Earnings Transcript for BMMJ - Q2 Fiscal Year 2021

Operator: Good afternoon, ladies and gentleman. Thank you for standing by. Welcome to Body and Mind's Financial Results for Fiscal Q2 2021 Conference Call for the quarter ending January 31, 2021. Body and Mind is a U.S. GAAP reporting issuer and unless otherwise noted, all figures will be in U.S. dollars. During today's presentation, 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, March 22, 2021. I'd like to turn the conference call over to Graham Farrell of Harbor Access, Investor Relations Advisors for Body and Mind. Please go ahead, sir.

Graham Farrell: Thank you, operator. Good afternoon, and welcome everyone to Body and Mind's fiscal Q2 2021 conference call. We are delighted to have you here. This call will cover Body and Mind's financial and operating results for the fiscal quarter ended January 31, 2021, 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; and Chief Financial Officer, Dong Shim. 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. The Company's actual results may differ significantly from those projected or suggested in 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, very much Graham. Hello everyone and thanks 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 our second quarter of fiscal 2021 ending January 31, 2021. We've been looking forward to reporting this quarter as we consolidated almost all our managed revenue in reported revenue as a result of successful license transfers and do 100% owned subsidiaries of Body and Mind. To preface our discussion, I'll remind you that we are a U.S. GAAP issuer and we do report in U.S. dollars. I'll touch on the potential benefits of the U.S. GAAP reporting a little bit later in the call. We're pleased to report both record consolidated revenue of US$6.31 million for Q2 which is a 300% record revenue growth for Q2 2021 compared to Q2 2020. Q2 showed a 19% sequential revenue increase over Q1 and I'll remind you that our reported income for the entire fiscal year 2020 were $6.23 million. On a very conservative run rate basis, that puts us at roughly $25 million run rate of revenue with any allowance for increased sales or new revenue from projects currently near completion. We'll discuss our current projects later in the call. A quick summary of our balance sheet. Total assets increased from $40.57 million to $41.44 million. Total liabilities increased from $7.19 million to $8.92 million. Total current assets grew from $6.53 to $7.31 million and total current liabilities grew from $4.81 million to $6.19 million. We ended Q2 with roughly $160,000 less from the start of the period and finished the period with $1.61 million in cash. Again, we have no long term or convertible debt and roughly 108.8 million shares outstanding as of March 16, 2021. Now I'll talk a little bit about some of our operational metrics. Our Q1 gross margin was 34% and we've improved gross margin to 43% in the second quarter as we've moved more revenue through our operations, expanded sales, and continued to control costs. We anticipate continued margin improvement going forward as sales of our first flower from extended cultivation in Nevada come online and we see increased sales through our dispensary operations. We're still in the growth stage with some of our assets which continue to ramp and we're also spending cash developing new operations. We all know COVID and lockdowns have been a real challenge for all businesses and now pretty much everyone. We're really looking forward to getting back to hosting some of our customer and brand events as COVID restrictions relax. We had some great success in the past with customer events and in-store marketing initiatives and we see these opportunities starting to come on line as restrictions relax. We're also seeing travel and tourism increase to our markets including Las Vegas, San Diego and Long Beach. An additional operating metric we see as an improving trend is the declining cash used in operations with just over $100,000 in cash used in operations over the quarter and roughly $420,000 in cash used in investments over the quarter. We anticipate cash used in operations continuing to improve and turn to positive cash flow as we move further into fiscal 2021. Our adjusted EBITDA for Q1 was roughly $57,000 and our adjusted EBITDA for Q2 increased to $0.66 million. We look forward to increasing our performance metrics as we continue to move more revenue through our lean infrastructure. In addition to record financial results, I'd like to welcome Alexis Podesta to the Body and Mind Board. Alexis is the past California Secretary of State for Business, Consumer Services and Housing and her agency was the lead in creating the legislation to transition California cannabis industry for medical to adult use. In 2016 