisition in 2018, has resulted in continued growth of the North American market share, an increase in daily transaction volume.
Additionally, we also realized revenue increases in our retail store location and through our data analytics platform Cabanalytics, generating recurring subscription revenue. Revenue from our wholesale segment increased by $1.2 million or 85% to $2.6 million in the third quarter of 2020, compared to $1.4 million in the same quarter last year. Compared to the second fiscal quarter of 2020, revenue from our wholesale segment increased by $1 million or 58%.
Our wholesale segment attracted new wholesalers and distributors by offering them our unique and proprietary designed licensed products, such as Snoop Dogg Pounds, Cheech & Chong’s Up in Smoke, Trailer Park Boys and more.
Our consolidated gross margins were industry leading at 40% compared to 38% in the second fiscal quarter. Our retail gross margin was 40% in the third fiscal quarter of 2020, compared to 38% in the second fiscal quarter of 2020. The increase in gross margin was primarily driven by significant increase in our grasscity.com platform revenue during the third quarter of 2020. The gross margin in our wholesale segment in the third fiscal quarter of 2020 was consistent at 35% compared to second fiscal quarter.
Operating expenses for the quarter decreased by $200,000 compared to the previous quarter. Like Raj, I’m excited to announce that the company recorded income from operations of $2.1 million in this quarter, compared to a loss from operations of $4 million in the same quarter last year. The company’s diversified business streams and focus on operational excellence continue to accelerate in this challenging economic environment.
Adjusted EBITDA excluding lease payments in this quarter was $4 million compared to an adjusted EBITDA of $1.9 million in the second quarter, and a loss of $3.4 million in the same quarter last year. As of the end of the third fiscal quarter, the company had over $7 million in cash and cash equivalents, compared to $800,000 as of the end of the last fiscal year, ending October 31, 2019.
The increase in cash was primarily driven by the company realizing positive cash flow from operations, and capital raises for deployment into capital expenditures. We continue to strengthen our balance sheet with a successful restructuring of a $10.8 million debt into an interest free loan due in 2025.
The working capital deficit significantly decreased to $11.4 million as of July 31, 2020, compared to $20.9 million as of April 30, 2020, due to restructuring of the $10.8 million debt.
Additionally, after the quarter, the company extended maturity of a $2.2 million loan to September 30, 2021.
With that, I will now turn the call over to the operator to open the line for the Q&A.
Question-and-Answer Session
Operator
Thank you [Operator Instructions]. Our first question comes from the line of Andrew Semple with Echelon Investment Partner. Your line is now open.
Andrew Semple
Hi, and good morning, guys. Congrats on the quarter.
Raj Grover
Thanks, Andrew.
Andrew Semple
Yes. Just my first question here. I was just looking at the segmented information. It appears Grasscity approximately doubled sales quarter-over-quarter. I just want to confirm I’ve got that right. What dynamics were at play? And whether you think this is the new level for the business going forward for that segment?
Raj Grover
Yes, absolutely. Good analysis there Andrew. Grasscity was a top performer for us this quarter. And this just solidifies our reasoning to acquire it in December of 2018, just prior to going public. And our whole intention of acquiring Grasscity was to integrate fulfillment capabilities out of North America. 90% of our business in Grasscity is originated in the United States. And before we acquired the business, 90% of the shipments were happening out of Amsterdam.
And we’ve made that shift out of our Las Vegas facility out of Nevada facility. And that has had a huge impact on our fulfillment rates now becoming 70% out of Nevada, and 30% out of Amsterdam. And that has just drastically improved the business performance. And we see this continuing. Our searchability online is at the highest levels we’ve ever seen. Our fulfillment is working on full capacity, there’s still room for improvement. We feel that we can take it up to 90% fulfillment out of North America. So yes, we do see the business at the bare minimum stabilizing at these levels or even growing from there.
