Good morning. My name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the High Tide Inc. Third Quarter Fiscal Year 2020 Financial and Operational Results Conference Call. [Operator Instructions]

I would now like to turn the call over to your host Crystal [Indecipherable].

Unidentified Speaker -

Thank you, operator. Good morning everyone, and welcome to High Tide first earnings call. Joining me today on the call are Mr. Raj Grover, President and CEO; and Rahim Kanji, CFO.

Earlier today, the company released its financial and operational results for the third quarter of fiscal 2020 ended July 31, 2020. These results are available on the company's website and on SEDAR.

Before we begin, I'd like to remind everyone that certain statements made on today's call may contain forward-looking information within the meaning of applicable securities laws. Such statements may include estimates, projections, goals, forecasts or assumptions, which are based on current expectations and not representative of historical facts or information. We want to be clear that such forward-looking statements represent the company's beliefs about future events, plans or objectives, which are inherently uncertain and are subject to numerous risks and uncertainties that may cause the actual results or performance to differ materially from such statements.

Additional information about both the material factors and assumptions forming the basis of our forward-looking statements and risks, and which could cause actual results or performance to differ materially and the material factors or assumptions that were applied to make certain conclusions, forecasts or projections in forward-looking statements on this call is contained both in a readily available document upon request and in our regulatory filings available on SEDAR under the company's profile. High Tide does not undertake any duty to publicly announce the results of any revisions to any forward-looking statements in this call or to update or supplement any information provided in today's call.

In addition, on this call, we will refer to supplemental non-GAAP accounting measures included adjusted EBITDA, which do not have any standardized meaning as prescribed by IFRS. We believe this non-IFRS financial measures assist management and investors in understanding and analyzing our business trends and performance. Please refer to our earnings press release for a calculation of these measures and reconciliations to the most directly comparable measures calculated and presented in accordance with IFRS. These non-IFRS measures should not be considered superior to as a substitute for or as an alternative to and should be considered in conjunction with the IFRS financial measures presented on the financial statements listed on SEDAR.

It is now my pleasure to introduce Mr. Raj Grover, President and CEO of High Tide. Thank you. Mr. Grover, you may now begin

Raj Grover - Founder, President and Chief Executive Officer

Thank you, Crystal, and good morning, everyone. Welcome to High Tide Inc's financial results conference call for the third quarter ended July 31, 2020. As Crystal said, my name is Raj Grover over and I'm the President and CEO of High Tide Inc. With me today is Mr. Rahim Kanji, our CFO.

Beginning today, we plan to host conference calls every quarter in conjunction with our earnings releases. There are a lot of exciting developments going on right now in our company and within the Canadian Cannabis retail industry, and we look forward to sharing them with you as the time progresses.

I'll start this call by providing an overview of our results and other key developments in the third quarter. Rahim will discuss the financials in debt and after that, we'll be pleased to answer any questions you may have.

Let me start by saying that fiscal year 2020 so far has been a landmark year in our company's history. We made a commitment to reporting our first profitable quarter in this fiscal year, and I'm pleased to report that High Tide became the first publicly-traded cannabis retail company amongst its peers for positive adjusted EBITDA, income from operations and positive cash flow from operations in its second quarter of fiscal 2020. We continue to generate income from operations and cash flow in our third quarter of fiscal 2020.

Currently, all of us are facing many challenges because of the COVID-19 pandemic. Throughout these challenges, we have continued to focus on our exciting corporate strategy to provide the best experience to cannabis enthusiast, achieving operational excellence and maintaining profitability. My message to you this morning is that High Tide is profitable and is well positioned for growth in cannabis retail industry with a very positive outlook.

Our earnings were in line with our expectations. Revenue for the third quarter of fiscal 2020 was CAD23.2 million, which is an increase of 180% over the second quarter last year. Gross profit increased to CAD9.23 million, up 202% over the same quarter last year. In Q3 2020, the company generated income from operations of CAD2.11 million compared to a loss of over CAD4 million in the same quarter last year. Adjusted EBITDA for the third quarter of 2020 was CAD4 million compared to a negative of CAD3.4 million in the same quarter of last fiscal year.

