Earnings Transcript for BMMJ - Q4 Fiscal Year 2021

Operator: Good morning, ladies and gentleman, and welcome to Body and Mind Conference Call. [Operator Instructions] This call is being recorded on Friday, November 19, 2021. At this time, I would like to turn the conference over to Graham Farrell. Please go ahead.

Graham Farrell: Thank you, operator. Good afternoon, and welcome everyone to Body and Mind’s 2021 fiscal year end and fourth quarter conference call. We are delighted to have you join us today. This call will cover Body and Mind’s financial and operating results for both the fiscal year and fourth quarter ended July 31, 2021, along with a discussion of some of our recent highlights and goals for 2022 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 Financial Officer, Dong Shim; and 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. 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. Thanks for taking the time for an update on the progress we’ve made this year at Body and Mind, and we look forward to discussing our fiscal year ending July 31, 2021. As Graham mentioned on the call, we have myself, Mike Mills, CEO; Trip Hoffman, our Chief Operating Officer; and Dong Shim, our Chief Financial Officer. The last year has been transformative for Body and Mind. As we’ve seen our current operations grow, we’ve opened new facilities, commenced our expansion into the $1 billion Michigan market and advanced new licenses. I’ll let Trip go into more detail on our operational achievements later on in the call. We’re really pleased to report record consolidated revenue of $26.9 million, which is a 332% increase over our fiscal year 2020 revenue of $6.23 million for the year ending July 30, 2020. In addition to a very strong year-over-year growth, we posted strong quarter-over-quarter sequential growth with a 14% increase in revenue from Q3 to Q4 with Q4 consolidated revenue of $8.14 million. Throughout our expansion, we focused on efficiently developing our assets, continually optimizing our operations and being good stewards of capital. Our focus translates to our strong balance sheet for fiscal 2021. Our total assets grew from $38.8 million to $48.13 million. Our total liabilities grew from $5.49 million to $13.78 million, largely as a result of taking our first tranche of our $11.1 million debt financing. Our total current assets grew from $5.6 million to $14.31 million. And our total current liabilities grew from $2.81 million to $6.45 million. We ended Q4 with roughly $7.37 million in cash and the combination of cash and our cash flow positive operations puts the company on a strong foundation to continue to grow. We have no convertible debt and only one common share class with roughly 109 million shares outstanding at the end of the fiscal year July 31, 2021. One of the key components we look for in operational performance is changes in gross margin. The gross margin is increased significantly from 24% last year to 45% for the past fiscal year. We continue to focus on margin improvement across the vertical. Keep in mind as we start new operations, there’s a fairly significant drain on both margin and financial results as operations move through the expense of preoperational periods, hiring staff getting started on. However, we typically have shown that we’re very quickly able to turn new operations cash flow positive. We also see a positive trend and improvement in net income and positive cash flow from operations. Our fiscal year net loss for the last fiscal year was $1.98 million, which was a significant improvement over the prior year loss of $4.6 million. We’ve been shrinking our quarterly losses over the last fiscal year. And our last quarter Q4 showed net income of $0.2 million. Like to note that our $1.98 million loss for the 2021 fiscal year was fairly significantly impacted by a $592,000 loss on impairment, which was a result of revaluing payment and shares between issue and closing transactions. On a multiple basis that puts us at roughly 1.6 times, trailing sales with most smaller cannabis companies at 2.2 times 2021 sales and the largest cannabis companies out there at five to seven times 2021 sales. Our adjusted EBITDA has also shown a strong trend with a Q3 result at $1.54 million and a similar Q4 adjusted EBITDA of $1.53 million, putting us with a solid $6 million adjusted EBITDA run rate. On a multiple basis that puts us at just over seven times adjusted EBITDA. As we continue to optimize all our operations are either on the future. We’re in discussions around interesting opportunities to go deeper in states where we have operations. And we’re always looking at opportunities to enter new limited license states as they open. We’ve been very selective of the opportunities we’ve engaged in the past on what appeared to be good opportunity that may have stretched – overstretched our operations and taken us one step too far. From a regulatory perspective, we’re seeing ballot initiatives for legalization approved in both Arkansas and Ohio, as well as state legalization initiative in Ohio and a recent proposal in that state to amend the medical programming. The Safe Act is passed the House again, and there’s now competing federal legalization legislation from both Democrats and Republicans. The recent legalization bill proposed by Republican representative, Nancy Mace is interesting and representative Mace has been refreshing the open about her past cannabis use. On the topic of being open about cannabis use, the recent ads by Seth Rogan and Sarah Silverman are fantastic. If you haven’t seen them take a minute to watch. They’re a great initiative by the U.S. Cannabis Council, and you’ll actually want to call your representative after you watched the ads. So it was challenging to guess what will happen with both federal and state legislation, but the pace towards cannabis acceptance and advances at state and local levels have never seen faster. I’d like to turn the call over to Trip Hoffman, our Chief Operating Officer to outline our advances across our various operations.

