Goodness Growth Holdings (ticker: GDNS) has reported its fourth quarter and full year 2023 results, emphasizing its cream-and-fire strategy, which has led to clear improvements in operating profit and total revenue. The company has entered into a collaboration with Grown Rogue to enhance operations and has announced divestitures in New Mexico and New York, with a pending sale of the latter to Ace Ventures.
Goodness Growth is also managing litigation with Verano and expects to file a motion within 30 days. The earnings call revealed increased same-store sales, particularly in Maryland due to the launch of adult-use sales, and the company plans to expand into Minnesota's adult-use market.
Key Takeaways
- Goodness Growth's cream-and-fire strategy has improved operations and revenue.
- The company has entered a collaboration with Grown Rogue and announced divestitures in New Mexico and New York.
- A pending sale of New York operations to Ace Ventures is expected to enhance performance and profitability.
- Litigation with Verano is ongoing, with a motion for redetermination to be filed soon.
- Same-store sales rose by approximately 30% in the fourth quarter, with strong growth in Maryland and Minnesota.
- Expansion of product lines under the HiAF brand, as well as the Simple and SMALL A$$ BUD brands, is planned.
- The company is optimistic about participating in Minnesota's adult-use program and leveraging its cultivation capacity.
- Goodness Growth did not provide specific odds on tax liability but has taken a reasonable tax position and may receive a refund.
- The company is currently offside on some covenants due to the inclusion of New York in its books.
Company Outlook
- Goodness Growth anticipates slower growth in Minnesota until the launch of adult-use sales in 2025.
- The company is optimistic about its future, aiming for profitable growth and cash flow generation from operations.
- Plans to expand into the Minnesota adult-use market are in place, with current strong performance in Maryland.
Bearish Highlights
- There is a risk of not accessing financing for expansion if the New York transaction does not close.
- The medical market in Minnesota has not been directly impacted by the hemp-derived THC market, which is seen as complementary.
Bullish Highlights
- The company has reported increased same-store sales and successful brand and product launches.
- Goodness Growth has rebranded stores under the Green Goods name and is seeing strong revenue performance in Maryland.
Misses
- Goodness Growth is offside on certain covenants due to having New York on their books.
- The company acknowledged that while they are investing in hemp-derived THC products, they do not expect a significant impact on their retail business.
Q&A Highlights
- The company did not provide specific odds regarding tax liability and receivables but has taken a reasonable tax position.
- Goodness Growth is in negotiations regarding a corporate guarantee to Innovative Industrial Properties (NYSE:IIPR) and is finalizing definitive documents with Ace Ventures.
- The secured lender, Chicago Atlantic, has been supportive despite the company's covenant violations.
Goodness Growth Holdings continues to navigate through its strategic initiatives and market challenges, with a focus on improving its operational footprint and cash flow. The company's pivot towards adult-use markets in Maryland and Minnesota, along with its brand expansion, are key drivers for future growth. The ongoing litigation and financial negotiations underscore the complexity of the industry's regulatory environment. Goodness Growth remains cautiously optimistic as it works through these challenges and strives for profitability in the evolving cannabis market.
InvestingPro Insights
Goodness Growth Holdings, with a market capitalization of $61.22 million, has been making strategic moves to solidify its position in the cannabis market. The company's collaboration and divestiture efforts, as outlined in the article, are part of a broader strategy to improve profitability and operational efficiency.
InvestingPro Data metrics provide additional context to the company's financial health and market performance. Notably, Goodness Growth has experienced a significant return over the last week, with a 7.46% increase in price total return, and an even more impressive 248.33% return over the past year. This indicates a strong market confidence in the company's strategy and future prospects.
However, it's important to note that the company operates with a significant debt burden and is quickly burning through cash, as highlighted by two InvestingPro Tips. This is further evidenced by the company's negative P/E ratio of -0.979, indicating that it is currently not profitable. Analysts are not anticipating the company to be profitable this year, which aligns with the negative adjusted P/E ratio over the last twelve months of -1.61. Despite these challenges, Goodness Growth's revenue has grown by 19.88% over the last twelve months as of Q3 2023, showing that its operations are expanding.
