Earnings Transcript for BMMJ - Q1 Fiscal Year 2021

Operator: Good afternoon, ladies and gentleman. Thank you for standing by. Welcome to Body and Mind's Financial Results for Fiscal Q1 2021 Conference Call. During today's call, all parties will be in listen-only mode. Following the presentation, the conference call will be opened to questions. [Operator Instructions] This conference is being recorded today, February 3, 2021. I'd like to turn the conference call over to Graham Farrell of Harbor Access, Investor Relations Advisor for Body and Mind. Please go ahead, sir.

Graham Farrell: Thank you, operator. Good afternoon, and welcome everyone to Body and Mind's fiscal Q1 2021 conference call. We are delighted to have you join us today. This call will cover Body and Mind's financial and operating results for the fiscal quarter ended October 31, 2020, along with a discussion of some of our recent highlights and goals for 2021 and beyond. Following our prepared remarks, we will open up the conference call to a question-and-answer session. The call today will be led by Body and Mind's Chief Executive Officer, Michael Mills; along with the Company's Chief Operating Officer, Trip Hoffman. Before we begin with our formal remarks, I would like to remind everyone that some of the statements on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. Company's actual results may differ significantly from those projected or suggested. Any forward-looking statements due to a variety of factors, which are discussed in detail in our SEC filings. I will now hand the call over to Michael Mills. Please go ahead, Michael.

Michael Mills: Thanks, Graham. Thanks, everyone for taking the time for an update on the progress we've made at Body and Mind over the last quarter and we look forward to discussing the first quarter of fiscal 2021 ending October 31, 2020. On the call, we have myself, Michael Mills, CEO; Trip Hoffman, our Chief Operating Officer; and Dong Shim, our Chief Financial Officer. We were looking forward to reporting this quarter for a while, as we continued to consolidate our managed revenue into reported revenue as a result of successful license transfers into a 100% owned subsidiaries of Body and Mind. These transfers happened roughly one-month into Q1 and the license transfers in our entities triggered the consolidation of revenues. We're also looking forward to reporting second quarter earnings when we anticipate consolidating revenues from these operations for the entire quarter. To preface our discussion on financials, please recall that we are a US GAAP issuer, and we do report in US dollars. We're very pleased to report record consolidated revenue of US$5.29 million for Q1, which was roughly 144% increase over Q4, and a reminder that our reported income for the entire fiscal year 2020 was $6.23 million. Our managed revenue for the quarter, which is revenue from all operations both consolidated and non-consolidated was $6.49 million. On a very conservative run-rate basis, this puts us at roughly US$26 million of managed revenue without any allowance for sales increases or new revenue from projects in development and we'll discuss our current projects later in the call. A reminder that managed revenue is also referred to a system-wide pro forma revenue considered sales of cannabis products from entities for which management arrangements or definitive agreements are in place, but BaM cannot consolidate due to regulatory restrictions, or from equity investments in which results cannot be consolidated. To a better expansion, we've focused on efficiently developing our assets continually optimizing operations and we've been good stewards of capital. Our focus translates to our clean balance sheet where we have no long-term debt. Our total assets increased from $38.8 million to $40.57 million. Our total liabilities increased from $5.49 million to $7.19 million. Total current assets grew from $5.6 million to $6.53 million, and our total current liabilities grew from $2.81 million to $4.81 million. We ended Q1 with roughly $27,000 less than the start of the period and finished the period with roughly $1.33 million in cash from our consolidated operations. Again, we have no long-term or convertible debt and roughly 108 million shares outstanding, as of January 25th of this year. Our Q1 gross margin was 34%, and we anticipate continued margin improvement going forward. We're still in the early growth stage with some of our assets and as an example revenues from San Diego continue to ramp from the dispensary, which opened just before the beginning of Q4. An additional improving operating metric is the decline in cash used in operations and are narrowing that loss. Our Q4 net loss was roughly $1.17 million, and our Q1 net loss was roughly $780,000 with a significant portion about net loss attributed to non-cash items. Our cash used in operations was roughly $167,000 for the quarter and we see cash used in operations continuing to improved and to turn positive as we get further into this fiscal year. Our adjusted EBITDA for the quarter was positive, but roughly $57,000, we look forward to increasing our performance metrics as we move more revenue through our BaM infrastructure. In addition to significant quarter-over-quarter sequential growth of Body and Mind, this past week is heard talk of meaningful advances in US cannabis legislation from Senior Democrats regarding potential changes to federal regulation. We've also seen numerous changes at the state level and higher than ever voter and legislative support for legalization of cannabis. In honor of our friend, David Wagner, who is an incredibly supportive in this industry and of Body and Mind, I'd like to read a short quote he used in his 2018 Green Regulatory Arbitrage paper. One way or another, it is a certainty that cannabis will be federally legalized through federal recognition of states' rights, our removal of cannabis from the list of scheduled substances or rescheduling decriminalization or some combination of some such measures. And my quote was put into the paper, it was actually a quote from Earl Blumenauer and David Joyce and that was actually written in July of 2018, very fitting considering the positive changes we're seeing in general attitudes around cannabis. I've spoken with several people over the past weeks. We've expressed concerns over our late financial filings for the last two quarters. We pride ourselves on achieving our milestones and these delays have been challenging. Some of the delay was a knock-on result of COVID firing extensions that were granted in mid-2020 and some of the delay was a result of our growth. I can assure investors that we identified, we are under-resourced last year and have added smart qualified internal finance staff and engaged external finance consultants to ensure we will report on time next quarter and on time for future quarters. Looking forward, we have current developments in the pipeline and we're keeping a very close eye on states that are opening as well as limited license jurisdiction that are opening for applications in the very near term. We are diving opportunities to go deeper in the states where we have operations and are actively reviewing opportunities in current and new states. I'd like to turn the call over to Trip Hoffman, our Chief Operating Officer to outline advances across our various operations.

