Hi, everyone. Welcome to Planet 13 Holdings 2022 second quarter financial results conference call. As a reminder, this conference call is being recorded on August 15th, 2022. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for research analysts to queue up for questions. If anyone has any difficulty hearing the conference, please press star followed by the zero for operator assistance at any time. I will now turn the call over to Mark Kuindersma, Head of Investor Relations for Planet 13.
Thank you. Good afternoon, everyone, and thank you for joining us today. Planet 13 Holdings Q2 2022 financial results were released today. The press release, the company's quarterly report, 10-Q, including the MD&A and financial statements, are available on the SEC's website, EDGAR and SEDAR, as well as on our website, planet13holdings.com. Before I pass the call over to management, we'd like to remind listeners that portions of today's discussion include forward-looking statements. There can be no assurances that such information will prove to be accurate or that management's expectations or estimates of future developments, circumstances, or results will materialize. As a result of these risks and uncertainties, the results or events predicted in these forward-looking statements may differ materially from actual results or events.
Risk factors that could affect results are detailed in the company's public filings that are made available with the United States Securities and Exchange Commission and on SEDAR. We encourage listeners to read those statements in conjunction with today's call. The forward-looking statements in this conference call are made as of the date of this call. Planet 13 disclaims any intention or obligation to update or revise such information, except as required by applicable law, and does not assume any liability for disclosure related to any company mentioned herein. In addition, we will refer to both GAAP and non-GAAP financial measures. For information regarding our non-GAAP financial measures and reconciliation to the most directly comparable GAAP measures, please refer to today's press release posted on our website.
Planet 13's financial statements are presented in U.S. dollars, and the results discussed during this call are in U.S. dollars unless otherwise indicated. On today's call, we have Bob Groesbeck, Co-Chairman and Co-CEO, and Dennis Logan, CFO. We'll now pass this call over to Bob Groesbeck, Co-Chairman and Co-CEO of Planet 13 Holdings.
I thank you, Mark, and good afternoon, everyone, and thank you for participating in our second quarter call. Larry's flying, and hopefully will be able to join us here shortly. I'll start with a review of what we are seeing in our operations today, followed by various growth projects before passing to Dennis to review our financials. Since our last call, we've seen a significant increase in macro uncertainty, including higher inflation, lower consumer sentiment, and a rapidly rising interest rate environment. This has been particularly apparent in Las Vegas with spending on shows, hospitality, and cannabis all being down year-over-year. According to the state data, cannabis sales were down 20% year-over-year through April and May.
Despite this slower macro market with a significant decrease in tourist spending and an increase in competition, we have still maintained our share of roughly 9% of all retail sales in Nevada. In Q2 in Nevada, we generated $16.9 million from the SuperStore, $2.1 million from the curbside and delivery, $2.5 million from Medizin, and $1.8 million from wholesale and other, for a total Nevada revenue of $23.3 million. We are taking steps at the SuperStore with unique discounts and special offers for Nevada residents to try and capture more local traffic during this period of depressed tourist spending. Our brands continue to perform well, both in store and in the wholesale market. While absolute wholesales were lower in the quarter, this is just a reflection of the total market decline.
Our market share for all of our brands held steady or improved. According to research firm Headset, TRENDI had 5% of the Nevada market for concentrates and vapes categories in Q2. The TRENDI brand also took 3.5% share of the pre-roll market, which put us in the top ten rankings for the first time. HaHa was 8% of edibles and 8% of beverages, and Dreamland Chocolates was another 4% of the edibles category. Looking ahead in Nevada, we don't see any signs that the macro environment or the consumer will see any relief in the back half of this year. In June and July, we saw a material weakening of the consumer as it dealt with increased inflation, including higher gas prices, food, and housing.