the California cannabis market was $2.8 billion and in 2020 the industry grew to $4.4 billion. Projections for 2023 are in the $6.3 billion to $7 billion range. This is an important margin. Over the past months we've seen numerous developments in cannabis legislation across municipal, state, and federal agencies and perhaps the most impact will be in the reintroduction of the SAFE Banking Bill into the House last week. The Bill has broad bipartisan support in the House of over 100 bipartisan cosponsors. The SAFE Banking Act was passed by the House in 2019 in a 321-103 vote and is expected to go to the senate shortly. While the current SAFE Banking language would not decriminalize cannabis on a federal level, it would make the entire industry significantly more efficient and lead the way to lower cost to capital and potential access to U.S. capital markets, both from a listing and investing opportunity. As we think about developments around SAFE Banking, we are getting prepared for the opportunity of U.S. listings for cannabis companies. We've already seen some of the largest U.S. cannabis companies convert from IFRS accounting to GAAP accounting as well as register securities with the SEC. Again, Body and Mind is a U.S. domiciled issuer and reports in U.S. GAAP and as we look forward to any change in U.S. banking legislation, this has the potential to speeder transition to U.S. Exchange in the event the opportunity presents . Looking forward, our development team is actively finalizing Arkansas and Ohio and have additional development opportunities in the pipeline. We have license applications in progress and are working with local and state agencies on new and ongoing license applications. We're keeping a very close eye on states that are opening as well as limited licensed jurisdictions that are opening for applications in the near term. Our executive team has been evaluating numerous acquisitions through our topline revenue and EBITDA and are seeing very interesting opportunities. 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'll now provide a brief history and update on the operational facilities of Body and Mind. In Nevada, we continue to operate a 100% owned 14,000 square foot cultivation and production licenses that we began in 2015. In March of 2020, we completed construction and commenced operations of a new 7,500 square foot production facility here in Las Vegas. This facility provides up to 10 times the capacity for more SKUs and more white label manufacturing opportunities. 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 of the cultivation operation. Also in December 2020, we received our distribution license approval, which allows B2B delivery of wholesale products and will provide overhead cost reductions for our wholesale operations. In March this month 2021, we completed the full utilization of our additional canopy space and we expect the sales going forward to reflect the new capacity. Moving on to Ohio. In February of 2019 we began managing a medical dispensary branded as The Clubhouse at its opening. In September 2020, we completed the license transfer of the medical dispensary into a 100% owned Body and Mind subsidiary, allowing full consolidation of financials. At the same time, the business was rebranded from The Clubhouse to Body and Mind. In October 2020, we began construction of a medical production facility with about 4000 square feet capacity. We expect those production activities to begin next month. In California, in August 2019, we began management of a medical and adult-use dispensary branded as ShowGrow in Long Beach. In December 2019, we began production and distribution of Body and Mind branded products under our brand management agreement with an unaffiliated licensee. In April of 2020, we opened a 60% owned medical and adult-use dispensary branded as ShowGrow in San Diego. In August 2020, we completed a license transfer of ShowGrow Long Beach dispensary into a 100% owned BaM subsidiary along full consolidation of the financials. And in January of this year, 2021, we began home delivery service from our ShowGrow San Diego dispensary. Moving on to Arkansas. In April of 2020, we began managing a medical dispensary branded as Body and Mind in West Memphis. That license also allows a limited cultivation and production on the same premises. Our management agreement we have in place provides a 67% share of the net profits. In October of 2020, we received the Best Dispensary in Arkansas award by Ark420.com. In November of 2020, we began the operational setup for the medical cultivation. We expect that medical cultivation operations to begin in the next couple of weeks. And in January of this year in 2021, we began home delivery services from Body and Mind in West Memphis. And that completes the operational update.