During this period of economic uncertainty, our strong quarter shows how well all of our company's revenue streams are performing. And having diversified revenue sources which includes bricks-and-mortar cannabis retail stores, industry leading e-commerce platform Grasscity.com recurring subscription revenue from our data analytics platform called Cabanalytics and wholesale segment with proprietary designs and licensed cannabis lifestyle products, all revenue streams have shown continued growth and resilience in these uncertain times.

The COVID-19 pandemic brought on many challenges, including regulatory hurdles with respect to our operations status as an essential service. We faced many challenges in Ontario, Alberta, and Saskatchewan. However, our team worked tirelessly through all of these challenges by providing a safe environment for employees and customers and even managed to open four stores in Ontario.

We managed the regulatory challenges by quickly shifting to a click-and-collect model when the Ontario Government removed the essential services designation, which resulted in the requirement to temporarily close all of our Ontario locations and switch to click-and-collect only. After the third quarter, we opened a premium store location in Banff, Alberta, a world-renowned year-round tourist destination.

We are also extremely proud of our customer loyalty program called Cabana Club. To date, approximately 57,000 members have joined the club. Currently, over 50% of our daily transactions are completed by Cabana Club members. Our club members enjoy receiving SMS and e-mail communications, highlighting new and upcoming product arrivals, member-only events and special offers

In the beginning of the year, the company launched its data analytics service named Cabanalytics and started generating recurring subscription-based revenue. The company continues to realize significant increases in its data analytic service through a growing subscriber base.

Our e-commerce platform, Grasscity.com has been operating for 20 years as an online retailer of smoking accessories and cannabis lifestyle products. Grasscity attracts approximately 7 million users to its online store each year and has had over 34 million unique users join its online forum since inception. High Tide's ongoing investment in Grasscity to refresh its online sales platform increase its searchability, align its supply chain with RGR and famous brands and optimize its distribution channels has resulted in significant growth in market share and daily transaction volume. Grasscity enables the company to leverage its vertical integration to improve order fulfillment, customer reach, product margins and overall profitability. Revenues

Revenues in the company's wholesale segment increased by 85%, being an increase from CAD1.2 million from the same quarter last year to CAD2.6 million this past quarter. The company's wholesale segment attracted significant number of new wholesale and distributor clients due to its proprietary designed and license products.

While showcasing a strong operational performance, we also focused on strengthening our balance sheet by restructuring a CAD10.8 million dollar debt, that was originally to mature in December 2020, which was restructured as a non-interest bearing loan maturing in 2025. Subsequent to the third quarter, we also extended maturity of an additional CAD2 million loan to September 30, 2021.

After the third quarter, we entered into a definitive arrangement agreement to acquire all of the issued and outstanding shares of Meta Growth Corp. On closing of this transaction, High Tide will become the largest cannabis retailer in Canada with annualized pro forma revenue of approximately CAD148 million. The investor presentation that provides an overview of this transaction has been updated to include High Tide and Meta's recent financial results and is available on our respective websites.

High Tide remains focused on the fundamentals of being a profitable retailer, while continuing to leverage cannabis and its related accessories through the company's manufacturing and e-commerce business portfolio. High Tide diverse mix of consumer channels provides access to layered insights and context unavailable to our competitors, enabling the company to understand North American and global cannabis user preferences in real time.

The company believes that achieving positive cash flow from operations, the restructuring of CAD10.8 million of debt into an interest-free debenture due in 2025 and the pending acquisition of Meta Growth has strongly position High Tide to execute on a strategic growth objectives for the remainder of fiscal 2020 and beyond. The company is well funded and operationally prepared to further its expansion in Ontario as Canada's largest and most underserved market.

With that, I will now turn the call over to Rahim Kanji, our CFO to discuss our financial results.

Rahim Kanji - Chief Financial Officer

Thank you Raj, and welcome everyone. In the third fiscal quarter of 2020, the company recorded consolidated revenue of CAD23.2 million, being an increase of CAD14.9 million or 180% compared to CAD8.3 million in the same quarter last year. Compared to the prior quarter ended April 30, 2020, the company recorded an increase in consolidated revenue of CAD3.6 million or 19%.

Revenue comprised mainly of sales through our bricks-and-mortar cannabis retail locations, our e-commerce platform Grasscity.com, our wholesale division and recurring subscription revenue from our data analytics platform Cabanalytics. The revenue also included royalties earned from franchised and branded locations.