Las Vegas saw an atypical decline in hotel occupancy in June and an average revenue spend per room dropped significantly, meaning that people did come, but they weren't spending like they used to. We will be carefully monitoring the consumer inflation and the macro outlook, as Dennis will speak to later, and we will be matching our variable spend to the situation with a focus on profitability and cash preservation. Turning to California, sales were up sequentially 7% for our dispensary and delivery. We are making incremental progress on generating new consumers and creating a loyal repeat customer base. We still are being hampered by an overall downturn in the economy and have had some limited negative impacts continually associated with the construction of nearby freeways.
On the cultivation production side, we started to introduce our popular Nevada brand, starting with TRENDI in May, which has seen a very good consumer response. The next product line we'll be looking to bring over is our Medizin flower line with its unique genetics. In total, we generated $4.9 million in California during the quarter, up from $2.9 million the previous quarter. As a reminder, Next Green Wave was integrated as of March second, so we had a full quarter of contribution in Q2. On the wholesale side, we recognize the challenging environment that the California market presents. We are focusing on maintaining a portfolio that is profitable and we will not chase revenue at the expense of profitability and cash flow.
At the same time, we believe if we can demonstrate, brand equity and profitability in this challenging state, it will make us more attractive partner for investors and other cannabis companies. Turning to our growth projects. In Florida, we secured the location for our cultivation production campus and are advancing as quickly as possible to construction and build-out. The team has done a good job of pre-buying our building supplies to avoid production delays and help insulate us from the rising cost of materials and supply chain interruption. The facility that we're building is patterned after our Coalinga operation, which has proven its ability to grow premium flower that can compete in an incredibly challenging market like California. Combined with premium genetics, we expect to produce high-quality flower that will be the core of our operations in Florida.
We signed leases for three of our initial dispensaries, each in high-traffic local markets on major thoroughfares, and typically adjacent to other destination retail operations like Home Depots, Walmarts, or national grocery chains. In Nevada, lounge regulations have passed. We are preparing an application to convert our restaurant into a consumption lounge. Creates a straightforward conversion for an incredibly high-end, unique consumption lounge as close to the Las Vegas Strip as possible. We expect our application to be successful and expect the timeline and capital expenditure required for the conversion to be relatively minimal. We will update you on the licensing progress and conversion as we move forward. Construction is substantially complete, and we are just waiting final approvals of our Nevada cultivation expansion at Bell Drive. We expect plants in the ground in Q4 of this year.
This expansion will add approximately 22,000 sq ft of indoor premium cultivation space for Medizin flower, and our other brands. We still find that there is a significant shortage of premium quality third-party flower in Nevada, and we believe this extra cultivation will unlock improved gross margins, increase customer traffic, and ultimately, more profitability. In Illinois, we've been granted our adult use dispensary license. We have a couple of locations that we previously scouted and are working with our real estate team to determine the best location based on revenue potential, lease costs, and the time and capital expenditure needed to open. We've also agreed to an option with Frank Cowan, our social equity partner, that allows us to purchase the remaining 51% ownership in our Illinois dispensary at our discretion.
The option is another example of prudent capital deployment to acquire a dispensary license. Looking back at the three goals we set at the start of the year and our performance so far. Goal one, for instance, was to maintain roughly that 8%-12% of market share for retail sales in Nevada, which we've achieved. We continue to grow wholesale share in the state while executing on accretive and diversified revenue opportunities such as cannabis lounge. In Q2, we came in at roughly 9% share of the retail sales. Our wholesale brands held or grew share, and we are making good progress towards a first of its kind cannabis consumption lounge. Number two, to improve profitability in California through increased sales and operating leverage at our dispensary, increase vertical integration, and enter into profitable wholesale operations.
In Q2, we saw modest growth from our dispensary, increased vertical integration, and successfully entered into the wholesale market. Third, build operations out in Florida that will drive growth in 2023. In Q2, we acquired the land for our cultivation production campus and are advancing as fast as possible to continue to target midyear 2023 for sales to begin in Florida. We are executing on all three of our goals. A year from now, we plan to have more than doubled our dispensary count and the number of states we have operations in. As a company, we recognize the challenging macro and capital markets environments we are navigating. Our priority is profitability and cash preservation while ensuring, rather, we are in a position to capitalize on industry growth. With that, I'll pass it over to Dennis to discuss the financials.