Trip Hoffman: Thank you, Mike. I'd like to provide a brief summary of our operational assets and confirm some of our recent developments. Starting with Nevada, we continue to operate a 100% owned 15,000 square foot cultivation facility and production licenses that we began in 2015. In March of 2020, we completed construction and commenced operations of our new 7,500 square foot production facility. This provides up to 10 times the capacity, so we can produce more SKU's and bring in more white label manufacturing. In December 2020, we completed the construction of converting the space from the prior production location into an approximate 20% increase in our flower canopy capacity. We expect the impact of that increased output to begin in March of 2021. Also in December 2020, we received our distribution license approval, which allows us to carry out B2B distribution of wholesale products and will provide us a break in our overhead costs. Moving to Ohio. We've managed a medical dispensary branded as The Clubhouse, since its opening in February of 2019. In September of 2020, we completed the license transfer of the dispensary into a 100% owned BaM subsidiary, which allow consolidation of the financials for about two months to three months in this quarter. Also in September of 2020, we re-branded the dispensary from The Clubhouse to Body and Mind. Currently, our medical production facilities under construction with about 4,000 square foot of capacity. We expect those production activities to begin in April of 2021. Moving to California. In August of '19, we began management of a medical and adult-use dispensary branded ShowGrow in Long Beach. In December of 2019, we began production and distribution of BaM branded products under our brand management agreement was an unaffiliated licensee. In April 2020, we opened our medical and adult-use dispensary branded ShowGrow in San Diego. We own 60% of that dispensary. In August of 2020, we completed a license transfer of the ShowGrow Long Beach dispensary into a 100% owned BaM subsidiary. And that also allowed us consolidation for about two months of the three months in this current quarter. And then in January of this year 2021, we began home delivery service from our ShowGrow San Diego dispensary. Moving to Arkansas. In April of 2020, we began managing a medical dispensary branded as Body and Mind in West Memphis. The license also allows for our limited cultivation and production on the same premises. The management agreement provides 67% share of the net profits. In October 2020, we received the Best Dispensary in Arkansas award by Ark420. In November of 2020, we began our operational setup for the medical cultivation in that same facility. And we expect those cultivation activities begin next month in March 2021. And then finally, in January of this year 2021, we began home delivery services in West Memphis as well. Thank you.

Michael Mills: I think we can open the call to questions, if there is any questions. Thanks very much, Trip. And just like to thank Trip and our entire team for the incredible work that they've done to move us into this positive adjusted EBITDA environment and really start to align all our assets into cash flow positive territory. This is a really exciting time for the company.

Operator: Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Tony Bowers with Intro-act. Please go ahead.