For readers looking to dive deeper into the financial intricacies of Goodness Growth Holdings, InvestingPro offers additional tips on the company's financial health and market performance. With the use of the coupon code PRONEWS24, you can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, providing access to a wealth of financial data and analysis to inform your investment decisions. There are 10 more InvestingPro Tips available that can further guide potential investors in understanding the risks and opportunities associated with Goodness Growth Holdings.
Full transcript - Vireo Health PK (GDNSF) Q4 2023:
Operator: Thank you for standing by. And welcome to the Goodness Growth Holdings Fourth Quarter and Full Year 2023 Results Call. I would now like to welcome Sam Gibbons, Investor Relations, to begin the call. Sam, over to you.
Sam Gibbons: Thank you, Mandeep. And thanks to everyone for joining us. With me on today's call are our Interim CEO and CFO Josh Rosen, and our President, Amber Shimpa. Today's conference call is being webcast live from the Investor Relations section of our website. Dial-in and webcast details for the call have also been provided in today's earnings release, which is also available on our website. Before we get started, we'd like to remind everyone that today's conference call may contain forward-looking statements within the meaning of US and Canadian securities laws. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in such forward-looking statements. For more information on forward-looking statements, please refer to cautionary note regarding forward-looking statements in today's earnings release. Now I'll hand the call over to Josh.
Josh Rosen: All right. Thanks, Sam. And thanks everyone for joining us this afternoon. Before we get into the details surrounding our fourth quarter results, I want to call out how excited I am about our future, particularly with respect to the momentum I feel among our team. Our industry focuses a lot on assets and politics and I like to put the lens on talent and energy. We have a lot of work to do and watching our legacy team embrace and collaborate instantly with new talent and then to have that new talent articulate how welcoming and committed to improvement and growth they find us is the most rewarding element of this role for me. And you'll hear from our president Amber on this call, but I'd like to note my appreciation for how she's attacked her added responsibilities and she's truly the catalyst for the overall energy. With that important introduction noted, I'd like to begin today's prepared remarks with an overview of key highlights from fiscal year 2023 on slide 3 of today's presentation, which should be available in the Quarterly Results and Events and Presentation sections of our investor relations website. As we've discussed, 2023 was a pivotal and transformational year for Goodness Growth. We entered the year in a significantly compromised financial position caused by Verano's wrongful termination of our merger agreement in October of 2022. Our teams, who at the time had been preparing for the expected integration with a much better capitalized operator, were suddenly faced with an existential threat that put our ability to operate independently longer term at considerable risk. Our board of directors and executive management team knew we had to pivot quickly in order to protect the continuity of our business. And in February of 2023, our year of cream-and-fire strategy was unveiled internally and soon thereafter disclosed to the investment community in conjunction with their subsequent results conference call. As a reminder, our strategy name of cream-and-fire refers to the famous phrase cash rules everything around me as well as our focus on producing fire cannabis products that delight our customers. As we discussed at the time, it was critical for our organization to embrace a scrappy operator mentality as we made swift moves to decentralize and infuse our organization with mature market talent with our primary goals of improving our operations and quality products and protecting our cash position, with a focus on driving improvements and operating profit as we worked toward generating cash flow from operations. We entered into a collaboration agreement with Grown Rogue to accelerate our operational improvement initiatives across our core markets. And as we've discussed over the course of the past several quarters, we've been very pleased with the progress we have made to date to improve harvest yields and product quality across our operating footprint. In tying back to my initial comments about the importance of talent and energy, what's made this collaboration work is the people committed to progress on both teams. Collaborations are hard and the Grown Rogue team is a key part of the cultural transformation we've made. The formation of our Weed Hustle Office in early 2023, was also a catalyst for substantially improving the positioning of our product portfolio and driving value for customers in our key markets. And since then, we've built up much stronger capabilities to move inventory more quickly and convert product into cash flow. The launch of adult use sales in Maryland in the second quarter of the year was a critical development for our business and the initiatives I just discussed have clearly translated that performance in Maryland's adult use market. This is particularly exciting as we await the launch of adult use sales in Minnesota in early 2025. We also knew we had to simplify the business with strategic asset divestitures. And we have since divested our former operations in New Mexico and this afternoon announced that we've executed a binding term sheet to divest our New York operations to Ace Ventures. While these decisions were not easy for our team and have somewhat hampered our longer term growth outlook, they were again mission-critical components in our ability to protect the long-term health of our company in the wake of Verano's wrongful termination of our merger. As disclosed with this afternoon's New York divestiture announcement, we plan to meet our obligation to divest our New York operations in the second quarter of 2024. We've executed a binding term sheet to divest our New York operations. With Ace Ventures, Ace has to meet a few closing conditions