Thanks, Bob. Before I begin, I'd just like to remind everyone that all numbers discussed on today's call are in United States dollars, unless specifically stated otherwise. As Bob mentioned, uncertainty we faced in Q2 is indicative of our path forward toward an unprecedented macro environment that is seeing a consumer dealing with higher interest rates, record inflation, and a general fear about the future of the economy. In Q2 2022, we generated $28.4 million in revenue. This is a 10.6% sequential improvement over Q1 2022, driven by seasonality in a full quarter of the Next Green Wave asset in our operations. Compared to Q2 2021, revenue was down 13.9%, quarter-over-quarter, with a substantially weaker consumer who is dealing with, again, record high prices for everything from gas to food.
Looking ahead at Q3, we've seen a material weakening in consumer spending across the board in Nevada, with the most up-to-date Las Vegas tourist stats showing a significant drop in average revenue per room at the hotels, a proxy for how much consumers are spending on entertainment when in Las Vegas. Over the course of the year, our goal is to maintain our market share in Nevada, which we recognize may be a challenge given our higher exposure to tourism than the rest of our competitors in the state. Gross margin in the quarter decreased to 49.4%, down from 50.2% last quarter. We expect to see gross margin pressure continue as more revenue comes from local customers in Nevada, wholesale customers in California, and compared to prior quarters.
In June, we also started to see pricing pressures in Nevada as competition intensified, with total Nevada state sales down 13% year-to-date as of May, which is the last month in which the state has published data. We continue to target 50% or higher gross margin for the medium to long term, with gains through vertical integration and automation offsetting pricing pressure and our business mix shift to wholesale with the addition of the cultivation assets in California. Sales and marketing expense was $803,000 this quarter, up from $603,000 In Q1. The increase was driven by marketing around key events during the quarter and new campaigns to drive traffic.
We maintain a critical eye on this line item and are focused on only doing marketing that we believe has a strong ROI. The company spent $9.9 million on G&A expenses in the quarter, and this excludes share-based compensation, down from $11 million last quarter. We are making progress on reducing costs across the organization and have further room for improvements and cost savings. Even though we are adding additional expenses in Florida as part of our build-out in that market, we still expect to reduce the G&A number. The company generated positive operating cash flow of $1 million in the first six months of the year, while at the same time staying current on all our tax payment obligations and expanding our working capital needs in California.
As of June 30, 2022, the company had a cash balance of $52.6 million and no debt. This is down from $61.6 million at the start of the year, as we spent approximately $10.2 million on expansion initiatives with our Nevada cultivation facility and our Florida operations. In a constrained capital market, we have one of the cleanest capital positions, giving us immense flexibility and removing the risk of us being forced into an unfavorable debt or equity financing. As we've discussed, our priorities are building out our Florida roadmap, finalizing our Nevada cultivation expansion, and pursuing our Illinois growth opportunity, and we have the capital on hand to execute on each. We will continue to update the market periodically on the build-out and CapEx requirements of each initiative we're working on.
I would now like to ask the operator to open the call for questions.
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. We do have a first questioner, Bobby Burleson from Canaccord.
Hi, good afternoon. I guess my first question is just, you know, trying to understand California. Maybe you can walk us through. I mean, I think Las Vegas is pretty clear-cut in terms of, you know, less traffic around conventions, et cetera. You know, maybe what are you seeing afflicting California's demand, retail demand? And are you seeing any kind of synergies yet in terms of customer traffic between the two superstores?
Yeah. Hi, Bobby. It's Bob. I'll take an initial stab at this.
Hey, Bob.