Retail from our retail segment - revenue from our retail segment increased by CAD13.9 million or 209% to CAD20.5 million in the third quarter of 2020 compared to CAD6.6 million in the same quarter last year. Compared to the second quarter of 2020, revenue from our retail segment increased by CAD2.7 million or 15% in the third quarter of 2020. The increase in our retail segment was bolstered by our best-in-class e-commerce platform Grasscity.com.

Grasscity.com is the most established online platform for smoking accessories and cannabis lifestyle products. Our investment to further enhance Grasscity.com's platform since the acquisition in 2018 has resulted in continued growth of the North American market share and increase in daily transaction volume.

Additionally, we also realized revenue increases in our retail store locations and through our data analytics platform Cabanalytics, generating recurring subscription revenue.

Revenue from our wholesale segment increased by CAD1.2 million or 85% to CAD2.6 million in the third quarter of 2020 compared to CAD1.4 million in the same quarter last year. Compared to the second fiscal quarter of 2020, revenue from our wholesale segment increased by CAD1 million or 58%. Our wholesale segment attracted new wholesalers and distributors by offering them our unique and proprietary designed licensed products such as Snoop Dogg Pounds, Cheech & Chong's Up in Smoke, Trailer Park Boys and more.

Our consolidated gross margins were industry leading at 40% compared to 38% in the second fiscal quarter. Our retail gross margin was 40% in the third fiscal quarter of 2020 compared to 38% in the second fiscal quarter of 2020. The increase in gross margin was primarily driven by significant increase in our Grasscity.com platform revenue during the third quarter of 2020. Gross margin in our wholesale segment in the third fiscal quarter of 2020 was consistent at 35% compared to second fiscal quarter.

Operating expenses for the quarter decreased by CAD200,000 compared to the previous quarter. Like Raj, I'm excited to announce that the company recorded income from operations of CAD2.1 million in this quarter compared to a loss from operations of CAD4 million in the same quarter last year.

The company's diversified business streams and focus on operational excellence continue to accelerate in this challenging economic environment.

Adjusted EBITDA, excluding lease payments in this quarter was CAD4 million compared to an adjusted EBITDA of CAD1.9 million in the second quarter, and a loss of CAD3.4 million in the same quarter last year.

As of the end of the third fiscal quarter, the company had over CAD7 million in cash and cash equivalents, compared to CAD800,000 as at the end of the last fiscal year ending October 31 2019. The increase in cash was primarily driven by the company realizing positive cash flow from operations and capital raises for deployment into capital expenditures.

We continue to strengthen our balance sheet with the successful restructuring of a CAD10.8 million debt into an interest-free loan due in 2025. The working capital deficit significantly decreased to CAD11.4 million as of July, 312020 compared to CAD20.9 million as at April 30, 2020 due to restructuring of the CAD10.8 million debt.

Additionally, after the quarter, the company extended maturity of a CAD2.2 million loan to September 30, 2021.

With that, I will now turn the call over to the operator to open the line for the Q&A.

Question & Answers

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Semple with Echelon Investment Partners. Your line is now open.

Andrew Semple - Echelon Investment Partners - Analyst

Hi, and good morning, guys. Congrats on the quarter.

Raj Grover - Founder, President and Chief Executive Officer

Thanks.

Andrew Semple - Echelon Investment Partners - Analyst

Yeah. Just my first question here. I was just looking at the segmented information. It appears Grasscity approximately doubled sales quarter-over-quarter. I just want to confirm I've got that right. What dynamics were at play? And whether you think this is the new level for the business going forward for that segment?

Raj Grover - Founder, President and Chief Executive Officer

Yeah, absolutely. Good analysis there, Andrew. Grasscity was top performer for us this quarter. And this just solidifies our reasoning to acquire it in December of 2018 just prior to going public. And our whole intention of acquiring Grasscity was to integrate fulfillment capabilities out of North America. 90% of our business in Grasscity is originated in United States. And before we acquired the business, 90% of the shipments were happening out of Amsterdam. And we've made that shift out of our Las Vegas facility - out of our Nevada facility and that has had a huge impact on our fulfillment rates now becoming 70% out of Nevada and 30% out of Amsterdam. And that is just drastically improved the business performance and we see this continuing.

We are - our searchability online is at the highest levels we've ever seen. Our fulfillment is working on full capacity, there is still room for improvement. We feel that we can take it up to 90% procurement out of North America. So, yes, we do see the business at the bare minimum stabilizing at these levels or even growing from here.