and is well positioned to do well in the New York market. This divestiture is later than we anticipated and committed to in our revised credit agreement. We have appreciated our secured lender's patience as we optimize our outcome in New York. This transaction, once closed, will significantly improve the performance of our go-forward operations and profitability. And we're also excited about the potential of our ongoing collaboration with Ace Ventures, which includes a 15% share of net profits with an advisory agreement. Although we're displeased with how the terminated Verano merger is forcing our exit from New York, we're excited to support Ace, who stands to become the only minority led RO license holder in the state. The Ace team brings a combination of deep cultivation experience with California OG roots, with a willingness to move to Upstate New York, with a local ground game in New York City that I believe should support meaningful shelf space. Quality and price matter in every market, and that includes when competing with the illicit market. Turning briefly to our litigation with Verano, it is progressing and we expect to file a motion for some redetermination in British Columbia within the next 30 days. The wrongful termination of our merger created exceptionally challenging circumstances for us, which included having little choice but to divest our New York operations, and we are seeking substantial damages for the harm that's caused our business and shareholders. As many of you have heard from me previously, I'm excited to be able to speak more openly about this litigation as an asset, and I'm confident that's coming soon. As a quick related tangent, if I find these topics intellectually interesting as well, we'd be happy to point folks to resources that help frame just how high the threshold is to walk away from definitive merger agreements. Or for a fun industry example, notice what the private player PharmaCann, part of this, when they mutually agreed to terminate a merger agreement with MedMen in 2019. I recall at the time, I was shocked they didn't simply highlight what are the many issues MedMen was dealing with as a material adverse event. I now understand why. Please turn to slide 4 of today's presentation, where we illustrate how the qualitative components of our cream and fire strategy outlined on the left side gained traction throughout the year, with some additional specificity on a couple of quarterly key financial metrics, dating back to the fourth quarter of 2022. As we've discussed, growing into a better credit by improving our ability to generate cashflow has been the most fundamental focus of our operating strategy this year. And we've been able to demonstrate clear improvements in those areas with our second consecutive quarter of operating profit above $5 million. We've also included comparisons of these metrics for both full year 2023 and 2022, and are pleased with the improving trends in these metrics and our ability to sustain leaner costs. Total revenue excluding discontinued operations increased 34% year-over-year in the fourth quarter and 30% year-over-year for the full year. Performance has been driven by the combined benefits of our recent operational improvement initiatives and the launch of adult use sales in Maryland on July 1st. After experiencing meaningful year-over-year growth in Minnesota, catalyzed by the introduction of flower into its medical cannabis program, we are seeing growth in the medical market slow. This is an expected slowdown as the market anticipates the introduction of adult use in 2025. Amber will talk more about this, but our push in 2024 is as much about preparing for 2025 as it is the continued improvements supporting our current operations. Fortunately, these goals largely support each other. As I've mentioned previously, while early numbers in an adult use market can be noisy, we appear to be capturing incremental market share in Maryland, which can be seen in comparing our relative growth, both sequentially and year-over-year with the state's published numbers. One quick aside, the two stores that we support as an advisor in Maryland have not performed as well as our own stores. And you'll see that we adjusted our fees to support our partners' business interests. And then to our benefit, we lowered the price of our purchase option as our long-term intention is to support moving these stores to better locations and acquiring them when the regulations allow. Our partner has an initial site identified that we're optimistic about for one of the stores. Finally, before I pass the call to Amber, I'd like to provide some clarifying comments on a couple of aspects of the business that relate to our credit facility and changes to our tax position. As we indicated in this afternoon's earnings release, until our transaction to divest our New York assets close, we're short of both our commitment to divest New York and New York's losses greatly compromise our ability to meet the performance-driven maturity date extensions within our credit agreement. That said, we've had productive conversation with Chicago Atlantic to secure an extension of our credit agreement, and we expect to secure this extension during the month of April. It will include the ongoing commitment to divest New York in a timely fashion. Also, like some others in our position, please note that within our 10-K, we have adjusted our tax position to reflect our go-forward expectation to be filing as a normal taxpayer. In our reasonable belief, supported by a third-party legal opinion, that Section 280E does not apply to solely intrastate cannabis-related business activities. As a result, we expect to file for tax refunds with the IRS for tax years 2020 through 2022 during the second quarter. As you can see on the face of our balance sheet for fiscal 2023, we've accounted for an income tax receivable of $12.3 million, as well as an uncertain tax position liability of $22.3 million as a result of this change to our tax position. We believe this is a reasonable, practical approach to take, but there is no guarantee that the IRS will not challenge this position. That concludes my prepared remarks, and I'll now pass the call over to Amber Shimpa for some additional business highlights from the year and a review of our key performance indicators.