Yeah, no, we're not really seeing a you know a direct correlation between visits to here and in Southern California. We are increasing the awareness down there considerably. People now know we're there. You know, our focus, as I said earlier in my comments, is you know to create that customer loyalty. We've done some pretty aggressive pricing specials to get them to the store, and we're seeing a real nice uptick in repeat customers. You know, things are moving in the right direction in a very challenging market. You know, really there's a lot of competition in Santa Ana, which is fine. We don't have any problem with that on the legal side.
It's basically the black market that still remains a massive challenge for retail operators, and that's gonna continue to be the problem or a problem until the state of California starts taking a much more aggressive position against them.
Fair enough. Maybe just in terms of, you know, what you guys can do to capitalize on the brand awareness, the Planet 13 brand awareness, maybe with less capital-intensive, smaller storefronts that you infill in certain markets. We'll get an update on that. I know you're making progress with the, you know, the license in Illinois and, you know, what you're doing in Florida, et cetera. Where do you stand on that strategy of maybe, you know, kind of the Amazon, you know, stores that we see here in San Francisco? Do you see a way of, a lower cost way of spreading the retail brand in certain markets?
We've taken a look at a number of opportunities through acquisition, you know, to open smaller storefronts, you know, particularly in the Southern California area. We've hosted a number of inbounds on Northern California opportunities. The problem is, I still think there's a disconnect between what the stores are doing and what their relative valuations are.
You know, a lot of these operators are now running into tax problems both at the state and federal level. You know, we're gonna continue to monitor that. If we you know we see something that's you know valued appropriately and we've got a seller who's interested in a stock deal, you know then we'll move that forward. We're not there just yet. You know, I think our focus now, of course, in California is to continue to integrate the Next Green Wave operation into the store and start carrying our brands from Nevada, as I said earlier, into the Southern California market. Then the retail play will come. There's no shortage of opportunities down there by retail storefronts, I can assure you.
Absolutely. Okay, great. Thank you.
Yep.
Our next questioner is Doug Cooper from Beacon Securities.
Hi, Doug.
Good afternoon, guys.
Hi, guys.
Dennis, can you just give us an update on the sort of pro forma cash position after your CapEx in Florida and Nevada? We can get to Illinois in a second.
Yeah. As we said, we ended the quarter, you know, kind of $52.6 million in cash. The Nevada expansion, you know, most of that was spent in the quarter with it, or in the six months with $10.2 million on expansion activities in the quarter. We've got a little bit left in Nevada to finish off the cultivation facility. Then Florida, you know, we have announced, we purchased, you know, we made a land purchase. We've had the building delivered to site, so, you know, that's underway. The retail expansion, you know, I think we have five, you know, some of you, Bob, you can correct me if I'm wrong.
I think we have five lease locations that we've announced to the market, and each one of those will probably cost us $500,000-$750,000 to build out to our spec. We are getting, you know, long rent-free periods and tenant improvement allowances from the landlords. That's gonna depend on each specific scenario on that one to figure out on a per store level there. You know, overall, we budgeted $25 million for Florida. I think we're well on target to come in under that. You know, again, Nevada, we budgeted $7 million for the expansion of the cultivation facility. I think we have a couple million we have to spend on, you know, building out the rest of the Grand Hallway and building into the consumption lounge that Bob mentioned.
You know, we are converting the Trece restaurant into that consumption lounge. You know, it's gonna be fairly cost-effective for us to do that. We just have to do some upgrades to the HVAC, get separate ventilation in that one space, but otherwise not that expensive to do. Moving on to Illinois, you know, we do have to build out a storefront at some point in order to, you know, secure the license on a permanent basis. Right now, it's a provisional license, and we are exploring different alternative scenarios, you know, anywhere from what, you know, what Bob had alerted to or alluded to earlier with that smaller storefront through to, you know, kind of a medium-sized SuperStore type location.
We won't go anywhere near the size, I think, of what we are in Vegas or, you know, even to the extent I don't think we'll go as big in Illinois as we are in California. Again, really, it's gonna depend on where we get that lease location. You know, budgeting for Chicago build-out at this point is a little premature until we can figure out what the kind of location we're going to get into.