Michael Mills: Thanks very much, Trip. If there are any questions out there please feel free to contact the operator and we'd love to give you update now.

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

Graham Farrell: Operator, do we have any questions there?

Operator: It looks like we have one more question from Peter Wright with Intro-act. Peter, your line is now open.

Peter Wright: Great. Thank you guys for taking my question and congratulations on the fantastic results. Three questions if I can. My first question is on scale, and if you think of the target model, help us think about how you're thinking over the next 18 months. What are the numbers, maybe on a top line level that you have to get to achieve your target model? I've got three questions if I could throw them all out there if I can and we can along Mike. The second question I have is around branding. And what I'm looking to get a better understanding of is as we transition from Clubhouse to Body and Mind or ShowGrow to Body and Mind, what is really the implications economically that you're seeing from these transitions, the good and maybe some of the challenges that you see in this brand change if there is any? And then the third question that I have is, operationally as you get some exciting new features within the dispensaries delivery and the such, what are some of the trends that you see being more of a full service dispensary, maybe from an average basket size or a mix and ability to kind of guide product demand towards your proprietary product, what are some of the benefits there as you get a more full operational model on these dispensaries?

Michael Mills: Thanks very much, Tony [ph]. I'm going to let Trip comment on the first couple of questions here. And I think we think, let me talk to you, let me talk a little bit about brand, and when you have a disparate brand, kind of like, I think you have mentioned the Clubhouse in Ohio, and moving that to Body and Mind, I think every time we bring Body and Mind to the forefront in the form of dispensaries, in the form of our products, in the form of really everything that we have to offer, we gain that much more interest across the broad market and it's very interesting to see the change in Ohio from Clubhouse to Body and Mind, in the sense that this is a brand and this is a group that's bringing opportunities from states that have been medical and then transitioned to adult-use for many, many years. So I think obviously the Body and Mind brand, we feel that it appeals to a very large broad group of people and bringing it into really every aspect of our business is key. With respect to getting to some of the operational numbers that we had discussed earlier, I might want Trip take that one and then circle back to other question.

Trip Hoffman: Yes, thanks Mike and thank you, Tony. So, as we think about how we're going to meet our forecast for the next 18 months, there's couple of drivers that don't include acquisition or starting up new businesses. Essentially we have our organic growth from the existing operations and we also have the expansion operations that we've discussed in the past, the Ohio production plus the Arkansas cultivation. So we do expect, as I mentioned in my summary, both of those new operations that come online very soon, we've been involved with the state licensing authorities for inspections and things like that just recently, and so we're in a very good position, we know that we're very close to those. So we do expect those events to take place as planned. And then on top of that, the organic growth starting with our 20% increase in capacity here in Nevada, and then following that up with all the dispensaries with extremely strong demand as everyone else is seeing across the country as the adoption of the use of cannabis just keeps -- continues to grow, we do expect to see something along the lines of a 30% year-over-year growth, just from our existing operations, but it could be slightly more than that, but that's from where we are. In addition to that, the third way of our top line growth and what we talk about internally, is that we are always looking for new opportunities, whether they're bolt-on opportunities for other dispensaries or other operations or starting up new license applications across the country in different jurisdictions that we are very fond of. And we continue to work that very diligently. We do expect to have some things that will be coming out, that we can make public here in the next quarter or two, but it's a fast and furious pace of activity on that front right now. I'll turn it back to Mike for a minute.

Michael Mills: Peter, did that answer all your questions?

Trip Hoffman: He may have dropped off. He did have one other question, Mike, I will just touch on regarding dispensary trends and what we're seeing across the country, basket size and such. So just to speak generally on dispensary basket size and the number of customer tickets per day, varies greatly from location to location. It will vary from as low as $60 per average ticket to as high as $140 per average ticket depending on if you're in one of the blue collar communities versus a more affluent community, and likewise your number of tickets can also be dependent upon the amount of competition around. In each of our stores that we are seeing significant growth on both the average ticket size, and on the number of tickets per day, the number of tickets per day that is an easy one, just as we get more market footprint in new areas, and as we keep pushing on our marketing efforts which we are really pushing a new digital marketing campaign effort this year for all of our operations, that includes not just the digital online presence but also social media strategy and the like. And we are already seeing tremendous responses from that effort we expect that to continue. But generally, we do expect the trends to continue to grow with the number of tickets, and the basket size depends upon how wholesale prices fluctuate from place to place, as well as the competition in nearby areas and we do see them holding strong as well right now.

Michael Mills: I might just add, we had such great success in the past with our outreach programs that are directed at the dispensary level, getting to know budtenders, getting to know managers at dispensaries, running what we would call pop-ups, where we have a Body and Mind representative go into various dispensaries and showcase our products, and interact with budtenders, interact with customers. We haven't been able to do that, really for the last year or so, and we know that that's a very effective program for us when people try our products they like them. So we're really looking forward to get back into that routine. And as I mentioned, in California, we used to run Cozy Sesh concert series at Long Beach, something that we had looked to bring to San Diego. That's a great way of building a customer base, interacting with your customer, but also bringing some of the brands in and letting them interact with your customers. So a lot of these marketing channels and when you think about cannabis, and being able to reach customers, a lot of the standard advertising that a CPG company would use. It is just not available to cannabis companies. So you have to be very strategic with your social media, which we're being, but this personal touch and the ability to really have those conversations with your customers and your budtenders, with your buyers is incredibly important. We're really looking forward to that opening up again.

Operator: Thank you.

Michael Mills: Welcome.

Operator: There are no further questions at this time, you may proceed.

Michael Mills: Great, well thank you very much for everyone for calling in and listening to this earnings, and I would encourage anyone to reach out directly if you have specific questions. I would like to say that these record results that we've brought forward are a huge team effort, and I would really like to thank everyone on the Body and Mind team, our investors and the people who've supported us to get here. Thanks very much.

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