Amber Shimpa: Thanks, Josh. And thanks to everyone for joining us. I'm going to start on slide five of today's presentation, where we provide an update on our core market key performance indicators during the fourth quarter and through the fiscal year 2023. The positive traction we've experienced around our cream and fire focus is due to the efforts of our entire team. And let me say, what a time to lead here at Goodness. I couldn't be more proud of our group's energy and commitment to being better together. We've melded our seasoned scrappy operators with gritty, mature market talent, which has sparked a drive and passion within our team that grows stronger each day, a huge note of gratitude to our team and recognition for them bringing the fire. We made great progress so far this year to improve the productivity of our facilities as well as the quality of product being produced, which has allowed us to lower prices with higher quality products that our dispensary customers and employees can then share with the customer. As you can see, the trajectory of total flower yields and percentage of A flower over the course of the last year shows considerable improvement. Our goal is to drive more sell through of higher quality products at better value for customers. And we believe that our results to date on these important operational KPIs serve as strong indicators that we are positioned to have continued success achieving these objectives. On a consolidated basis, same store sales increased approximately 30% during the fourth quarter. This performance reflects some continued challenges in the New York market. And we are pleased to see continued growth in Maryland and Minnesota of approximately 210% and 5%, respectively, during the fourth quarter. For the full year, same store sales increased approximately 28%. We were also pleased to see improvement across all of our core markets and inventory turns after experiencing some variability in these metrics earlier in the year. And the improving trend in this metric demonstrates that we're improving our ability to turn product into cash flow much more quickly. On slides 6 and 7, we've highlighted some of the drivers of our success in 2023 with recent brand and product launches in the Maryland market. As Josh mentioned, our local team in Maryland has done a great job growing our market share in manufactured products, and we are very excited about the performance of our HiAF brand of vapes and HiColor gummies in Maryland. We plan to introduce additional product categories under the HiAF brand moving forward and plan to introduce both of these brands into the Minnesota adult use market next year. We've also had great success positioning our product portfolio to value shoppers across our operating footprint. And the launches of our Simple and SMALL A$$ BUD brands are continuing to perform very well within these corners of the market. Moving on to some state market updates on slide 8. Our home market of Minnesota continues to grow following the commencement of flower and edible sales in 2022. And we are looking forward to the launch of adult use sales in 2025. We anticipate a slower market until adult use launches, and we're taking advantage of this time to invest in enhancing our productivity and preparing our team for 2025. We expect to share some progress updates on these initiatives over the course of the next several quarters. In New York, as we disclosed earlier today, we've executed a binding term sheet to divest our New York operations to Ace Ventures and expect this transaction to close following regulatory approval before June 30th. Given some preliminary regulatory diligence, we believe New York's strong desire to have a minority-led RO can support an efficient timeline. We have entered into a collaboration agreement with Ace for management and compliance in return for a 15% share of net profits in New York moving forward and we are excited to support Ace's entrance into New York's wholesale market once we receive regulatory approval for the ROND license. In Maryland, we continue to see strong revenue performance of our two Green Goods dispensaries and our recently executed consulting, licensing, and wholesale agreements with two additional dispensaries helped grow our presence in the wholesale channel. These two additional stores have been rebranded under the Green Goods name. And as Josh mentioned, we have an option to acquire these two stores once regulations allow. Revenue growth in Maryland has continued to outperform the market average over the past two quarters. According to the state's disclosures, total market sales in Maryland were up about 130% year-over-year in Q4. Our retail revenue was up 210% and wholesale was up 134%, representing total growth of over 180% year-over-year. For the full year, the Maryland market was up about 54% and we were up just over 100%. Before we conclude today's call, we provided customary financial detail slides for both the fourth quarter and full year 2023 for reference throughout the remainder of today's presentation. Slide 9 and 10 provide summaries of our core market revenue performance and key financial metrics from the fourth quarter and full year and slides 11 through 14 contain summaries of our balance sheet, debt outstanding, share capitalization, and EBITDA reconciliation. For a complete review of state-by-side revenue performance, include non-core markets and discontinued ops, please refer to our Form 10-K which will be filed with the SEC later today. I'll now hand the call back to Josh for some closing comments.