Trip Hoffman: Thank you, Mike. I’d like to provide an operational history and update for the past fiscal year by going through each of the states that we operate. Being with Nevada, during the past fiscal year in December 2020, we completed construction of converting the space from prior production location into an approximate 20% increase in our flower canopy capacity. Also in December of 2020, we received our distribution license approval, which allows for B2B delivery of wholesale products and provides an overhead cost reductions for our wholesale operations. In March of 2021, we completed the full utilization of the additional canopy space and our sales are now reflecting the new canopy increase by about 20%. In the first half of 2021, we also introduced about five new flour strains for our flour menu. Moving on to Ohio, in September of 2020, we completed the license transfer of the medical dispensary into a 100% owned BaM subsidiary along full consolidation of financials. At the same time, the business was rebranded from the Clubhouse to Body and Mind. In October of 2020, we began construction of a medical processing facility with about 4,500 square feet of capacity. In May of 2021, the construction of that facility was completed. And June of 2021, we received the operational permit and began the medical processing activities. In August of 2021, we closed the NMG Ohio transaction to transfer the dispensary and production licenses to wholly owned subsidiaries of BaM. And then recently we were able to ship the first Body of Mind branded production products in the Ohio market. Moving to California, in August of 2020, we completed the license transfer of ShowGrow Long Beach dispensary into a 100% owned BaM subsidiary, which allowed us to have full consolidation at the financials. In the second half of 2020, we also began curbside and online order purchase methods for both dispensaries in California. In January, 2021, we began home delivery service from the ShowGrow San Diego dispensary. In the second quarter of 2021, we terminated our manufacturing brand agreement that we had with a company in California. And we receive local approval for manufacturing and distribution licenses held by 100% owned BaM subsidiary. The state license approvals are in the process for those operations. And then finally in May of 2021, we began home delivery services from the ShowGrow Long Beach dispensary. Moving on to Arkansas. In the second half of 2020, we began online order purchase methods. In October, 2020, we received the Best Dispensary in Arkansas award by Ark420.com. In November of 2020, we began operational setup for medical cultivation. In January, 2021, we began home delivery services from that Body and Mind West Memphis dispensary. In April of 2021, we began our cultivation activities at that facility. And then just this month, we recorded our first harvest from that cultivation. In Michigan, in the first half of 2021, we began setting up a new vertical market expansion into the state by securing leases for cultivation, production, and dispensary locations. The cultivation of production, operations will allow for up to 60,000 square feet of development in two phases. Phase 1 will provide about 25,000 square feet of cultivation and 5,000 square feet of production with a balance of the space to be developed into cultivation in Phase 2. In Q3 of 2020 – 2021, sorry, we receive state and local medical and adult use provisionary licenses for cultivation and production in Manistee, Michigan, and for dispensary in Muskegon, Michigan. In September of 2021, we began construction of the dispensary in Muskegon with plans to open for business either next month or early 2022. And then finally in October, 2021, we received the building permit for the cultivation and production facility in Manistee and that’s getting underway soon. And finally Illinois, in August of 2021, we participated in the Social Equity Justice Licensed Lottery grant process for license applications that were submitted in December, 2019. For that lottery, two entities with which Body and Mind has management and convertible loan agreements in place, received winning numbers from the lottery in the greater Chicago area region for adult use dispensaries. These licenses remain on granted by the State of Illinois pending a state order from a judge while outstanding legal actions are concluded. And with that, we’d like to open up for questions.

Operator: Thank you. [Operator Instructions] And your first question will be from Tony Bowers at Intro-Act. Please go ahead.

Tony Bowers: Yes. Hi, Mike, Trip. Nice momentum closing out the year. You’ve obviously got now six states that are in various stages of development. Your strategy, which I think is proven success is to be vertically integrated where you – where that’s permitted. It looks like Michigan may be the first territory where you’ll be able to put all that together. And how do you see filling in the different parts of the matrix across your whole portfolio and the eventual impact on normalized margins from so doing?