Andrew Semple - Echelon Investment Partners - Analyst

That's great color. Thank you. Just want to also ask on the - on the gross margins this quarter at around 40%. I heard your comments in the prepared remarks on the e-commerce business supporting that. Just wondering if you think there is further room for expansion above the 40% level? Or do you think the - do you think it remains around this level for some time?

Raj Grover - Founder, President and Chief Executive Officer

So look, I'm very happy. Me and Rahim are both very happy to see this have around 40%. It's quite incredible. In our last quarter, we had industry-leading gross margins of 38%. And now just quarter-over-quarter, we've improved this to 40%. And we see this stabilizing between 38% and 40%. Is there further room for improvement? It's always possible. But I will say comfortably and confidently that we can generate between 38% and 40% gross margins. And this is again, thanks to High Tide's diversified business portfolio. We've got our e-commerce divisions that generates high gross margin, our retail division generates industry-leading gross margin, and then, of course, our wholesale division helps as well. So yes., we definitely see it hovering around 38% to 40%.

Andrew Semple - Echelon Investment Partners - Analyst

That's great to hear. Just wanted to also touch on your recent announcements on the restructuring of CAD2 million of debt and extending the maturity there. Just curious if you're able to comment on whether there is ongoing work on that front, whether you're continuing to speak to debt partners on perhaps extending maturities and whether we may see some more announcements on that?

Rahim Kanji - Chief Financial Officer

Yes, that's absolutely the case, Andrew. Like you see, just a few months ago, we negotiated a CAD10.8 million debenture that was outstanding that was due in December 2020. It's going to be paid out in five years as an interest-free loan. And then further further to that, we extended another CAD2 million just very recently a few days ago. And we are in conversations and we feel great about it that we will be able to restructure some of our smaller remaining debt that is coming due in the next quarter or two. And we don't see that as an issue as well, issue at all. And we have already begun those conversations and they're looking pretty promising.

Andrew Semple - Echelon Investment Partners - Analyst

Great. Just perhaps one quick one and then I'll get back in queue. Just wanted to get your thoughts on the OpEx this quarter, fairly consistent despite the revenue growth. So I'm just wondering whether you think you can squeeze further operating leverage of existing cost base or whether we're going to start to see that begin to move a little bit more closely with the movement in revenues.

Rahim Kanji - Chief Financial Officer

Regarding our operational expenses, this is something, Andrew, that I'm particularly proud about. I mean, you can see our revenue increased from CAD19.6 million to CAD23.2 million from Q2 to Q3, yet our operational expenses went down CAD200,000. I mean, we are feeling pretty great about where the OpEx is right now. And as we start to grow aggressively again, that OpEx might go up, but I think we're going to keep it very much in relation to where the business is today and where the Canadian cannabis industry is today. We are making calculated moves on OpEx because our main goal is to generate EBITDA quarter-after-quarter. So we are very - we're keeping our eyes on the OpEx and we feel pretty great about it going forward that we don't see any unforeseen changes coming through and our OpEx going too much higher from here.

Andrew Semple - Echelon Investment Partners - Analyst

That's great. And thanks for taking my questions here. I'll get back in queue. Congrats on the quarter.

Raj Grover - Founder, President and Chief Executive Officer

Thanks, Andrew.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of John Chu with Desjardins Capital Markets. Your line is now open.

John Chu - Desjardins Capital Markets - Analyst

Good morning, and congrats on the quarter. So I want to dig down a bit deeper on just your diversified sales pace hearing [Phonetic]. This seems pretty unique to us in terms of how diversified your revenue is compared to your peer. So when I look at the non-cannabis side, the smoking accessories, we calculated to be about a third of your revenue for the quarter, and geographically, it looks like just the U.S. base which is still related to the Grasscity that seems - that's about 23% of your revenue for the quarter. So from our view, just seems to help reduce your volatility and your sales risk, but the post seem to be a pretty strong source of growth for the quarter - sales - quarter-over-quarter sales growth here. So maybe just talk about the outlook in terms of percentage of total sales and how you think that might look like as we go forward? Can that represent a still a pretty meaningful or even possibly a bigger chunk of where it is today? Or can we see that compared to level out of it?