Andrew Semple
That’s great color. Thank you. I just want to also ask on the gross margins this quarter at around 40%. I heard your comments in the prepared remarks on the e-commerce business supporting that. Just wondering if you think there is further room for expansion above the 40% level. Or do you think you remain around this level for some time?
Raj Grover
So look, I am very happy, me and Rahim are both very happy to see this hover around 40%, it’s quite incredible. In our last quarter we had industry leading gross margins of 38%, and now just quarter-over-quarter we’ve improved this to 40%, and we see this stabilizing between 38% and 40%.
Is there further room for improvement? It’s always possible. But I’ll say comfortably and confidently that we can generate between 38% and 40% gross margin. And this is again, thanks to High Tide’s diversified business portfolio. We have got our e-commerce divisions that generates high gross margin, our retail division generates industry leading gross margin, and then, of course, our wholesale division hence as well. So yes, we definitely it hovering around 38% to 40%.
Andrew Semple
That’s great to hear. Just want to also touch on your recent announcements on the restructuring of $2 million of debt and extending the maturity there. Just curious if you are able to comment on whether there is ongoing work on that front, whether you’re continuing to speak to debt partners on perhaps extending maturities and whether we may see its more announcements on that?
Raj Grover
Yes, that’s absolutely the case Andrew. Like you see just few months ago, we negotiated a $10.8 million debenture that was outstanding, that was due in December 2020. It’s going to be paid out in five years as an interest free loan. And then further to that, we extended another $2 million just very recently a few days ago, and we are in conversations and we feel great about it that we will be able to restructure some of our smaller remaining debt that is coming due in the next quarter or two. And we don’t see that as an issue as well, issue at all, and we have already begun those conversations and they are looking pretty promising.
Andrew Semple
Great. Just perhaps one quick one and then I’ll get back in queue. Just wanted to get your thoughts on the OpEx this quarter, fairly consistent despite the revenue growth. So I am just wondering whether do you think you can squeeze further operating leverage of the existing costs base, or whether we’re going to start to see that begin to move a little bit more closely with movement in revenues?
Raj Grover
Regarding our operational expenses, this is something, Andrew, that I’m particularly proud about. I mean, you can see our revenue increased from $19.6 million to $23.2 million from Q2 to Q3, yet our operational expenses went down $200,000. I mean, we are feeling pretty great about where the OpEx is right now.
And as we start to grow aggressively again, that OpEx might go up. But I think we’re going to keep it very much in relation to where the business is today, and where the Canadian cannabis industry is today. We are making calculated moves on OpEx, because our main goal is to generate EBITDA quarter-after-quarter. So we’re keeping our eyes on the prize here on the OpEx, and we feel pretty great about it going forward that we don’t see any unforeseen changes coming through and our OpEx going too much higher from here.
Andrew Semple
That’s great, and thanks for taking my questions here. I’ll get back in queue. Congrats on the quarter.
Raj Grover
Thanks, Andrew.
Operator
[Operator Instructions] Our next question comes from the line of John Chu with Desjardins Capital. Your line is now open.
John Chu
Good morning, and congrats on the quarter. So I want to dig down a bit deeper on just your diversified sales base here. This seems pretty unique to us in terms of how diversified your revenue is compared to your peers. So when I look at the non-cannabis side, the smoking accessories, we calculated to be about a third of your revenue for the quarter. And geographically, it looks like just the U.S. base, which is still related to the Grasscity teams, that’s about 23% of your revenue for the quarter.
So from our view it just seems to help reduce your volatility and your sales risk. But they all seem to be a pretty strong source of growth for the quarter-over-quarter sales growth there. So maybe just talk about the outlook in terms of percentage of total sales and how you think that might look like as we go forward? Can that represent still a pretty meaning for you and even possibly a bigger chunk of where it is today? Or can we see that level out a bit?
Raj Grover
It’s a great question, John. We are very excited about our cannabis versus non-cannabis revenue trajectory. As you know, we’re a well-diversified cannabis company with integrated business units. And, I would like to confirm that 23% of our revenue was indeed generated in the U.S., which is the most exciting market for us.