Josh Rosen: All right. Thanks, Amber. And thanks to everyone for participating on today's call. In summary, 2023 was a challenging, although successful, year for Goodness Growth and we're entering 2024 in a much stronger position to drive profitable growth and generate cash flow from operations, with particular excitement with respect to supporting the launch of Minnesota's adult use market in 2025. We've been very excited to see our cream and fire initiatives gain traction throughout the year. There's a strong sense of optimism emerging across our organization supported by the execution of the ground with our Minnesota and Maryland operations, which points to a bright future for our company. Our litigation with Verano remains an extremely important event and potential asset for us. And as we referenced earlier today, we're seeking considerable damages for the harm caused to our business and our shareholders. We expect to file a motion for summary determination with the court in British Columbia within the next 30 days. With that, I think we're ready for Q&A.
Operator: [Operator Instructions]. Our first question comes from the line of Eric Des Lauriers with Craig-Hallum.
Eric Des Lauriers: Congrats on the continued improvement here. Very impressive. My first question, this is perhaps more for Amber, I think you mentioned some of the brands that were performing strongly in Maryland. I was wondering if you could perhaps just repeat that for me. Which of the brands have been performing well for you guys? Perhaps what's some of the biggest improvement year-over-year with all these quality initiatives that you've undertaken and sort of how to think about which of those will be brought to Minnesota?
Amber Shimpa: Revisiting the brands that are performing really well for us right now in Maryland, I first mentioned the HiAF brand of vapes. This is our vape line of Dizzy [ph] that is very flavor, fruit forward. We saw a gap in the market that had been filled by just a few and were really excited to not only invest and lean into a brand and a product quality that we thought could really benefit the Maryland market, we also brought in some mature market talent to help us get the quality of our oil for those vapes at a level that we were really proud of. Again, leaning into the fire aspect of our products. Another product that we're really proud of in Maryland is our HiColor gummies. And this brand, we've had for years now, again, focused on flavorful, fruit forward and just performing really well. What we lean into there as well is from a price point, the quality of the product you're getting for the price. We put ourselves up against anyone in the market there. And then the other two brands I mentioned are the Simple Brand and the Small A$$ Bud brand. Those are flower brands for us that play on the value side, the value customer. Still delivering great quality, but just that are really fantastic every day, low price. Those products, we will look to bring into Minnesota as the market matures and allows adult use brands, as well as – in New York, we do have a few of those brands in play in New York right now.
Josh Rosen: Eric, can I jump in real quick? Because I wanted to make just a very important clarification in case there's any confusion. The AF stands for Amazing Flavors. Just wanted to make sure you had that.
Eric Des Lauriers: In terms of the collaboration agreement with Ace, first of all, very nice to see that binding agreement signed here. Congrats on getting that to this stage, at least. I know there's still a closing, but congrats on that step. In terms of the collaboration agreement going forward, understood, it's a 15% net profit share. Should we think of this as some of these brands that you just mentioned as being in the legal market for the foreseeable future? Is this more of bringing some of the learnings that you've experienced over the past year or so with the cream and fire strategy and this more mature market expertise? Is it kind of bringing that and making sure that quality stays high during this transition or is it more of like your brand's going to be in the New York market? Just a little bit more color on that collaboration agreement would be helpful.