Raj Grover - Founder, President and Chief Executive Officer

So, great question, John. We are very excited about our cannabis versus non-cannabis revenue trajectory. As you know, we're a well diversified cannabis company with integrated business units. And I would like to confirm that 23% of our revenue was indeed generated in the US, which is the most exciting market for us. And it was not only e-commerce contributing to that, but also our wholesale business. Our wholesale business has doubled practically year-over-year and 90% of that wholesale business has originated in the United States. And we definitely see an increase going forward both in our e-commerce businesses and wholesale.

And, especially wholesale, we're very bullish on because until about last year we never had any wholesale business in the US. So we've built this whole business just over last year. And we are seeing significant increases quarter-over-quarter, that's simply because we have some pretty unique offering to our famous brands business division, which has got celebrity and licensed products that none of our competitors in the wholesale space have. And regardless, even if you are a competitor to High Tide, some of these products is so unique that business is still going to carry in their portfolio.

So we're bullish on wholesale and we're bullish of the revenue being generated out of the U.S. going forward in the next few quarters.

John Chu - Desjardins Capital Markets - Analyst

Okay, great. And then maybe just a little bit more on Grasscity and the e-commerce platform. You talked about how could it was a bit of a headwind for the business as a whole, but some of the commentary we hear just from the CPG world is - on the e-commerce side is that, COVID actually help accelerate e-commerce adoption by consumers by potentially up to five years. And so obviously that could be a nice tailwind for Grasscity and your e-commerce platform. Can you maybe just comment about to the extent to which COVID has actually help Grasscity and driving revenue and the outlook going forward on that?

Raj Grover - Founder, President and Chief Executive Officer

Yes. So look, Grasscity is definitely been boosted by COVID. But I would tell you that the main reason for the increase in Grasscity is - like I mentioned earlier, is the fulfillment that we are doing out of our Las Vegas facility which was all happening out of Amsterdam. And we now have the ability to ship orders overnight to our U.S. customers versus prior to us acquiring the business and setting up the business, which took us good six to nine months, which was anticipated. The shipping times were anyway from seven to 14 days. And we saw this as an opportunity in 2018 that if we integrated the business well in the United States, we are going to see a substantial revenue in and that's exactly what is happening. Like I said, the fulfillment went up from from 90% Amsterdam to 70% Las Vegas and 30% Amsterdam. And that has changed that growth trajectory completely for us because now consumers can get their packages fast, they can see the variety being shipped out of the United States and I see that at the biggest reason for increases in our Grasscity platform.

John Chu - Desjardins Capital Markets - Analyst

Okay, perfect. And then last question just on the gross margin. So it sounds like what the levels we're seeing this quarter, last quarter seem to be fairly sustainable. But just wanted to double check that, with the current backdrop we've been seeing and some of the commentary we've been hearing from your peers about very competitive Alberta market, more stores opening up in Ontario, product prices declining, that - you factor that into to your gross margin outlook in terms of 38% to 40% being sustainable at those levels considering those factors. Is that fair?

Raj Grover - Founder, President and Chief Executive Officer

Yes. Yes, John, we do. And like you know the reasoning is - again is, we are well diversified Canadian Cannabis company with ntegrated business units. So we're not just dependent on one market like Alberta, which is definitely getting saturated. But Alberta has not the only market we operated. So - and that's the good news. And like I just mentioned earlier, again, I'm fairly comfortable saying that 38% to 40% gross margins are fairly easily achievable for us. Do I want to talk about further margin enhancement? It's a possibility. But I can comfortably tell you that we will land within the 38% and 40% range going forward.

John Chu - Desjardins Capital Markets - Analyst

Okay, great. That's very helpful. Thank you.

Raj Grover - Founder, President and Chief Executive Officer

Thanks.

Operator

Thank you. Ladies and gentlemen, currently, there are no further questions. I would like to turn the floor back to management for closing remarks.

Raj Grover - Founder, President and Chief Executive Officer

Thank you, operator. This exceptional combination of quarterly financial results reinforces our conviction that High Tide is one of the top performing cannabis companies in Canada today. Our dedicated and passionate employees work together to achieve these outstanding results and they should feel extremely proud of their hard work in this collective accomplishment. I'm very thankful to our shareholders and stakeholders for their ongoing support of our strategy, and we remain committed to achieving the highest standard in Canadian Cannabis retail.

With that, I will ask operator to close the line.

Operator

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Q3 2020

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