Tony Bowers: Hi, Mike and Trip. Congratulations on a really solid quarter. Your managed sales grew about 16% quarter-on-quarter, which is a very substantial annualized rate significantly higher than the industries growing. What do you think is likely to be possible looking ahead?

Michael Mills: Yes, I can take that. This is Michael. Tony, I think that, there is a -- a few factors there. One of them is, is the early start of any operation, whether it's a dispensary or a production and cultivation operation. There is a number of months of ramp-up. And you're not going to -- particularly, when you're opening dispensaries right in the middle of COVID. You're certainly not going to see the sales jump that we had expected to see. And that growth becomes sort of stretched out over time, but we expect in these new operations to continue seeing growth. And I don't think that, that's an unreasonable expectation.

Tony Bowers: And the implications for cash as you move the final managed parts into consolidated. How is that going to impact your balance sheet?

Michael Mills: Yes. With respect to cash, we expect to see a similar level of cash going forward. We have cash to develop all the assets that we are in the process of developing at this point in time and we're certainly looking at new assets to move into.

Tony Bowers: I mean this has been obviously a very peculiar operational environment. The mix between delivery, curbside and on-premise, what's optimal?

Trip Hoffman: I'll take this. We are just beginning our process with home delivery in two dispensaries and we'll plan to roll that out and our third very soon. And it's a slow growth, but it's being well adopted as everyone knows coming through the COVID scenario, the expansion into curbside pickup order ahead so you minimize your time in the store. And now home delivery is growing very strongly, not just at our operations, but at all of our peers as well. So we do expect it to become a significant part of our operation. We do look at the home delivery part as non-distracting from our current sales in the store as that allows us to actually -- to turn on more marketing opportunities and market to people that are further away as we're willing to drive a little further of our delivery vehicles. So we do see that as another significant growth factor.

Tony Bowers: Thanks.

Operator: [Operator Instructions] There are no further questions at this time. You may proceed.

Michael Mills: Well, thanks again, everyone for taking the time to -- I see maybe one more from Tony here. Did you have another question, Tony?

Tony Bowers: Inevitable, and maybe it's imminent. What is -- what do you view as the critical size that you need to be not eaten, but to be a Hunter? And at what level do you hit your sort of target profitability?

Michael Mills: Yes. I think -- I think that the first, certainly from myself, the first part of that question was cut-off, but I believe what you're asking is, how big do we need to become so that the level of revenue that we're putting through the company makes sense. Obviously we've just sort of come to an adjusted EBITDA positive situation here as we continue to add revenue in -- through the system I think that, that metric will come up nicely with respects to where we looking, what makes sense. Obviously we're looking in the states that we're operating in. We understand those states very well. We understand the regulations and particularly taxation. That can be a single asset acquisition in the form of a dispensary or cultivation. It can be a license that, that we apply for ourselves and move forward. I think on a bigger level and when you're asking about being eaten, I think everyone is very familiar with the amount of money that's been raised in this industry in the last month or two and the largest companies out there. I expect we'll start looking at -- we'll see a very different cannabis landscape at the end of this year than we do right now. I think there is a really good opportunity for us to bring our operational expertise into either single operations or multiple operations. And I think everyone in this industry is talking to other companies of whether that's privates or other publics. There is a lot of discussions going on, right across the entire industry. I think one of the advantages that we may have that other groups may overlook is, we'll look at opportunities where maybe we don't control the entire asset that we're looking on. And what we're seeing is we're seeing a lot of opportunities where three or four or five people came into winner, whether it's a dispensary license or a cultivation license or a production license. And some of those people want to remain and they're good at what they do, I mean, understand that they want to be part of a larger group. I feel like we've developed a reputation in the industry as good people to work with. And we'll have discussions with groups that I think would be overlooked by many of the other companies. So we see those all else being attractive targets.

Tony Bowers: Well, that's great color. Thanks. And once again, great discipline to turn cash flow positive.

Michael Mills: Thanks very much, Tony. I think that might be the last call that we have. I'd like to thank everyone for joining us, and please feel free to reach out, if you have any questions on Body and Mind. And we're very excited to continue moving forward, this is a great time to be in the U.S. Cannabis space.

Operator: Ladies and gentlemen, this concludes your conference call for today. Thank you for participating. And I ask that you please disconnect your lines.