Okay. $2 million left in Nevada, but how much left to go in Florida out of the $25 million budget?
Doing the math, you know, probably. It depends. It's gonna depend, Doug. We do have some initiatives we're working on that may allow us to push some of that CapEx further out into the future. I look at, you know, we probably have $20 million, between $15 million-$20 million left to go.
Okay. If you got $52 million now, let's, you know, go $20 million, that's $32 million. Another $2 million in Nevada, it's there. It's down to $30 milion. You're sort of somewhere between, let's call it $25 million-$30 million, excluding Nevada. Is that a conservative sort of assumption?
We also have options, you know, for additional cash. I mean, we do have some assets we could do sale leasebacks on. You know, we could probably bring in another $10 miilion-$15 million in cash in the near term on that. You know, we are looking at ways to, you know, augment that balance sheet on a non-dilutive basis as well.
Okay. In Illinois, just before we move on to Nevada. In Illinois, with a small, let's just say a small medium store, is it worth being there for that? Like, is this you're committed to Illinois, or is this something you can? Is there a market if you decided to sell it, so that license?
Yeah. I'll defer to Bob on that one in terms of whether or not.
Well.
In the longer term.
Yeah, look, we think it makes sense to pursue, you know, the build-out of the store initially. Again, as Dennis said, we're not looking to do something of the size that we've done here in Vegas, certainly. You know, Illinois still has, you know, a pretty robust market, and it seems like there's still some upside there. Again, it's a functional location and, you know, everything else falling into place. You know, that being said, at some point, if somebody makes us an offer for the asset, then, you know, we'll consider that. You know, our goal at this point is to move forward and build it out and we're confident it'll be successful.
Okay. Moving to the back half of the year, given the preamble you gave on the consumer, and so would you expect to be cash flow positive in the second half of the year?
You know, Dennis, I mean, we would like to be, Doug, and that's what we're aiming for. We'll, you know, I think it's really gonna depend on if we can maintain, you know, the existing level of consumer tickets and visitors that we've had in Q2, or that, you know, what happens to it on a go-forward basis in Q3. It is soft so far into Q3. It's kind of equivalent to Q2. We'll have to see how it goes for the balance of the year.
That's our intention, to you know try to make sure that we're spending on an SG&A level and, you know, and kind of below the gross profit line, in line with what the revenue generation capabilities are of our assets, so.
Okay. Hey, Bob, just in Nevada, I just wanted to confirm some of those numbers you gave in terms of room capacity, is that that's down as well as revenue per room? But maybe you can just give me some of those metrics, if you have them at the tip of your tongue.
Yeah. I don't have the specific data in front of me. What's interesting, Doug, is the gaming revenue has actually increased, and it's, some of the properties are at pre or above pre-pandemic levels. What they're doing is heavily discounting. You can pull those from the Las Vegas Convention and Visitors Authority website, heavily discounting the room inventory to draw traffic. We're seeing that also in the restaurants and, you know, across the non-gaming platforms. It's real. You know, when you have inflation, I know we're, the talking heads tell us there was no inflation in July, but last time I checked it was 8.5%. It's had a negative impact, no question. You know, we're seeing that in the store, as Dennis mentioned.
We're seeing that, you know, the consumer typically would come in and buy, you know, three or four types of products. Now they're maybe buying two, and they're being much more careful in their spend.
Okay
We're just gonna continue to watch it. As Dennis said, we're gonna, you know, tighten our belt and be as efficient as we can. We know things will turn. It's just a question of when.
You know, we know the illicit market in California continues to be a problem. Do you think, do you get the impression that it is gaining share?
Yeah. Look, the illicit market in Nevada is very robust as well. I don't think it's quite as strong as California, but it's a real problem. I am optimistic because I think our governor recognizes that, and he's, you know, I think will devote the time and the resources to try to rein that in. It is a problem. Yeah, there's no question about that. It does have an impact on all of us in the legal market.