Josh Rosen: I think the starting point is with our brand simply because they're there and we have them ready to go. But I think that ultimately will really lead more heavily into Ace's camp from a decision-making standpoint than our own. We hope that we can provide that support from that vantage point. But really for us, I think it's a combination of things. One, I think it's Ace recognizing and seeing what we've been able to accomplish in Maryland and in Minnesota with respect to improvements and knowing that we've just not put the resources ourselves into New York in that capacity. And so, turning ourselves on in that capacity to really help drive improvements in operations on the core side of things was definitely part of this. The other side is what Ace really brings to the table in spades is what I think is just a tremendous ground game on the ground in New York City and then really significant credibility on the cultivation and genetic side. So I think the ability for them to develop their own, I think they like to refer to it as their own New York-centric brands, is really quite high. And so, from our vantage point, I think being able to support the operations, much like we've been able to do in Minnesota and Maryland, is the starting point, a little bit less brand-centric for us, but supporting their operations in their vein to drive that, as I've referred to, kind of a really New York strong presence.
Eric Des Lauriers: Two more questions from me. One just kind of just a broad question on Minnesota. Certainly, we've seen these dynamics in other states where the medical market sort of slows down or begins to plateau a bit ahead of the adult use launch. I'm wondering what your assessment is of the sort of hemp-derived market in Minnesota. Certainly on things like gummies and beverages, there's a bit more of a competitive dynamic from that area of the industry in Minnesota versus others. So just wondering if you can kind of comment high level on what you're seeing there.
Josh Rosen: It's going to be somewhat anecdotal, but with real anecdotes behind it, but nonetheless anecdotes. I think a couple of things. First, we didn't notice in our overall medical market any real direct impact, kind of a head-on impact of what's become a much stronger hemp-derived THC market in Minnesota. And I think that's because of the following anecdote, which is I think much like we've not seen THC beverages generate all that much interest or market share through the regulated dispensary system, that customer is a different customer than what we're seeing in Minnesota as kind of the standard demographic hemp-derived THC buyer that can buy product at a liquor store and or restaurant and even grocery stores in places in Minnesota. And so, that dynamic, I find actually incredibly fascinating. We'll have more to say on this ourselves over the next quarter or two as we look to find ways to kind of benefit and collaborate in that marketplace. That said, we don't see it as a significant threat to our medical business today nor the adult use, the implementation of the adult use program. We actually view it as complementary. And probably the most remarkable thing about it, having now spent a significant amount of time in Minnesota, is just the complete destigmatization to THC that's going on there to a degree that I've not seen in any other state. And that normalization I think is actually opening up and expanding the market to a degree that any incremental market share you might see from a little bit less THC consumption through flower, for instance, or through pre-rolls that might migrate to beverage I think is just being expanded by the addressable market in the state. So I think, again, fairly anecdotal at this point, but really I know we speak from a position of really enjoying watching this market develop and participating through our medical program obviously in the state, but excited to enter the adult use side of the equation as we look into 2025.
Eric Des Lauriers: That's very helpful insight. I appreciate that color. And just last question from me here on Verano, understand this is ongoing lawsuit and you are not at liberty to discuss a whole lot here, but wondering if you can help us kind of understand the steps ahead as you see them. So as I understand it, within the next 30 days, you're expecting to file the lawsuit up in British Columbia. Can you just help us kind of sketch out what the path looks like beyond that in terms of steps, if you're able to add any insight in terms of timing? Understood that we're dealing with a lot of, I guess, call it, lack of visibility, but just anything you have to help us kind of understand the steps or timing or the opportunity would be very helpful.
Josh Rosen: Yes, I'll provide a little bit of color. There's not a lot of certainty. It tends to get fairly expected, particularly as you start talking about timelines, but I think the piece that probably maps to what we might be used to in the US is motion for summary determination is very similar to motion for summary judgment. And so, similar from a timeline standpoint. It depends on the success of that. Obviously, that is the desire to work in a more truncated fashion. And if successful, that would lead to a more truncated outcome. If not successful with summary determination, then you go to full trial. And so, still a relatively elongated timeline in that arena. Fortunately, for us, we feel really good about our sustainability as an independent operator at this point. And so, if it takes longer, we feel like things have come together in a good way for us relative to the core merits of the case, et cetera. So excited to be able to talk more about this soon.
Eric Des Lauriers: I appreciate you taking my questions and congrats again on the progress.
Operator: Our next question comes from a line of Pablo Zuanic from Zuanic & Associates.