And it was not only e-commerce contributing to that, but also our wholesale business. Our wholesale business has doubled practically year-over-year. And 90% of that wholesale business has originated in the United States. And we definitely see an increase going forward both in our e-commerce businesses and wholesale. And especially wholesale, we’re very bullish on because until about last year, we never had any wholesale business in the U.S.
So we built this whole business just over last year, and we are seeing significant increases quarter-over-quarter, simply because, we have some pretty unique offerings through our Famous Brandz business division, which has got celebrity and licensed products that none of our competitors in the wholesale space have. And regardless, even if you are a competitor to High Tide, some of these products are so unique that businesses still want to carry in their portfolio.
So, we’re bullish on wholesale, and we’re bullish of the revenue being generated out of the U.S. going forward in the next few quarters.
John Chu
Okay, great. And then maybe just a little bit more on Grasscity and the e-commerce platform. You talked about how COVID was a bit of a headwind for the business as a whole. But some of the comments we hear just from the CPG world is on the e-commerce side of that, COVID actually helped accelerate e-commerce adoption by consumers by potentially up to five years. And so obviously that could be a nice tailwind for Grasscity and your e-commerce platform.
Can you maybe just comment about to the extent to which COVID has actually helped Grasscity and driving revenue and the outlook going forward on that?
Raj Grover
Yes. So look, Grasscity has definitely been boosted by COVID. But I would tell you that the main reason for the increase in Grasscity is like I mentioned earlier, is the fulfillment that we are doing out of our Las Vegas facility, which was all happening out of Amsterdam. And we now have the ability to ship orders overnight to our U.S. customers, versus prior to us acquiring the business and setting up the business which took us good six to nine months, which was anticipated, the shipping times were anywhere from seven to 14 days. And we saw this as an opportunity in 2018, that if we integrated the business well in the United States, we are going to see a substantial revenue increase.
And that’s exactly what is happening. Like I said, the fulfillment went up from 90% to Amsterdam to 70% Las Vegas, and 30% Amsterdam. And that has changed that growth trajectory completely for us, because now consumers can get their packages fast. They can see the variety being shipped out of the United States. And I see that as the biggest reason for increases in a Grasscity platform.
John Chu
Okay, perfect. And then last question just on the gross margin. So it sounds like what the levels we’re seeing this quarter, last quarter seem to be fairly sustainable. But just wanted to double check that, with the current backdrop we’ve been seeing and some of the commentary I’ve been hearing from your peers about very competitive Alberta market, more stores opening up in Ontario, product prices declining that you factored that into your gross margin outlook in terms of 38% to 40% being sustainable at those levels, considering those factors. Is that fair?
Raj Grover
Yes, John, we do. And like the reason again is, we are well-diversified Canadian cannabis company with integrated business units. So we’re not just dependent on one market like Alberta, which is definitely getting saturated. But Alberta is not the only market we operate in, and that’s the good news.
And like I just mentioned earlier again, I’m fairly comfortable saying that 38% to 40% gross margins are fairly easily achievable for us. Do I want to talk about further margin enhancement? It’s a possibility. But I can comfortably tell you that we will land within 38% and 40% range going forward.
John Chu
Okay, great. That’s very helpful. Thank you.
Raj Grover
Thanks.
Operator
Thank you. Ladies and gentlemen, currently there are no further questions. I would like to turn the floor back to management for closing remarks.
Raj Grover
Thank you, operator. This exceptional combination of quarterly financial results reinforces our conviction that High Tide is one of the top performing cannabis companies in Canada today. Our dedicated and passionate employees worked together to achieve these outstanding results, and they should feel extremely proud of their hard work in this collective accomplishment.
I’m very thankful to our shareholders and stakeholders for their ongoing support of our strategy, and we remain committed to achieving the highest standard in Canadian cannabis retail.
With that, I will ask operator to close the line.
Operator
Thank you. Ladies and gentlemen, this concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.
Source: Seeking Alpha