Michael Mills: I can take that. Tony, the way we typically look at acquisitions or really allocation of capital is where we get the best ROI. So given the choice between setting up the cultivation in a state like Michigan, which continues to have very strong flower pricing or a jurisdiction like California that’s seen some pricing pressure, we’ll move to the jurisdictions that really have the best operating opportunity. So with respect to the states that we’re in, we’re always looking to go deeper. I think that the opening the processing facility in Ohio is a great step for us. It lets us get our brand into that state, obviously having a dispensary in that state gives us really a large lead order for that processing facility. And we know from the popularity of our products in Nevada, that are extracted products and our edibles will sell very well in that state. So I think that that’s a first step towards being vertical in that state. Obviously, you touched on Michigan. We have a full vertical plan for that state and are looking to move on that very quickly. When we look at California, we have announced that we have a manufacturing facility that we’re working on. Moving into cultivation in California at this point in time, isn’t necessarily something that I would run towards. I’d probably look at moving into a dispensary in the limited license jurisdiction and really moving our manufacturing facility forward and bringing our brand into that state. We’re keeping a close eye on new states that are opening up. And we look at acquisitions almost on a daily basis in the states that we’re in and then also in new states.

Tony Bowers: You’ve been watching this market for some time now. I know that financial markets don’t always have the right level of indication of interest. And right now investors are pretty shy of the space. Are you seeing in terms of opportunities more willing sellers at this point than you’ve seen in the past?

Michael Mills: There always seems to be a bit of a lag between private owners who own assets and the market. There’s still some people who think that their assets are worth what they’ve sold for or their neighbors sold for in 2016, 2017. So I think that there are assets out there that are attractive and there’s certainly deals that can be accretive. But not every private seller out there isn’t necessarily interior with what’s going on in the public markets.

Tony Bowers: You’ve already had, well, a whole quarter since these books results. There’s been fear that the consumer was fading a little bit after the stimulus payments stopped. But the retailers have shown in some cases, extraordinary momentum in spite of the supply chain problems. What are you seeing in your cannabis business with respect to consumer health?

Michael Mills: Yes, I think that there look, there was just a huge uptick in cannabis sales during the pandemic, I think that if anybody goes and looks at their personal spending, if you’re not going out to dinner and you’re not going out to the Moody’s, and you’re not going on vacation, there’s quite a bit of extra money around. And I think that some of that for cannabis users went into additional cannabis purchases. So there has been a bit of a tail off. I think from our operations, most of them are relatively new and they’re in limited license jurisdictions. So they’re still ramping. So we – I don’t think we’ve seen the same sort of challenges that maybe other groups have seen. But I do think that the overall spend in Canada’s really ratcheted up during COVID.

Tony Bowers: Yes, no question. Well, we hope for some regulatory – productive regulatory relief to re-interest people in the sector.

Michael Mills: Yes. And as I mentioned earlier, if you look at – if you look back 10 years, Colorado and Nevada, and some of these early states, they were really viewed as rogue states. And I can’t believe those states are going to legalize medical, and legalizing medical it almost has become a defacto at this point. And the conversations around adult use legalization in some of the states that we’re in and at a federal level, they’ve never been more prevalent.

Tony Bowers: Well done. Keep the momentum going.

Michael Mills: Thanks very much, Tony.

Operator: Thank you. [Operator Instructions] And next question will be from Emily Baker at Mission Capital.

Emily Baker: Hi, Mike and team congratulations on the momentum and the new markets. Wanted to ask if you could give us an update on the AUDACIOUS stake and if that has moved since over the last few weeks, it appears that it might have during that week of rally of all the names?

Michael Mills: Emily, I haven’t seen anything typically those. And I guess, just a backup for everyone on the call. We had a strategic investment agreement with Australis now called AUDACIOUS. That investment agreement ended in September when they dropped below 10% ownership. They’re at roughly 8%, Emily, those transactions that AUDACIOUS did were private transactions. So I don’t typically see those in the market. So I really can’t comment on that, but I think that the change in having them released from the strategic investor agreement was fairly significant for Body and Mind. And I would suggest that you’d probably want to reach out to AUDACIOUS for confirmation on their shareholding.

Emily Baker: Great. Thanks guys.

Michael Mills: Thanks, Emily.

Operator: Thank you. And at this time, I would like to turn the call back over to Mr. Mills.

Michael Mills: Thanks, Sylvie. So thank you very much for taking the time to be on the call. I guess in conclusion, when I look at the U.S. cannabis space, I continue to see incredible opportunity for experienced operators, focused on strategic entry, into new states and jurisdictions as they open up. And I think one of the things about U.S. cannabis is there are new states and there are new jurisdictions within currently illegal states that are opening almost every quarter. We keep a very close eye on these. Our strategy of focusing on operations, winning limited license states, winning limited licenses, and accretive acquisitions is demonstrating success. In conclusion, I’d like to thank our team for their tireless work to create top shelf products, work with our patients and customers and push on licensed development and acquisition initiatives. We have a lean team who understand the cannabis business and are ready to continue expanding the Body and Mind brand. Thank you very much for your time.

Operator: Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines. Have a good weekend.