Pablo Zuanic: Look, it's a two-part question. Regarding Minnesota, can you clarify if you have line of sight on what the program is going to look like? I'm getting conflicting reports, but do we know when reg sales start? Are the encampments going to be grandfathered right away or is there going to be a waiting period like in New York? What color can you share in terms of what the program is going to look like or it's still really up in the air? And related to that, can you comment in terms of where you are right now in terms of cultivation compared to what you would need to be assuming the reg starts next year and whether you would be in a position to fund that expansion and cultivation if you require that?
Josh Rosen: I will provide the color that I can. I think the reality in Minnesota is that there are still some things to be determined. We were pleased with the initial rules and our ability to participate in the adult use program when it commences in March of 2025, as it was outlined. There are still a few moving pieces attached to that as we look at the current political season at the State House right now. And so, I'm not going to comment further on that at this juncture, other than just expressing the optimism in our ability to participate and the conversations we continue to have along those lines. So we're comfortable with our ability to participate. The portion of this that speaks directly to our cultivation capacity, we are evaluating paths. Obviously, we're still sitting in a somewhat compromised financial position relative to funding new initiatives. That said, we think should we be able to add capacity per the rules in the State of Minnesota, said capacity would be particularly productive. It's a market that's likely to be really heavily supply constrained in the early days. And our view, even going into the regulatory sessions, has been and the political side of this has been this market is one that has room for kind of all participants to do really, really well. The legacy participants, new participants. You heard the previous questions about the hemp derived THC market, which is pretty vibrant market in Minnesota. We think there's room for a lot of folks to do really well in the state given the starting point and where things can go from here. And so, I'm not going to give you a real specific answer yet. We hope to get dialed in, particularly once this New York transaction closes, the capital side and how we might be able to access some capital in order to support additional capacity in Minnesota. But as of right now, we have our existing greenhouse operations and that's the extent of our capacity.
Pablo Zuanic: Just to follow up on that. So I think you said in the case of New York, it would take as long as nine months. I think you said that. So, is there a risk to a scenario that we get to December and New York hasn't closed yet, and hence you're not able to tap financing from IIPR or Chicago Atlantic to fund expansion in Minnesota. Is that a risk? Is that a concern? Or am I missing the point there?
Josh Rosen: No, I think you're spot on. That's been the risk for quite some time. We're optimistic now that we've got the wheels in motion. And never guaranteed, but we're optimistic that based upon the visibility that we have and the things with Ace that we're on the right path with respect to the New York divestiture. We think because they're a minority-led operation, we think the regulatory clearance there will be fairly smooth. Fairly smooth with compared to what we experienced with the prior Verano transaction in New York. It was a longer timeline then, but I think we're at a point now where we can move pretty quickly on the regulatory side of the state. But I have no pushback against how you articulated the risks. The risks remain tied to being able to close New York and having access to additional capital.
Pablo Zuanic: And one last one. So in terms of your Minnesota stores right now, can you give more color in terms of how they are performing? Obviously you do report sales by state, so we know what's the total sales, we know the number of stores, but just you have a sense of how they are performing versus your competitor. The competitor doesn't, of course, even if they don't disclose sales from Minnesota, but just to have a sense of how you're doing in the current market. And I realize that the medical market in Minnesota is quite underdeveloped compared to other medical markets.
Josh Rosen: I think our position has been for some time that we have moderately more than 50% market share between the two incumbent medical players that are there. Don't think that's changed on the margin. And so, we feel like we do well, but I don't think that's changed meaningfully in one direction or the other. I think our competitor there has put resources to work and we have great respect for. So I think not much more commentary other than you can see the same store sales numbers. I think the overall performance has been solid, but as we get ready for adult use, we think there's a lot of room for improvement, even within our existing infrastructure, existing capabilities, and we're excited about that. To go back to the last comment, while I referenced the risks and you referenced the risks attached to not being able to finance incremental growth in Minnesota, we have a pretty successful business and a pretty successful platform, even if we don't, as it stands today in Minnesota. And so, our ability to just drive more productivity, throughput, et cetera, I think can go a long ways.
Pablo Zuanic: I'm going to add one more, if I may. So, like you said, right, the hemp-derived market in Minnesota is probably more developed than in most other states, I guess, on a per capita basis. So assuming that the rules don't change significantly and we have reg next year, would it make sense for you to actually sell those type of products in your dispensaries in a reg market? If there's people selling them outside, why would you want to sell them in your own stores? Any thoughts on that?