Okay. When you're talking about the catering, you know, almost like, during the pandemic when there was no tourism at all, you know, shift to catering to some of the locals, what quantum are we talking about in price reductions to attract those guys?
Well, Doug and Dennis, I wouldn't say we're doing price reduction more, you know, specials I would call it, you know, to drive that traffic. Like, you know, when you come in, you spend $100, you can buy, you know, a $25 eighth as a bonus. Or, you know, you spend so much, you can get a discount on a product. We're not trying to, you know, do a door crasher special. You know, we've looked at that in the past and it has not had a positive impact on margins by doing that.
Mm-hmm. Mm-hmm.
we are focused on trying to maintain that margin level, but find ways to drive people to spend more money where they see some value in that extra additional spend that they otherwise might not, you know, partake in.
Maybe, I mean, this is Las Vegas, so maybe you can't do it, but, you know, cutting costs, would you close the stores or are they always gonna be open 24/7?
You know, we've gone through various phases, and so it's gonna depend on the demand. I mean, we have had times where we have closed it. It's over certain hours. We've shut the restaurant for certain days. I think we're closed, Bob. You can correct me. I think we've got the restaurant closed one or two days.
Yeah. Tuesdays and Wednesdays.
Yeah. We are looking at, you know, those situations, Doug, where it doesn't make any sense between two and four on a Tuesday morning in the A.M. where we get, you know, two people in the store, then we definitely look at doing something different. Until such time though, like we monitor it on a weekly basis, you know, day over-
And the day over day
day, kind of week-over-week scenario, so.
I guess my final one, just on the lounge, you know, I'm assuming you're not gonna charge cover or anything like that. So is that just to draw traffic into the store essentially so that you can have a place to, you know, smoke it on site? Will the conversion of the restaurant take away some revenue from the restaurant?
Well, yeah. Doug, that's a good point. The whole purpose, of course, is to provide an additional traffic driver to the facility. We think that that's gonna be very helpful. We don't think it's going to hurt traffic at the restaurant at all. In fact, we think it's going to increase that. You can still buy, you know, high quality food in the restaurant that is not infused. It's the customer's choice if they want infused foods or the, you know, the other, you know, the other lines that we'll offer, whether that be drinks or, you know, the ability to smoke in the lounge area. We're excited about that because it's, you know, given our proximity to the Strip, we're one of the few operators that can really meet the customer or the tourist demand, here.
It's, you know, initially it'll be a novelty, of course. I don't think anybody's done that to scale in the industry.
Bob, I think we should also elaborate on you know some of the rules that are in place on you know that single-serve purchase in the restaurant, and you can only consume what you buy in the restaurant. You can't buy-
Yeah, that's a good point.
You can't buy in the dispensary and bring your bag over to the restaurant and smoke it. You actually, the way the regs are written, you actually have to buy a single-serve product from the restaurant itself, from the lounge itself and not from the dispensary.
Correct.
consume it.
Just in terms of like proximity to the Strip then, how many other consumption lounges do you expect within, maybe not walking distance, but, you know, short cab ride away or whatever to an on-site consumption lounge?
Well, I think initially, Doug, we'll see maybe two or three. There'll be quite a few more, I think, out in the, you know, the suburban areas. But again, you know, this is an untested or unproven model, so it. You know, we're fortunate given the tourist draw that we have here and the, you know, the customer demand for this type of service, we're gonna be fine. I don't know how the locals will respond to it when they can just get in their car and go home. It'll be interesting to see.
Okay. That's it for me, guys. Thank you very much.
Yep. Good talking to you, Doug. Thanks.
Sir, there appears to be no further questions in the queue. Do you have any closing comments that you would like to finish with?
Not here. Thank you.
No. Yeah. Thank you. You may end the call. Thanks very much.
Thank you.
Okay. Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.