Josh Rosen: Simple answer is yes, agreed. And I think underneath that, though, I'd come back to the comment that I made prior about beverages. Beverages by and large have not been real successful from a distribution strategy standpoint through cannabis dispensaries. And so, while we think there are opportunities, in particular some brand amplification opportunities, I'm not convinced that we would be meaningfully large market share players when it comes to moving hemp-derived THC products through our own dispensaries, for instance. Particularly, if you spend time in Minnesota, the products are pervasive at this point on the hemp-derived THC side. With our eight stores, we'd be eight distribution points out of 1,000-plus in that environment. So I don't think they will be meaningful needle movers for us from a retail standpoint in that vein. But it is something that we put time and energy into and think about. And I would be surprised if we don't have them in our stores.
Operator: Our next question comes from the line of Ben Cubitt with Samara.
Benedict Cubitt: A couple of questions. One, I wonder if you could explain a bit more clearly about the tax, you have the tax liability and the tax receivable. So just are you able to like handicap, like are you expecting the $12 million of the receivables? I guess, what do you think the probabilities that you have to pay out this $22 million liability? Like, are they equal odds or…?
Josh Rosen: Yeah, I'm going to hesitate to put odds. We think we've taken a reasonable position from a tax standpoint and let other people handicap the odds themselves. I think had we not seen the refund already get processed with cash returns in our industry, I would have likely hesitated to think that we will actually get a refund at this juncture. Again, based on precedent, it's very possible that we would get a refund. It's nothing that we will count on from a cash flow standpoint. And I'm going to leave it there instead of handicapping.
Benedict Cubitt: The results are pretty good and I can't imagine your creditor could have expected anything better at this point in the process of the kind of turnaround. What covenants were you offside on that puts this into like a current liability?
Josh Rosen: It largely or almost entirely relates to continuing to have New York on our books, and so we had a fixed charge covenant ratio performance metric for the first quarter that would allow us to kick the term of the debt all the way out to potentially – it's quarter by quarter, but all the way out to potentially early 2026. And with New York on the operating law side, we were going to have a very hard time meeting that for the first quarter, for instance. The other side of that is, per that credit agreement, we were required to have sold New York and we had not yet closed on that transaction. So that puts us out of compliance. And so, those are the two places that create that need to address. And as I referenced, very pleased with the collaborative approach of our secured lender and Chicago Atlantic has been – and they have been supportive relative to the performance that we put up. And it's definitely been part of – I'm sure why they chose to be collaborative is I think we are performing well. And I think they also note that there's continued room for ongoing improvement.
Benedict Cubitt: Are they likely to give something up? Like, they asked for kind of like, I don't know, a bunch of warrants? Are they going to have to pay up to get it extended or is it something more like they're obviously a big shareholder and a big creditor, so it'll be relatively seamless or are they going to ask for their pound of flesh?
Josh Rosen: I will only note that they are a secured lender at core.
Benedict Cubitt: I also noticed that you called it a binding term sheet with this Ace group. What's between this and I guess a definitive agreement? Like, are you close to that or like what…?
Josh Rosen: There are a couple of moving pieces and closing conditions that go along with this. But, really, the key components is capital at risk in their vein. So, they need to close in the capital piece, something that we've got – as I referenced before, never guaranteed, but really optimistic that they've got the pieces put together for that part. And so, that piece is one. We are still working through the full puts and takes of the corporate guarantee on the innovative industrial property sale respect that we have. So that would be the other dynamic that would tie into an ultimate closing. And then, obviously, the regulatory piece of this, although you can have definitive docs before and be contingent upon regulatory. And so, I would consider it relatively close with the actual form and function of the definitive docs, but we're not over that finish line yet.
Benedict Cubitt: I guess that was my next question. So, Goodness Growth is having to provide a corporate guarantee to IIPR? Like, they won't just take them on as a new counterparty?
Josh Rosen: That's what exists today. But upon closing with enough capital and with some certain conditions, that's the piece that there's still a little bit of put and take to.
Operator: [Operator Instructions]. There are no further questions at this time. I would like to thank everyone. This concludes today's call. You may now disconnect.
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